Effect of the Saudi Regional Headquarters Program on the strategic aspects of Doing Business in KSA
The Saudi Regional Headquarters(RHQ) Program limits the scope of multinational corporations (MNCs) toeffectuate government tenders from January 2024. The possibility of governmenttendering for MNCs will be severely affected, unless timely measures are takento comply with the guidelines, as set out, under the RHQ policy. The Ministryof Investment, Saudi Arabia (MISA) and the Royal Commission for Riyadh City(RCRC) have collectively expressed an intention to diversify the economy ofSaudi Arabia, by encouraging foreign companies to relocate their regionalheadquarters to the Kingdom, if the latter wish to continue procuringgovernment tenders after January 2024. This has also been made official throughthe announcement dated February 15, 2021, published by the Saudi Press Agency.
As per the guidelines proposed byMISA, a RHQ is defined as "a unit of a multinational group that is dulyestablished under the laws of Saudi Arabia for the purpose of supporting,managing and providing strategic direction to its branches, subsidiaries andaffiliates operating in the MENA region". Furthermore, the RHQ programprovides that the foreign companies which are willing to execute futuregovernment contracts in Saudi Arabia will have to mandatorily obtain a RHQbusiness license. However, optional compliance requirements, under this mechanisminclude carrying out strategic directional and managerial functions along with aminimum of three operational activities.
Many companies such as the BakerHughes Co., KPMG and Schlumberger have already received their licenses as onOctober 27, 2021 for carrying out profitable business in the Kingdom of SaudiArabia. Moreover several other companies that have signed up for receiving thebenefits provided by the RHQ program include Deloitte, PepsiCo, Unilever,Siemens Mobility and Philips.
Tax Benefits for MNCs having RHQ in Saudi Arabia
The RHQ program has also provided several exemptions in the form of tax relief to the MNCs, which are registered under the scheme and are ready to carry the works and procurement practices, accordingly. Some of the provisions published in the RHQ, have been reproduced hereinafter:
- The RHQ compliant foreign subsidiaries are exempt from paying ‘Income Tax’ which is generally at 20% of the profits and benefits derived from commercial business activities in the Kingdom as such entities are not allowed to collect revenue through business activities. The exemptions under the tax regime are still in a compilation stage and the KSA government is working on codification of the necessary tax relief framework during the course of 2023.
- Anticipated tax exemptions would only be applicable to companies having a RHQ in Special Economic Zones (SEZs) that are a part of the infrastructure development and rehabilitation agenda of the KSA government.
- Non-compliance of the Saudization policy attracts hefty fines. Another prominent benefit guaranteed by the RHQ program to foreign companies is an exemption for ten years from Saudization which is officially known as the Saudi Nationalization Scheme or Nitaqat, which is a policy set into motion the Ministry of Labor.
Opening Saudi Arabia further for business will boost productivity and smooth our journey to become one of the largest economies in the world.
Saudi Vision, 2030
Exemptions for MNCs not having RHQ in Saudi Arabia
In furtherance of the RHQ implementation program framework, the MISA, the Ministry of Finance and the General Authority for Foreign Trade will prepare a list of non-compliant foreign companies and periodically update the list on the virtual government procurement portal for disseminating useful information across key stakeholders and amongst the general public.
Foreign subsidiaries which lack the RHQ in the Kingdom of Saudi Arabia can enter into limited contacts with the Government, owing to the narrow set of exemptions from the applicability of the RHQ guidelines in special circumstances as provided below:
- Foreign firms having an estimated cost of works and procurement services less than one million Saudi Arabian Riyals.
- MNCs carrying out their works and procurement practices from outside the Kingdom.
- In the submission of bids for government tenders, the bids of non-registered foreign companies shall be technically accepted if only one bid has been presented and if such a bid is the best bid after a through financial and technical evaluation of the monetary parameters accompanied with the Bid.
- Limited tender participation is permissible if only one qualified bidder is available for the acceptance and for emergency situations where engagement with non-registered foreign firms is necessary to resolve existing issues.
- To address concerns regarding direct purchase agreements with the non-registered the companies, the government shall invite the MNCs but with a limited permit to enter into the Saudi Market.
Progressive steps undertaken by the Saudi Government for implementation of the RHQ program
Conversion of King Abdullah Financial District into a special zone with an ‘offshore status’.
This region would be a prominent hub for several foreign companies, as it will ensure that these companies are given preferential treatment. This incentive is still pending approval from higher authorities within the Kingdom.
Furthermore, though the RHQ program, various overseas organizations will receive a waiver of Professional Accreditation for specific categories of professions such as engineering, medicine, accounting, and investment to name a few. The RHQ program also assists registered multinational corporations in providing exemptions on visa limits along with speedy acceleration in issuing Saudi visas to such organizations.
Additionally, a noteworthy merit associated with the applicability of the program pertains to effective allotment of spouse work permits in the Kingdom of Saudi Arabia with the added advantage of dependent age extension to 25 years old for respective visa holders. Also an important aspect of the RHQ policy deals with providing comprehensive categorical services to foreign entities for business, personal and concierge related purposes.
The implementation of the RHQ program by 2024 might coincide with the objective of protecting the local market from unfair competition as competition in the Kingdom will necessarily rise with the presence of permanent foreign company branches in the country. Another challenge within this regime pertains to a proper definition of RHQ or the question as to what constitutes or defines a RHQ in Saudi Arabia.
As the legal regime of RHQ compliance will effectuate from January 2024, international subsidiaries willing to carry on business in Saudi Arabia are required to relocate their headquarters to the Kingdom of Saudi Arabia to avail benefits such as grant of tax relief on the income earned from carrying out prescribed activities in the process of procuring governmental tenders. Moreover, owing to the benefits of the RHQ policy, it is estimated that by 2024, the number of MNCs which have set up their regional headquarters in the Kingdom for conducting international business is likely to increase manifolds.
The possibility of doing business in Saudi Arabia involves long-term decisions, stakeholder consultations, multiple transactions, costs and huge investments wherein the RHQ program has a crucial role to play for MNCs interested in carrying out long-term business operations with the Saudi government agencies and public sector organizations such as ministries, authorities, commissions and, wholly owned government entities governed by the Government Procurement and Tender Law of the Kingdom of Saudi Arabia.
