ZATCA has published the Regional Headquarters Tax Rules (“RHQ Tax Rules“), approved and enacted by ZATCA’s board resolution no. (9-1-24) on 04/02/2024. Under the RHQ Tax Rules, RHQ licensed entities will enjoy the following tax incentives for a period of 30 years commencing from the date on which the RHQ license is issued:
- 0% income tax on eligible Income (i.e. income from the main activities that an RHQ entity is allowed to carry out pursuant to its RHQ license); and
- 0% withholding tax on dividend payments made by RHQ entities to nonresidents and payments to related persons (as defined under the Transfer Pricing Bylaws).
Any income derived by an RHQ entity that is not eligible for an exemption under the RHQ Tax Rules (such as income from ineligible activities or in cases of tax avoidance) will be subject to tax in accordance with the rules of the income tax law and its implementing regulations. Note that Eligible Income is defined as income from Eligible Activities, which comprise the main activities of RHQs towards strengthening the group’s profile in the region and providing strategic supervision and administrative guidance and support for the internal business of the company, related entities and subsidiaries in accordance with the national classification of economic activities 701011 (Activities of head offices – overseeing and managing of other units of the company or enterprise). However, it is not clear at this time whether Eligible Activities covers all activities that RHQ entities may carry out under their RHQ licenses and whether optional activities qualify as such.
The RHQ Tax Rules also include the following provisions:
- RHQ entities will be able to benefit from double tax avoidance treaties to which the Kingdom is a party, as they are deemed residents of the Kingdom.
- RHQ entities are required to satisfy the following economic substance requirements (“ESR”) in order to benefit from the tax incentives:
- Having premises in the Kingdom from which the RHQ carries out its business activities;
- That the RHQ activities are directed and managed from the Kingdom;
- That the RHQ incur operational expenses and generate revenue from eligible activities in the Kingdom; and
- The RHQ must have at least one director residing in Saudi Arabia and employ an adequate number of full time employees during the tax year who have sufficient skills to carry out their duties.
- Failure to comply with the ESR will result in penalties up to SR 400,000 in addition to suspension of the incentives if the violation of the ESR is not remedied within the duration stated in the RHQ Tax Rules.
- RHQ entities – even those benefiting from tax incentives – must register with ZATCA and file annual tax returns in accordance with the requirements of the income tax law.
Finally, the RHQ Tax Rules include anti-avoidance provisions to prevent misuse of the RHQ incentives by obtaining tax relief on income that is not intended to be exempt by the RHQ Tax Rules. ZATCA is entitled to revoke tax incentives from an entity that:
- Submits false or misleading information to ZATCA; or
- Intentionally misapplies the RHQ Tax Rules to take advantage of -or assist others in taking advantage of- the RHQ Tax Rules in relation to ineligible activities.
Since RHQ entities remain subject to the income tax law and the Zakat regulations, penalties and fines provided for thereunder will apply to the RHQ entities for violation of the RHQ Tax Rules anti-avoidance provisions. In addition to revocation of the tax incentives from an RHQ entity, ZATCA will issue an assessment for the tax years in which the violations occur in addition to imposing fines and penalties afforded under the relevant tax legislation.
Companies holding RHQ licenses wishing to benefit from the tax incentives should review the business and operational model of the RHQ, with consideration for the ESR and transfer pricing support to determine which payment recipients qualify as related persons for purposes of the withholding exemption.
