On 4 February 2024, Saudi Arabia’s Saudi Zakat, Tax, and Customs Authority (ZATCA) released the Regional Headquarters Tax Rules. This guide provides the rules and requirements for the regional headquarters program announced in December 2023. The Regional Headquarters program offers a 0% corporate income tax rate and a 0% withholding tax rate on approved Regional Headquarters activities. The Regional Headquarters Tax Rules consists of six chapters, which are as follows:
- General provisions
- Tax incentives
- Economic substance requirements
- Tax and zakat procedures
- Penalties and violations
- Final provisions
The main points are as follows:
1. The tax incentives are accessible for 30 years and can be renewed from the date the Regional Headquarters license is received. The incentives include:
2. A 0% income tax on eligible income of a Regional Headquarters from eligible activities. This includes the main activities of the Regional Headquarters 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, subsidiaries, and other related companies according to the National Classification of Economic Activities.
3. A 0% withholding tax rate on payments made by the Regional Headquarters to non-residents, with respect to the following:
- dividends;
- payments to related persons;
- payments to unrelated persons for services necessary for the Regional Headquarters activities.
4. The 0% withholding tax rate will not apply in the following areas:
- If the payment made by the Regional Headquarters relates to non-eligible activities;
- Cases related to the avoidance according to Article 12 of the Regional Headquarters Rules.
5. It’s important to mention that the Regional Headquarters’ income from non-eligible activities is subject to tax treatment as per the applicable Saudi tax laws. As per the economic substance requirements, the Regional Headquarters must satisfy the following requirements:
- The must hold a valid license issued by the Ministry of Investment, and shall only carry out activities that are within the scope of such license;
- The Regional Headquarters must have adequate premises in Saudi Arabia that are suitable for its business activities;
- The activities of the Regional Headquarters must be directed and managed in Saudi Arabia, which includes holding board meetings for the Regional Headquarters where strategic decisions are made;
- The Regional Headquarters must incur operational expenditure in Saudi Arabia that is commensurate with the activities of the Regional Headquarters;
- The Regional Headquarters must generate revenues from the eligible activities in Saudi Arabia;
- The Regional Headquarters must have at least one director that is resident in Saudi Arabia;
- The Regional Headquarters must employ an adequate number of full-time employees in a tax year, in proportion to the level of activity carried out by the Regional Headquarters;
- The Regional Headquarters’s employees must have the requisite qualifications and skills necessary to execute their duties and fulfil their responsibilities.
6. With respect to tax and zakat procedures, the Regional Headquarters must satisfy the following rules:
- The Regional Headquarters shall register with ZATCA in accordance with the procedures prescribed in the relevant tax and zakat laws;
- The Regional Headquarters shall file tax and zakat returns in accordance with the provisions of the relevant tax and zakat laws;
- The Regional Headquarters shall file an annual report, using a prescribed form provided by ZATCA and according to the procedures specified by it, for the purpose of verifying compliance with the economic substance requirements.
- For the duration of the Regional Headquarters license, the Regional Headquarters must prepare and maintain accounts for each tax year, including the partial tax year, commencing on the date of obtaining the Regional Headquarters license and ending on the last day of that entity’s tax year.
- The authority shall be entitled to carry out all its powers for the administration under the law, including obtaining information and conducting examination activities in respect of the Regional Headquarters in the kingdom, in accordance with the procedures and provisions outlined in the relevant tax and zakat laws.
7. In cases of non-compliance with the requirements of the tax and zakat laws, penalties outlined in the relevant tax and zakat laws will apply to the Regional Headquarters. The Regional Headquarters has the right to object to the assessments, reassessments, and penalties raised by the authority, and it has the right to appeal and file a grievance in the ways stipulated in the relevant tax and zakat laws. Additional penalties are outlined concerning economic substance, with a SAR 100,000 fine applicable if a violation is rectified within 90 days and a SAR 400,000 fine if not rectified within 90 days and in case of a repeated violation within 3 years. Failure to address a violation may result in the suspension of tax incentives.
8. Finally, the Regional Headquarters Rules also include provisions for tax treaties and agreements. For the purpose of all international treaties, conventions, or other agreements to which the Kingdom is the party, the Regional Headquarters are deemed residents of the Kingdom to the extent they satisfy the residency requirements in the Income Tax Law.
The Regional Headquarters Rules were published on 16 February 2024 and entered into force after publication in the Official Gazette.
