Kingdom of Saudi Arabia launches Regional Headquarters Program

Related Authors: Marc Saroufim | Yasmin Talal Beheri, Al Akeel & Partners

Background

In 2020, the Kingdom of Saudi Arabia ("KSA") launched the initiative of the Regional Headquarters Program ("RHQ Program"), jointly developed by the Ministry of Investment ("MISA") and the Royal Commission for Riyadh City, aiming to encourage international entities to have their main presence established in KSA.

Whilst entities have their headquarters in KSA, they would be able to support and manage their subsidiaries and affiliates operating in the region. Entities wishing to continue their contracts and business with the Saudi government are generally required to locate their regional headquarters to the Kingdom by 2024 (with certain exceptions – see “Exceptions” section below). The RHQ Program is part of many initiatives being introduced in an effort to increase foreign investment in KSA and to diversify the country's economy, as part of the Kingdom's Vision 2030.

RHQ License

In order for entities to be eligible for the RHQ Program's license, the regional headquarter must:

Operate as a registered separate legal entity (i.e. foreign company or a branch in KSA);
Have a physical office and act as the “center of administrative power” in the region;
Cover subsidiaries and/or branches of the entity located in at least two (2) different countries other than KSA and its country of incorporation; and
Not conduct any commercial operations (i.e. activities which generate revenue).

Entities wishing to maintain their RHQ license must choose their business activities to be undertaken in Saudi as per the following - Activities are categorized as Mandatory Activities and Optional Activities. The minimum activities that an RHQ must undertake are Mandatory Activities (i.e. the “provision of strategic direction and management functions”), in addition to three (3) Optional Activities. Please see further details below:

	Business Activities
Mandatory Activities (all are required)	Provision of strategic direction and management functions (as follows): Formulate and monitor the regional strategy Coordinate strategic alignment Embed products and/or services in the region Support acquisitions, mergers and divestments Review financial performance Provision of management functions (as follows): Business planning Budgeting Business coordination Identification of new market opportunities Monitoring of the regional market, competitors, and operations Marketing plan for the region Operational and financial reporting

Optional Activities (three are required)	Sales and Marketing Support Human Resources, and Personnel Management Training Services Financial Management, Foreign Exchange, and Treasury Centre Services Compliance and Internal Control Accounting Legal Auditing Research and Analysis Advisory Services Operations Control Logistics and Supply chain management International Trading Technical Support or Engineering Assistance Network Operations for IT System Research and Development Intellectual Property Rights Management Production Management Sourcing of Raw Materials and Parts

The RHQ license has an annual license fee of SAR 2,000 and a one-time service fee of SAR 10,000 (limited to the first year). Additional fee waivers may be applicable for certain application tiers.

Exceptions

On December 27, 2022, the Council of Ministers of Saudi Arabia issued Resolution (dated 03/06/1444H) approving the regulations of government agencies contracting with entities that do not have a regional headquarter in KSA (the "Regulations"). The Regulations will come into effect on January 2024 preventing all Saudi government agencies from contracting with entities that do not have a regional headquarter in KSA. The Regulations also restrict government agencies from contracting with any related parties to such entities that do not have their regional headquarter in KSA. The Regulations should not apply to government works or procurements with an estimated value of less than one (1) million Saudi Riyals or if the works are conducted outside KSA.

Having said that, the Regulations provide for certain exceptions where government agencies may be able to contract with entities which do not have their regional headquarter in KSA (or their related parties) (Foreign Entities). Under these exceptions, government agencies, institutions, and funds are allowed to deal with Foreign Entities in the absence of any other offer that is technically acceptable or in the case where the offer submitted by such Foreign Entity is deemed to be the best offer (after all other offers are evaluated from a technical point of view) - the offer submitted by the Foreign Entity must be financially less than twenty-five percent (25%) or more than the value of the second best offer. Government entities wishing to contract with any Foreign Entity are required to submit a report to the Court of Audit and the Expenditure and Project Efficiency Authority (EXPRO) signing the relevant contract, which must include a detailed justification.

We are expecting further updates in relation to the RHQ Program in the coming few months. We highly recommend foreign entities aiming to contract with government agencies in KSA to re-consider their corporate structures, among other matters, in light of the new rules.

If you have any questions on this topic, please let us know.