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Saudi Arabia (KSA) offers tax incentives to Regional Headquarters (RHQs) to attract multinational companies. These incentives aim to boost economic growth and attract foreign investment. The Regional Headquarters Tax Rules issued recently provide clarity on eligibility, incentives, and requirements for RHQs operating in the KSA.
The tax rules outline the purpose of offering tax incentives to RHQs. These incentives are designed to support RHQs in their strategic activities, enhance their regional profile, and provide administrative support to their subsidiaries. However, these incentives come with certain conditions and limitations.
In All About KSA’s RHQ Program, we explained the RHQ program. Now, let’s understand the key aspects of the tax rules.
Definition of Terms:
The tax rules define key terms such as "The Kingdom," "Tax Rules," and "Regional Headquarters." They also explain terms like "Eligible Activities" and "Non-eligible Activities" to help understand the scope of operations covered by the incentives.
Tax Residence:
RHQs are considered residents of the KSA for international treaties and agreements if they meet residency requirements. They remain subject to all Tax and Zakat Laws unless exempted.
Tax Incentives:
RHQs that meet specific qualification criteria are entitled to tax incentives, including 0% income tax on Eligible Income and 0% withholding tax on certain payments. However, these incentives do not apply to payments related to Non-eligible Activities or cases of tax avoidance.
Withholding tax at 0% applies to payments made by RHQs to non-residents for (i) dividends, (ii) payments to related persons and (iii) payments to unrelated persons for services necessary for RHQ activities.
Duration of Tax Incentives:
Tax incentives for RHQs are granted for a period of 30 years, subject to renewal. The incentive period starts from the date of obtaining the RHQ license and ends when the entity ceases to be an RHQ or after thirty years, whichever comes first.
Economic Substance Requirements:
RHQs must fulfill the Economic Substance Requirements to qualify for tax incentives. These requirements include holding a valid license, having suitable premises in the KSA, conducting activities directed and managed in the KSA, incurring operational expenditures, generating revenues, having a resident director, and employing a sufficient number of full-time employees with the necessary qualifications.
Anti-Avoidance:
RHQs must comply with Transfer Pricing Bylaws and refrain from intentional misapplication of tax rules. Failure to comply may result in revocation of tax incentives and imposition of penalties.
Tax and Zakat Procedures:
RHQs must register with the Zakat, Tax, and Customs Authority (ZATCA or the Authority) and file tax and Zakat returns in accordance with the law. They are also required to submit an annual report to verify compliance with Economic Substance Requirements.
During the license period, RHQs must maintain accounts for each Tax Year, including separate accounts for Non-eligible Activities if conducted. This ensures transparency and accountability in financial reporting.
The Authority has the power to monitor and verify RHQs' compliance with Economic Substance Requirements. RHQs can also request rulings from the Tax Authority for interpretation or clarification on taxation matters.
Penalties are imposed for non-compliance with Tax and Zakat Laws and Tax Rules. These penalties vary depending on the severity of the violation and may include fines or suspension of tax incentives.
Conclusion:
The tax rules provide a clear framework for RHQs operating in the KSA, offering incentives to support their strategic activities while ensuring compliance with Economic Substance Requirements and tax regulations. These measures aim to foster economic growth and attract foreign investment to the KSA.
Related articles covering the same subject matter
The Strategic Implications of Relocating Regional Headquarters to Saudi Arabia: An In-Depth Analysis
Saudi Arabia – Tax Measures to Boost Investments and Economy
Establishing a Regional Headquarters in Saudi Arabia
All About KSA’s RHQ Program
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