Publication of economic substance regulations for special economic zones

Saudi Arabia has introduced economic substance requirements (ESR) for licensed entities undertaking qualified activities within its special economic zones (SEZs). The Economic Substance Requirements Regulations for SEZs, approved by the Board of the Zakat, Tax and Customs Authority (ZATCA), became effective on 7 August 2026 upon publication in the Official Gazette.

The regulations apply to licensed entities operating in the following SEZs:

• King Abdullah Economic City (KAEC) Special Economic Zone
• Ras Al-Khair Special Economic Zone
• Jazan Special Economic Zone
• Cloud Computing Special Economic Zone

Below is a summary of the key requirements and considerations for affected businesses.

Licensed entities must demonstrate compliance with economic substance requirements from the first financial year in which the qualified activities are conducted, including:

• Maintaining adequate premises and assets within the SEZ.
• Employing an adequate number of full-time employees physically present in the zone, including personnel engaged through contracting companies.
• Incurring operational expenditure commensurate with the nature of the qualified activities.
• Ensuring that qualified activities are directed and managed from within the SEZ, including:
  a. Having at least one director responsible for the activity who is resident in the Kingdom.
  b. Ensuring management possesses the necessary qualifications to manage the activities.
  c. Holding board (or board equivalent) meetings in the Kingdom where strategic decisions are taken and documented.

Licensed entities conducting IP-related activities must satisfy the following additional requirements:

• At least 50 percent of directors managing the qualified activities must be residents of the Kingdom.
• Providing a detailed business plan supporting the commercial rationale for holding IP assets in the SEZ.
• Providing detailed employee information, including qualifications, experience, contract type, and employment duration.
• Demonstrating that strategic decisions, risk management, and risk assumption relating to IP assets occur within the SEZ.
• Ensuring activities extend beyond mere marketing of IP assets.

The regulations clarify that tax and customs incentives and exemptions do not apply to income derived from IP activities related solely to the marketing of IP assets.

Licensed entities are required to submit an annual return in the form prescribed by ZATCA to demonstrate compliance with the ESR requirements.

Failure to meet the economic substance requirements shall result in penalties imposed by the Economic Cities and Special Zones Authority (ECZA) in accordance with applicable SEZ regulations.

With the regulations now in effect, licensed entities operating in Saudi Arabia’s SEZs should evaluate their readiness to comply with the new substance requirements.

Key considerations include:

• Assessing whether their current operating model satisfies the economic substance requirements.
• Reviewing governance and decision-making frameworks.
• Evaluating the adequacy of local personnel, premises, assets, and operating expenditure.
• Assessing exposure where intellectual property (IP) activities are undertaken within the SEZ.
• Preparing for annual ESR reporting and potential regulatory reviews.

KPMG can assist businesses in assessing the impact of the new economic substance requirements, identifying potential gaps, and reviewing eligibility for SEZ incentives, and supporting compliance and reporting obligations under the regulations.

For more information on how these developments may affect your business, please contact our tax professionals.