Multinational companies that moved their regional headquarters to Saudi Arabia this year with the aim of securing lucrative government contracts will “likely” receive tax relief, the kingdom’s investment minister said, as executives fear being taxed in more than one jurisdiction.
Many executives said they were still unsure about the details of the tax regime two years after being informed of the relocation deadline. Some say the main concern is that, in the absence of a taxation agreement between Riyadh and other Gulf states that could be overseen by the regional headquarters, the subsidiary’s profits could be taxed twice.
“So when you designate that entity as your regional headquarters, all of your regional profits can be taxed in Saudi Arabia,” one executive said. “It caused fear and panic in the patch.”
Investment minister Khalid al-Falih said an announcement would be made to clarify the regulations. Saudi Arabia, the world’s top oil exporter and the Middle East’s largest economy, announced a regional headquarters program in 2021, sending shockwaves through the United Arab Emirates, which has the largest number of regional corporate headquarters.
“It’s business as usual for them in Saudi Arabia and outside of Saudi Arabia,” Falih told the Financial Times. Operations outside Saudi Arabia “will be taxed in the country of operation of the entity. It will not mix or mingle with the regional headquarters,” he said.
“The guiding principle is that the RHQ special vehicle, which will be made in Saudi Arabia, will only be taxed on the limited profits – almost nothing – made in RHQ. . . It is possible that the income limited by the RHQ SPV will be exempted from tax,” said Falih.
The regional headquarters scheme is part of an ambitious plan to make Saudi Arabia less dependent on oil income by turning the kingdom into a trade and finance hub. State companies, which dominate the economy, will 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 been granted licenses to move their regional headquarters to the kingdom, with many to be based in Riyadh’s King Abdullah Financial District. PepsiCo announced earlier this month that it had moved its Middle East chief executive office to the kingdom.
The program emphasizes a lot of competition with the UAE, which for years has been a regional hub for multinationals with a laissez-faire approach to business, a socially liberal lifestyle and a hub airport.
The UAE, which will begin implementing a 9 percent corporate tax in May, has responded with various incentives to attract companies. Saudi Arabia, which pays a 20 percent corporate income tax, has promised incentives of its own, including the waiver of visa restrictions and recruitment quotas for Saudi nationals for 10 years. But they have been overshadowed by uncertainty over taxes.
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 to spend on mega projects such as the Neom new city project.
Tax uncertainty is “paralyzing some people from doing things. It’s slowing us down. Then we talked about it today and said guys, we’re going to go ahead and create that entity in Riyadh,” said the executive.
Falih said the palace did not want to saddle the company with additional costs.
“We realize that we must do everything we can through policies and regulations to ensure that the company will not be exposed to additional risks or costs from alternative jurisdictions to manage regional operations, and the biggest of course is taxation,” he said.
But the requirement for all senior executives to be residents of Saudi Arabia has been expanded to include a requirement that they rent accommodation and pay their salaries to a bank based in the kingdom, one consultant said.
“It’s getting harder,” he said. “Every month it’s getting more expensive to rent accommodation and office space because people are moving in – there’s not enough supply.” Securing international schooling for children is also a challenge.
One executive said his company had set up a Saudi regional headquarters, to oversee operations in other Gulf states such as Bahrain, Kuwait, Oman and Qatar. The UAE office will continue to be the regional headquarters for the wider Middle East.
To qualify as a regional headquarters under the Saudi plan, the base must oversee operations in at least two other countries. But Michael Bessey of consultants Albright Stonebridge Group said the latest information from the investment ministry is that the Saudi-based regional headquarters should be the base for all regions.
“The requirements are becoming stricter – companies that continue to call Dubai their regional headquarters [Middle East and north Africa] probably not acceptable,” said Bessey. “So companies need to think about how to portray the UAE office going forward.”