Saudi Arabia looks at tax relief for multinationals relocating HQs

Multinationals that relocate their regional headquarters to Saudi Arabia this year with the aim of securing lucrative government contracts would be “likely” to receive tax relief, said the kingdom’s investment minister, as executives fear they could be taxed in more than one jurisdiction.

Many executives said they were still uncertain about the details of the tax regime two years after they were informed of the relocation deadline. Several said a key concern was that, in the absence of a taxation accord between Riyadh and other Gulf states that could fall under the regional HQ’s oversight, subsidiaries’ profits could be taxed twice.

“So the moment you designate that entity as your regional head office, all of your regional profits could then be taxable in Saudi Arabia,” said one executive. “That has caused fear and panic across the patch.”

Investment minister Khalid al-Falih said an announcement would be made soon to clarify the regulations. Saudi Arabia, the world’s top oil exporter and the Middle East’s largest economy, announced its regional headquarters programme in 2021, sending shockwaves through the United Arab Emirates, where most regional corporate head offices are based.

“It is business as usual for them in Saudi Arabia and outside Saudi Arabia,” Falih told the Financial Times. Operations outside Saudi Arabia “will be taxed in those entities’ country of operations. They will not be intermingled or mixed with the regional headquarters,” he said.

“The guiding principle is that the RHQ special purpose vehicle, which will be created in Saudi Arabia, will be only taxed for the limited — almost nothing — profits that they make within the RHQ . . . Most likely the limited income by the RHQ SPV will be granted tax relief,” Falih said.

The regional headquarters scheme is part of an ambitious plan to make Saudi Arabia less reliant on oil revenues by transforming the kingdom into a trade and finance hub. State-owned enterprises, which dominate the economy, are set to spend hundreds of billions of dollars on new projects over the next decade, attracting multinationals to the kingdom.

About 80 companies, including Unilever and Siemens, have already been granted licences to move their regional headquarters to the kingdom, with many expected to be based in Riyadh’s King Abdullah Financial District. PepsiCo announced earlier this month that it had relocated its Middle East chief executive’s office to the kingdom.

The programme underscored the growing competition with the UAE, which for years served as a regional hub for multinationals with its laissez-faire approach to business, socially liberal lifestyle and hub airports.

The UAE, which will start imposing a corporate tax of 9 per cent in May, has responded with a range of incentives to attract companies. Saudi Arabia, which levies a 20 per cent corporate income tax, has promised its own incentives, including exemptions on visa limits and recruitment quotas for Saudi nationals for 10 years. But they have been overshadowed by the uncertainties on taxation.

Many companies feel they have no choice but to move if they want to win lucrative government contracts in Saudi Arabia, the fastest growing G20 economy with billions earmarked for spending on mega projects such as the Neom new city project.

The taxation uncertainty is “paralysing some people from doing things. It was slowing us down. And then we just talked about it today and said guys, we’re going to go ahead and set up that entity in Riyadh,” the executive said.

Falih said the kingdom did not want to saddle the companies with additional costs.

“We realised that we had to do everything we can through policy and regulation to ensure that the companies will not incur additional risks or costs from the alternative jurisdictions for managing their regional operations, and the biggest one of course is taxation,” he said.

But requirements for all senior executives to be resident in Saudi Arabia had been expanded to include demands that they rent accommodation and are paid salaries into a bank based in the kingdom, said one consultant.

“It’s getting more onerous,” he said. “Every month it’s becoming more expensive to rent accommodation and office space as others move in — there just isn’t enough supply.” Securing international schooling for children has also posed a challenge.

One executive said their company had set up a Saudi regional head office, to oversee operations in other Gulf states such as Bahrain, Kuwait, Oman and Qatar. The UAE office would continue as a regional headquarters for the wider Middle East.

To qualify as a regional HQ under the Saudi plans, the base must have oversight of operations in at least two other states. But Michael Bessey of consultants Albright Stonebridge Group said the latest information from the investment ministry was that Saudi-based regional headquarters should serve as a base for the entire region.

“The requirements are becoming stricter — a company that continues to call Dubai a regional headquarters for [Middle East and north Africa] would probably not be acceptable,” said Bessey. “So companies need to think about how they describe their UAE offices moving forward.”