Saudi Arabia

Foreign tax credit

Income tax and related fines and penalties paid or payable to Saudi Arabia or to other countries are non-deductible expenses.

Incentives for investment in less-developed regions

The government of Saudi Arabia has granted tax concessions to the following six less-developed regions in Saudi Arabia, with the intention of attracting more investment:

• Ha’il.
• Jazan.
• Najran.
• Al-Baha.
• Al-Jouf.
• Northern territory.

These tax privileges are granted for a period of ten years from the start of any project.

The qualifying investing company’s annual tax bill may be reduced by:

• Half the annual training expenditure on Saudis.
• Half the annual salaries paid to Saudis.
• 15% of the non-Saudi capital share, subject to certain conditions.

More deductions are granted if investment capital for any project exceeds SAR 1 million and if more than five employees of Saudi nationality have jobs of a technical or administrative nature with contracts of at least one year.

Customs incentives

An exemption from customs duties is available on machinery and raw materials that are required for approved projects, provided that they are not available in the local market. Such exemptions should be applied for prior to their importation and are subject to certain terms.

Tax Rules for Regional Headquarters (RHQs)

The Tax Rules for RHQs have been published by the Zakat, Tax and Customs Authority (ZATCA) with an immediate effect from the date of publishing (i.e. 16 February 2024).

The rules clarify several key matters to the tax and investment society, which includes the following, among others:

• Key definitions regarding the RHQs.
• Tax incentives.
• Exemption duration and criteria.
• Economic substance rules for the RHQs.
• Tax compliance requirements.
• Fines and penalties in case of violating the rules.
• Rights of both ZATCA and the RHQ in case of tax audits and disputes.

Key definitions regarding the RHQs:

The Rules state some key definitions with respect to the RHQs, which include the following, among others:

• Regional Headquarters: The regional headquarters or a unit of a multinational group duly established under the laws of Saudi Arabia and the concept of regional headquarters activities of international companies applies according to the National Classification of Economic Activities.

• Eligible activities: The main activities of the 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, subsidiaries, and other related companies according to the National Classification of Economic Activities.

• Related companies or related persons: Shall have the same meaning prescribed in the Transfer Pricing By-Laws.

• Tax incentives: The tax benefits and exemptions available for RHQs, as prescribed in the Royal Decree. 

• Economic substance requirements: The requirements that must be satisfied by the RHQs to ascertain the substance of the economic activities in the Kingdom.

Tax incentives

RHQs meeting the qualification criteria shall be eligible to enjoy the following tax incentives:

• 0% income tax on the qualifying income.
• 0% withholding tax (WHT) on the payment made by the RHQ to non-residents, meeting any of the following criteria:

• Payments of dividends.
• Payments to related parties.
• Payments to third parties for services necessary for the RHQ’s activities.

The WHT exemption shall not apply in any of the following cases:

• If the payment made by the RHQ is related to non-qualifying activities.
• In any of the tax evasion cases prescribed as per the RHQs Tax Rules.

Income derived by the RHQ from non-qualifying activities shall be treated according to the provisions of the relevant tax regulations in the Kingdom.

The provisions of the in-force treaties in Saudi and international obligations shall apply to the RHQs.

For purposes of all international treaties, conventions, or other agreements to which the Kingdom is party, RHQs are considered tax residents to the extent they meet the tax residency criteria according to Saudi Income Tax Law.

Duration of the tax incentives

• The tax incentives are applicable to the qualifying activities for renewable 30 years, starting from the date of obtaining the RHQ licence to carry out the qualifying activities.

• The tax incentives shall expire on the earlier of:

• The elapsing of the 30-years period.
• The entity ceasing to be qualified as an RHQ for whatsoever reason.

Economic substance rules for the RHQs:

In addition to the set requirements by the competent authority, RHQs shall fulfil all of the following economic substance requirements:

• The RHQ should have a licence from the competent authority and shall only carry out the licensed activities as per such licence.
• The RHQ shall have adequate assets, including suitable building to carry out the RHQ activities.
• The activities of the RHQ, including holding the board meeting through which the strategic decisions are taken, shall be directed and managed in the Kingdom.
• The RHQ should commensurately incur operating expenditures in the Kingdom with the performance of the RHQ’s activities.
• The RHQ must generate revenues from the qualifying activities in the Kingdom.
• The RHQ must have at least one resident director in the Kingdom.
• The RHQ must employ an adequate number of full-time employees in the tax year that are commensurate with the level of the RHQ’s activities.
• The RHQ's employees must have the necessary knowledge and expertise to deliver their duties and fulfil their responsibilities.

Tax compliance requirements:

RHQs are required to comply with the tax and Zakat regulations with respect to filing the tax and Zakat returns.

In addition to the above, RHQs should comply with the annual report (according to the form provided and the specified procedures by ZATCA), to ensure and validate the compliance with the economic substance requirements.

Fines and penalties:

RHQs shall be exposed to certain fines and penalties in case of non-compliance with the Tax Rules for RHQs. These fines and penalties shall apply without prejudice the other penalties stipulated as per the Tax Regulations:

• In case of not fulfilling any of the RHQ economic substance requirements during the validity period of the license, ZATCA shall notify the RHQ with the violation committed by the RHQ and grant it 90 days from the notification date to rectify the violation. In case of failure to remedy the violation during the granted period, the following penalties shall apply:
• SAR 100,000, provided that the violation is remedied within 90 days from the date of imposing the fine.
• In case of failure to remedy the violation within the above prescribed period, or the violation is repeated within three years from the date of imposing the above mentioned fine, a fine of SAR 400,000 is imposed, provided that the violation is remedied within 90 from the date of imposing the fine.
• In case the violation persist following imposing the second fine mentioned above, ZATCA in coordination with the competent authority may consider suspension of the tax incentives.

RHQs must comply with the Transfer Pricing By-Laws and any amendments to it. Also, RHQs must ensure that all transactions with related parties are conducted at arm’s-length.

In addition to the above-mentioned fines and penalties, ZATCA in coordination with the competent authority may revoke the tax incentives for the RHQ in any of the tax avoidance cases mentioned per the Tax Rules for RHQs.