Saudi Arabia: Final economic substance regulations for special economic zones

The Zakat, Tax, and Customs Authority (ZATCA) on August 7, 2026, published final regulations providing the economic substance requirements regulations applicable to the four special economic zones (SEZs) of King Abdullah Economic City (KAEC), Ras Al-Khair (RAK), Jazan, and Cloud Computing.

The special economic zones offer tax benefits including exemptions from withholding tax and Zakat, customs duty suspensions, and a 0% value added tax (VAT) rate under specific conditions.

Key economic substance requirements

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:
  • Having at least one director responsible for the activity who is resident in Saudi Arabia
  • Ensuring management possesses the necessary qualifications to manage the activities
  • Holding board (or board equivalent) meetings in Saudi Arabia at which strategic decisions are taken and documented

Additional requirements for intellectual property (IP)

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

• At least 50% of directors managing the qualified activities must be residents of Saudi Arabia
• 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

Limitation on tax incentives and exemptions

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.

ESR reporting and penalties

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.

Read an August 2026 report prepared by the KPMG member firm in Saudi Arabia