Tax Alert ZATCA releases guidelines

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On 14 April 2024, the Zakat, Tax, and Customs Authority (ZATCA) released comprehensive guidelines for regional headquarters in Saudi Arabia. These guidelines, available in English and Arabic, provide detailed explanations of regulatory provisions, accompanied by practical examples illustrating the application and utilization of the tax incentives.

The RHQ Program has been created for multinational companies that wish to establish their regional headquarters (RHQ) in Saudi Arabia for supporting, managing, and providing strategic direction to its branches, subsidiaries and related companies. An RHQ meeting the eligibility requirements stands to benefit from the following tax incentives for a period of thirty (30) years, subject to renewal:

Zero percent (0%) income tax on eligible income from eligible activities.
Zero percent (0%) withholding tax on payments made by the regional headquarters to non-residents, according to the following:

Dividends.
Payments to related persons.
Payments to unrelated persons for services necessary for the activity of the regional headquarters.

The guidelines clarify that if the RHQ engages in commercial activities, other than the activities it is licensed to practice, the tax treatment applied to the regional headquarters’ income from ineligible activities will be determined in accordance with the relevant tax laws in Saudi Arabia.

Qualification requirements of an RHQ: The guidelines refer to the qualification requirements issued by Ministry of Investment (MISA). One key element is that the multinational group must own at least two subsidiaries or branches globally other than the headquarters’ country and Saudi Arabia.

Mandatory and optional activities of an RHQ: The guidelines provide a detailed list of mandatory activities aim to support regional strategic and management functions. These activities include developing and monitoring regional strategy, mergers and acquisitions, financial planning and analysis activities. Furthermore, the guidelines list a set of optional activities including research and development, intellectual property management, human resources, treasury, internal audit, legal, procurement, etc.

Taxes and tax incentives applicable in Saudi Arabia to RHQ activities: The guidelines provide various examples clarifying what constitutes eligible activity for regional headquarters, which can be summarized as follows:

Example 1 (eligible activities): Provision of central management services for an affiliate is an eligible activity.

Example 2 (eligible activities): Engaging in the transfer of information (such as offers, invitations to bid, prices, and terms and conditions of sale) to the global headquarters is an eligible activity.

Example 3 (eligible activities): Conducting technical market research and service studies for the global headquarters and its affiliates is an eligible activity.

Example 4 (ineligible activities): Distribution of products is considered an ineligible activity.

Registration mechanism: The guidelines provide that the multinational companies wishing to apply for the RHQ Program must register through the electronic services portal of MISA.

Additionally, MISA has issued the following user guides for the multinational groups. These user guides are available on MISA’s website.

Economic substance requirements (ESR): An RHQ must satisfy ESR to benefit from the tax incentives. The RHQ must submit an annual report with ZATCA to verify that the ESR is met. The guidelines provide a detailed listing of ESR emphasizing that the RHQ must have appropriate assets, including adequate premises in Saudi Arabia that are suitable for its business activities. Specifically, the RHQ must have a physical office in Saudi Arabia, which may be either owned or leased by the regional headquarters. The office space at the disposal of the RHQ must be proportional to the activities it carries out. The activities of the RHQ shall be directed and managed in Saudi Arabia, which include holding board meetings physically in Saudi Arabia where strategic decisions are made. Additionally, the RHQ must employ an adequate number of full-time employees in a tax year, in proportion to the level of activity carried out by the regional headquarters. Furthermore, the regional headquarters must generate revenues from the eligible activities in Saudi Arabia.

Tax residency: The guidelines provide that an affiliate of an RHQ will not be treated as resident in Saudi Arabia if the central management is triggered by the virtue of eligible activities of the regional headquarters.

Example 5 (tax residency of the group subsidiary): A non-Saudi affiliate whose central management is run by RHQ will not be considered a resident of Saudi Arabia. However, if such affiliate’s operating business is being run by the affiliate’s employees residing in Saudi Arabia, this would create Saudi residency for the foreign affiliate.

