In a surprise move back in February 2021, the Kingdom of Saudi Arabia (KSA) announced that foreign companies will need to base their regional headquarters (RHQs) in KSA by 1 January 2024 or face exclusion from lucrative government contracts.
The ultimatum is set to trigger in a matter of weeks, and foreign companies are scrambling to meet the deadline.
Saudi Arabia’s dedication to economic growth
The initiative is in line with KSA’s Vision 2030, which aims to strengthen the KSA’s strategic position as an investment hub in the Middle East. With a broader objective to reduce dependence on oil and create new industries that generate jobs for its citizens.
However, this move positions KSA in direct competition with regional business hubs, notably Dubai — the commercial capital of the United Arab Emirates, home to the highest concentration of Middle East regional headquarters.
Remarkably, Saudi Arabia has exceeded its target for attracting RHQs, with over 180 companies now established in KSA, surpasses the initial goal of securing 160 RHQs by the end of 2023. The initial success of this initiative is transforming Saudi Arabia to a burgeoning for international businesses.
The impact on foreign companies
According to KSA Cabinet Decision 377/1444, multinational groups (MNGs) do not to have an RHQ in KSA if they possess 1) an RHQ in the Middle East and North Africa region, and 2) are on the Ministry of Investment Saudi Arabia’s (MISA) list of MNGs without RHQs in KSA.
Going forward from 1 January 2024, Saudi Arabia government will prepare a list of companies without an RHQ in the country. The list will be accessible through the unified electronic portal for government procurement. Consequently, companies without an RHQ will not be awarded government projects or bid in public tenders, unless specific criteria are met.
Requirements for RHQ license
Securing an RHQ license from MISA requires internal planning to address operational and legal considerations while meeting specified requirements. One of the guidelines specifies that RHQ must employ a minimum of 15 full-time staff within a year, including three at the executive director or vice president level.
The guidance further elaborated that RHQ cannot directly conduct commercial operations that generate revenue other than RHQ License activities. Additionally, MNGs must demonstrate a minimum presence in two countries beyond KSA and their headquarters’ country. Furthermore, RHQ has to engage in a detailed array of activities prescribed by MISA.
Advantages of setting up an RHQ in Saudi Arabia
Several factors make Saudi Arabia an attractive destination for businesses. Its strategic location at the crossroads of Europe, Asia, and Africa provides a gateway to major markets.
Moreover, economic reforms, privatization efforts, and a new bankruptcy law have made it easier for businesses to operate in the country. In particular, the tax environment is advantageous for foreign investors, with minimal personal income tax liability and a 15% corporation tax rate, complemented by exemptions and a zero-rated Value Added Tax (VAT) on many goods and services.
In addition to these favourable conditions, Saudi authorities have proposed additional incentives for employees working at RHQs, including exemptions to Saudization requirements, allowing a foreign spouse on a family residency visa to obtain work authorization, and extended family residency permits for dependent male children up to 25 years old.
While there may be some lack of clarity regarding potential tax incentives, the government officials have announced that tax regime for RHQs is under codification. They have assured that RHQs will be granted tax relief on their earned income.
Challenges of operating in Saudi Arabia
While there are distinct advantages, companies may encounter challenges when relocating to Saudi Arabia. These include significant differences of Islamic law compared to legal systems in other countries, potential bureaucratic hurdles, and cultural disparities in local business practices. To overcome these challenges, companies need to have a strong understanding of the local market and culture.
Furthermore, the cost of living has also gone up significantly in recent years, affecting expenses like school fees, utilities, gas, and clothing, with housing costs in sought-after areas of Riyadh rising by as much as 40 percent in 2022. Despite these challenges, this reflects the amount of opportunity available to entrepreneurs and foreign investors to meet the growing demand for projects that improve quality of life.
Set up your Saudi Arabia RHQ now
To ensure business continuity, MNGs with RHQs in the Middle East and North Africa, especially those heavily reliant on government contracts, will need to act quickly to relocate their RHQs to KSA before 2024 deadline. Likewise, MNGs considering the Saudi market must keep the RHQ requirement in mind for engaging with KSA Agencies and establish their presence sooner than later.
As a leading global corporate service provider, Healy Consultants stands ready to support our multinational clients at every step. From company incorporation, multi-currency corporate bank account opening, accounting, and tax support, to human resource management — we are committed to assisting you. For more information or personalized advice on establishing your business in Saudi Arabia, feel free to reach out to us via the provided hyperlink below.