KSA RHQ Tax Rules V1

Kingdom of Saudi Arabia – Regional Headquarters (“RHQ”) Tax Rules (“Tax Rules”)

The Zakat, Tax & Customs Authority (“ZATCA”) recently published the Tax Rules, further to the RHQ program issued in December 2023 (link to previous alert in comment). The Tax Rules lays down the below provisions relating to tax incentives available to RHQs.

1. RHQs will be subject to Tax & Zakat Laws unless explicitly exempted under the Royal Decree.
2. RHQ to be registered with the Authority as per the TAX & Zakat Laws and to file TAX & Zakat returns
3. RHQs meeting the qualification criteria are eligible for 0% Corporate Tax & Withholding Taxes on payment of dividends, payments to related persons & payments to unrelated persons in respect of services essential to RHQ activities. Tax incentives for the eligible activities available for 30 years, subject to renewal
4. The payments to related persons are required to be in compliance with the arm’s length principle in order to be eligible for the tax incentives. Related Persons shall have the same meaning as prescribed under the Transfer Pricing Bylaws
5. Non-eligible activities are not eligible for Tax incentives & the income in respect of such activities shall be determined on the basis of the existing tax laws
6. RHQs must meet the economic substance criteria which requires RHQs to:-
   • hold valid license issued by Governing body & carry out only those activities specified
   • have adequate premises inside KSA to carry out its activities
   • carry on strategic direction & management function
   • incur operational expenditure in KSA commensurate with its activities
   • generate revenue from eligible activities inside the Kingdom
   • have at least 1 resident director on Board & activities of RHQ shall be directed & managed in KSA including  board meetings
   • employ adequate no. of employees commensurate with it’s level of activity. Further such employees should have the requisite skills to perform activities of the RHQ
7. RHQs must file annual returns with the Authority for purposes of verifying compliance with economic substance criteria
8. RHQs are required to maintain separate accounts in respect of Non eligible activities
9. It also lays down penalties for RHQs in respect of non-compliances with economic substance criteria during the license tenure

It hence becomes imperative for businesses to ensure that they are ready from a transfer pricing perspective in order to ensure smooth implementation

ZATCA has stated that a detailed guidelines would soon be issued explaining the provisions of these Tax Rules. The anticipated guidelines is expected to bring more clarity with regard to the provisions of the Tax Rules.

Way forward

The Tax rules mandate RHQs to comply with economic substance criteria apart from adhering to  transfer pricing regulations to be eligible for tax incentives. Hence it is evident that RHQs would be subject to rigorous scrutiny to ensure such compliances are met & therefore there is a need for robust documentation to substantiate the same to authorities at any given point of time.