Permanent Establishment of a non-resident affiliate: A non-resident affiliate will not be considered a resident of Saudi Arabia simply because the regional headquarters carries out the mandatory activities in the kingdom. However, it may fall under the scope of tax in Saudi Arabia if the non-resident company carries out actual activities in the kingdom or generates income from a source in the kingdom.

Example 6 (income attributable to a PE in Saudi Arabia): In cases where the regional headquarters is set up as a branch and it carries out commercial activities or sells goods similar to those sold by its headquarters, the income generated from such activities would be taxable in Saudi Arabia, regardless of whether the income is directly attributable to the regional headquarters or is facilitated by it.

VAT implications: There are no special provisions for VAT application. As such, an RHQ entity must adhere to VAT registration requirements outlined in the VAT rules and comply with all rules currently in effect for VAT for supplies made by RHQ (including back charge costs) in accordance with the VAT Law and its Implementing Regulations.

Furthermore, an RHQ must issue a tax invoice for each taxable supply of goods or services in accordance with the requirements stipulated in the VAT Implementing Regulations, as well as the e-invoicing regulations.

Example 7 (local supply of services by the RHQ): Provision of services by an RHQ to a local KSA entity is subject to VAT at a rate of 15%. The local recipient entity is entitled to deduct the VAT paid as input VAT.

Example 8 (export of services by the RHQ): Provision of services by the RHQ to its foreign affiliates will fall under the provisions of Article (33) of the VAT Implementing Regulations and could be zero rated.

Zakat: An RHQ is subject to zakat based on the shares owned by a person subject to Zakat.

Transfer pricing: An RHQ must adhere to the arm’s length standard and transfer pricing documentation requirements in accordance with the provisions of the Transfer Pricing Bylaws.

Real estate transaction tax (RETT): Real estate transactions are subject to RETT regulations.

Tax procedures applicable to regional headquarters:

Registration: An RHQ must register with ZATCA for tax purposes.
Submission of returns and payment of tax/Zakat: An RHQ must comply with the obligations related to submitting tax, Zakat, or mix returns and paying any amounts due on the statutory deadlines specified in accordance with tax legislation and Zakat Collection Implementing Regulations.
Withholding tax: Based on Saudi Arabia Tax Laws and Regulations, withholding tax is due when a resident in Saudi Arabia or a permanent establishment of a non-resident entity makes a payment to a non-resident from a source in Saudi Arabia. Submitting an annual withholding form is mandatory, even if there is no tax to be declared throughout the fiscal year.
Value added tax (VAT): An RHQ must submit VAT returns on a quarterly or monthly basis.
Record keeping and maintaining requirements: An RHQ must prepare and maintain accounts, including audited financial statements, for each tax year throughout the term of the regional headquarters license, including the partial tax year that begins from the date of obtaining a regional headquarters license and ends on the last day of the tax year for that entity.
Examination, assessment, and objection procedures: An RHQ is subject to tax examination and assessment by ZATCA, in accordance with the tax legislation and regulations in force in Saudi Arabia.
Tax avoidance: The regional headquarters must adhere to all provisions related to tax avoidance and evasion stipulated in the relevant tax laws. ZATCA, in coordination with MISA may revoke the tax incentives for the regional headquarters in any of the following cases:
The RHQ intentionally submitted false or misleading information or declarations to ZATCA.
The RHQ has intentionally misapplied these tax rules or misused tax incentives to take advantage or assist others take advantage from the tax incentives in relation to non-eligible activities, and activities not licensed by MISA.
The RHQ made payments to non-residents on behalf of persons that do not qualify for tax incentives.

Penalties: Failure to comply with the economic substance requirements (ESR) as well as comply with the tax laws and regulations applicable in Saudi Arabia during the duration of the license could lead to penalties and suspension of the license.