Setting up a Regional Headquarters (RHQ) in Saudi Arabia can unlock headline tax incentives—alongside strict economic substance, transfer pricing, and VAT compliance. This step-by-step guide is written for corporate taxpayers in Saudi Arabia evaluating or operating an RHQ, with practical actions to protect your incentives and file clean returns with ZATCA.
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RHQ in KSA — What It Is & Who Qualifies
An RHQ is a Saudi entity or branch licensed to supervise, support, and strategically manage regional operations of a multinational group. Typical eligibility points include: having at least two group subsidiaries outside KSA, valid commercial registrations, and filing audited financial statements with the license application. The RHQ focuses on permitted HQ functions (strategic/administrative oversight) rather than frontline commercial activities.
The Big Draw: RHQ Tax Incentives (What’s in Scope)
- 0% Corporate Income Tax (CIT) on eligible RHQ income arising from permitted headquarters activities.
- 0% Withholding Tax (WHT) for payments by the RHQ to non-residents in three buckets: dividends; payments to related persons; and payments to third parties for services necessary to the RHQ’s activities.
- Duration: the incentive generally runs for 30 years from the date the RHQ license is granted.
- Not a blanket holiday: income from non-eligible activities is taxed under normal KSA rules; WHT relief does not apply to non-eligible payments or in cases of tax avoidance.
Action: ring-fence RHQ activities in your ERP (projects/CCs) to separate eligible from non-eligible income, costs, and payments.
Economic Substance: How to Keep the Incentive
Substance is not optional. Authorities expect a real HQ footprint in KSA commensurate with your regional role:
- Physical presence: a staffed office in KSA with appropriate assets and systems.
- Governance in KSA: hold regular board/leadership meetings in the Kingdom; take key executive decisions in KSA and document them.
- People & capabilities: maintain adequate employees (including senior decision-makers) aligned to permitted HQ functions.
- Annual substance report: file evidence of how the RHQ met ESR (employees, activities, decision-making, premises).
- No commercial trading: frontline sales/distribution for KSA is typically outside the RHQ license and risks incentive loss for those revenues.
Pro tip: minute every key decision in KSA; track leadership travel; attach agendas/attendance and resolutions to your annual ESR pack.
Permitted (“Eligible”) vs. Non-Eligible Activities
| Category | Examples | Tax Treatment |
|---|---|---|
| Eligible HQ oversight | Strategy, budgeting, regional governance, central management, market/tech research, brand/communications guidance | Potential 0% CIT on income; 0% WHT on qualifying outward payments |
| Support services to group | Shared services (HR/IT/Finance), coordination, bids & information flows to group companies | If aligned to license & substance → eligible; otherwise taxed normally |
| Non-eligible commercial activity | Local product distribution, on-the-ground trading, revenue contracts with KSA customers unrelated to HQ role | Taxable under standard KSA rules; WHT relief does not apply |
If the RHQ performs non-eligible activities (e.g., KSA sales), those revenues are excluded from the incentive and subject to normal tax—and may risk your RHQ status if systemic.
VAT & Customs for RHQs
- No special VAT regime: RHQs follow the standard 15% VAT Law & Implementing Regulations.
- Reverse charge (imported services): account for VAT under RCM; input VAT may be recoverable if cost relates to taxable activities.
- Imports: pay import VAT (and duties) or use available deferral mechanisms if conditions are met; treat recoverability under usual VAT rules.
- Branch scenario: if the RHQ is a branch of a KSA parent, intra-entity supplies are not “supplies” for VAT between the same legal person; normal B2C/B2B rules still apply to external customers.
Maintain a VAT reconciliation between e-invoicing, GL, and returns; pre-clear any zero-rating and blocked input VAT categories.
Transfer Pricing (TP) & Intercompany Charges
- Arm’s length pricing: HQ service fees, cost allocations, and royalties must be supportable with a master/local file and benchmarking.
- Substance match: charges must reflect actual KSA decision-making and capability (people, systems, risks).
- Documentation: service agreements, SoWs, time sheets, and benefit tests are essential—especially when claiming 0% WHT.
- Country-by-Country Reporting (where relevant): align ETR bridges with the RHQ’s low-tax nature to avoid controversy.
Governance & Compliance Timeline (Annual)
- Q1–Q2: Refresh RHQ license conditions; confirm subsidiaries map; approve annual HQ plan and budget in KSA.
- Quarterly: Hold documented leadership/board meetings in KSA; archive minutes and resolutions.
- Monthly/Quarterly: File VAT; reconcile FATOORA e-invoicing to GL; maintain RCM/import VAT proofs.
- Year-end: Prepare ESR annual report; segregate eligible vs. non-eligible income schedules; finalize TP files.
- Tax filings: Submit CIT/Zakat/WHT (if any outside the exemption) per statutory deadlines; retain evidence packs for 10 years.
Top RHQ Risk Triggers & How to Mitigate
- Substance shortfalls: too few senior staff or decisions taken outside KSA → beef up governance in KSA, document approvals, move key roles.
- Scope creep: RHQ starts selling/distributing → spin off commercial ops into a separate taxable entity; keep RHQ clean.
- Poor segregation: costs/revenues from non-eligible activity sitting in RHQ → create dedicated cost centers/projects and intercompany policies.
- WHT misapplication: applying 0% to non-eligible payments or without documentation → pre-clear payment nature and counterparty status.
- VAT mismatches: e-invoicing vs. returns; blocked input VAT claimed → run monthly controls & exception reports.
RHQ Launch Checklist (Executive Summary)
- ✔️ Confirm group structure: ≥2 offshore subsidiaries and audited FS ready.
- ✔️ Define eligible activities in the license; draft service catalog & intercompany agreements.
- ✔️ Build substance: premises, headcount plan (incl. executives), meeting calendar in KSA, asset provisioning.
- ✔️ Configure ERP/Tax: CCs for eligible/non-eligible; WHT flags; VAT RCM & import processes; e-invoicing integration.
- ✔️ Prepare ESR & TP documentation templates; set quarterly governance checkpoints.
