Tax alert: Tax rules for regional headquarters (RHQ)

The introduction of regional headquarters is a pivotal component of Saudi Arabia’s Vision 2030, aligning seamlessly with the nation's overarching goal to attract foreign direct investment.

The advantages of the RHQ Program were formally announced in December 2023. Nevertheless, the tax rules and regulations governing the benefits of the Program were not yet available, leaving many questions in the minds of taxpayers, especially multinational enterprises, regarding the applicability of the concept of RHQ to their businesses.

To address the confusion surrounding the RHQ concept, the Zakat, Tax and Customs Authority (ZATCA) has introduced “Regional Headquarters Tax Rules” dated 4 February 2024.

• RHQ has been defined to mean a unit of a multinational group duly established under the laws of Saudi Arabia engaged in the eligible activities.
• Eligible activities have been defined to mean the activities that serve to strengthen the multinational group’s profile in the region by providing strategic supervision, administrative guidance, and support for the business activities, subsidiaries, and other related companies according to the national classification of economic activities bearing number 701011.
• The regulations differentiate the eligible and non-eligible income of an RHQ for the purpose of tax incentives.
• Income from non-eligible activities is not entitled to tax incentives and is subject to applicable tax laws and regulations.
• A unit of a multinational group qualifying to be an RHQ and engaged in eligible activities, is entitled to the following tax incentives:

1. Zero percent corporate income tax on income from eligible activities.

2. Zero percent withholding tax on dividends, payments to related persons, and payments to third parties for services essential to the RHQ. Payments must relate to eligible activities to be WHT exempt.

• The duration of the tax incentives is set for a period of 30 years, subject to renewal.
• RHQ is required to comply with the economic substance requirements, which, inter alia, include:

1. Holding a valid license and conducting activities according to the license.

2. Having adequate business premises in the Kingdom.

3. Managing RHQ activities in the Kingdom, including holding strategic meetings.

5. Incurring operating expenditure in the Kingdom that is commensurate with the activities of the RHQ.

6. RHQ’s employees possessing requisite qualifications and skills.

• Registration with the Zakat, Tax and Customs Authority (ZATCA), and filing returns in accordance with the applicable tax laws and regulations are mandatory.
• Maintaining books and records is compulsory for RHQ, including maintaining separate accounts for eligible and non-eligible activities.
• Non-compliance with the tax rules can expose RHQ to the following penalties:

1. SAR100,000 provided that the violation is remedied within 90 days from the date of the imposition of the penalty.

2. SAR400,000 in the event that the violation is not remedied within 90 days or in the event that an RHQ repeats the same violation within 3 years from the date on which the penalty was imposed, provided that the violation is remedied within 90 days.

3. In case the violation persists in spite of the penalties, tax incentives accorded to an RHQ may be revoked.

• An RHQ is required to comply with the transfer pricing by-laws.
• RHQ is subject to the provisions of anti-avoidance and tax evasion provisions stipulated in the relevant Tax Laws.

The rules are available on ZATCA’s website and can be accessed here.