The Kingdom of Saudi Arabia (KSA), as part of Vision 2030, aims to diversify its economy and reduce its dependency on fiscal resources stemming from commodities.

Amongst others, Vision 2030 focuses on attracting more Foreign Direct Investment. It does so through incentivizing businesses to establish themselves in KSA. Additionally, subject to certain conditions, only businesses which are incorporated in KSA can still tender for contracts with the government and government agencies (i.e., any entities or agencies with public legal personality in KSA) from 1 January 2024.

The introduction of the Regional Headquarters Program (“RHQ”) fits in with Vision 2030. This joint initiative between the Ministry of Investment (“MISA”) and the Royal Commission for Riyadh City (“RCRC”), invites global companies with a presence in the MENA region to relocate their regional headquarters to the KSA, promising accessibility to the ever-expanding economy of Saudi Arabia and to be part of the 2030 strategic development goals.

Regional headquarters by definition refers to “the home or center of operations, including research and development, of a national or multinational corporation with no retail sales to the general public”. The eligibility requirements and further details for an RHQ are outlined by Invest Saudi, and can be found here.

Based on what is already known so far, the program offers a range of benefits and facilities for RHQs in KSA, although it remains to be seen at this stage whether RHQs will get to enjoy any tax holidays or incentives. Although often rumored, there is currently no legal framework to award such tax exemptions, until further notice.

This, in turn, brings the tax consequences in focus of setting up an RHQ in KSA. By nature, the RHQ will be a location for strategic and management functions, and possible support services. This triggers proper tax consequences. This article provides an overview of the tax implications following the setup of the RHQ in KSA within the context of the existing KSA corporate income tax framework.

Taxable revenue generated by the RHQ

For those that establish an RHQ in KSA, the legal entity through which the RHQ license will be operated, will be considered a tax resident in KSA based on its place of incorporation. If this is an LLC, its worldwide income is subject to tax in KSA.

The fact that its C-suite, and therefore assumed to be the decision makers, may potentially not be resident in KSA effectively, or take decisions outside of KSA, has no bearing on the tax residency of the RHQ, which is simply a KSA tax resident.

If, however, the place of effective management of such an entity is outside of KSA, the entity may have a second residency, which may create additional issues outside of KSA in the country where the entity would be considered as having a second residency.

Setting up the RHQ as a branch, and not as an LLC has its own challenges, especially around profit allocation.

While from a regulatory point of view the RHQ license does not permit commercial activities, the revenue generated will be subject to corporate tax in KSA. Under the existing corporate income tax framework, 20% corporate income tax will apply on the taxable income generated by the RHQ.

Given that the RHQ is aimed mainly at foreign investors, while a theoretical possibility, it is unlikely that the entity will be held by GCC nationals such that zakat will apply on its zakat base at a rate of 2.5% (the zakat base is calculated differently than taxable income for corporate income tax purposes).

While the entity’s activity is not of a commercial nature, from a tax point of view, it has key strategic functions sitting in KSA. The entity needs to comply with transfer pricing rules and needs to be remunerated for its functions. An entity which is a pure cost center and is therefore loss making continuously is not permissible from a transfer pricing point of view, not desirable and is likely to trigger an audit.

The RHQ’s functions, assets and risks will need to be analysed, and likely the outcome will be that its strategic functions need to be remunerated at arm’s length determined through a benchmarking analysis, while its less strategic functions, such as back office functions, would be considered as low value intra group services (“LVIGS”), where the nature of such services is considered supportive and supplementary rather than an element of the core business of the Group.

The OECD have a safe harbour for LVIGS transactions which include accounting and auditing, tax and legal services, IT services (when not part of the principal activity of the group), HR activities etc. KSA has endorsed those Guidelines.

Where services meet the definition of LVIGS, a simplified approach may be available, which would see the appropriate cost base identified for the LVIGS activities be recharged with a profit markup of 5% with no requirement for a full benchmarking analysis to support the arm’s length nature of same. However, documentation should be retained which supports the rationale for the treatment of the activities as LVIGS. This includes a Master File and Local File where intercompany transactions exceed 6M SAR annually.

Below is a table of the mandatory activities under the RHQ license, and the optional ones.

Other pitfalls for newly incorporated RHQ’s?

KSA residents are obliged to withhold a tax from the amounts payable to non-resident entities for services (“WHT”). WHT applies on the gross income sourced by the non-resident entities from KSA at the time of payment by the KSA resident customer. The rate applied to the payments ranges between 5% to 20%, depending on income types.

However, subject to the double taxation treaties (“DTTs”) entered with KSA, non-residents from countries that have treaties with KSA may be able to avail of a WHT exemption or relief on the income generated. KSA has entered DTT’s with numerous countries outlining the extent to which tax may be charged and the potential relief available on the WHT application pertaining to profit repatriation, dividend, interest and royalty payments, among a few others. The list and overview of DTT’s can be found here.

KSA additionally has wide Permanent Establishment concepts, covering amongst others virtual Permanent Establishments. KSA also has a Force of Attraction principle, widening the scope of any profits allocated to a Permanent Establishment. This exceptional position from an international point of view tends to constitute more of an issue with non-treaty countries.

The Financial Times has recently published an article found here, which refers to how the taxation uncertainty is “paralyzing some people from doing things”, with fears among executives revolving around how the setting up of the RHQ in KSA could potentially give rise to a tax creep on the regional profits generated outside of KSA, allowing KSA to tax such profits under its domestic tax legislative, in the absence of tax treaties between KSA and other countries in the region.

These concerns are partially unfounded. If the activities described above are conducted in KSA, no other countries would be entitled to tax them. Their very nature would not make them particularly prone to Permanent Establishment risks elsewhere (although there may be residency risks elsewhere).

Where there is more of a valid concern, is around passive income, where DTT’s may help in reducing potential foreign withholding taxes and establishing a method for double tax relief to be used in KSA. It is therefore important that KSA continues to develop its DTT network.

Value Added Tax (“VAT”) considerations

In general, the place of supply in respect to both goods and services determines the applicable VAT regime. The supply of services by a KSA resident entity, including an RHQ, to a non-resident customer, who benefits from the service outside the GCC territory, is in principle subject to zero-rate for KSA VAT purposes. In order to apply the zero-rate, the supplier must ensure it can meet each of the criteria set out in Article 33 of the VAT Implementing Regulations.

This treatment should be appropriately accounted for in any invoices issued by the RHQ to its affiliates. Additionally, it will be important for the RHQ to monitor the activities/supplies undertaken in KSA which are subject to VAT and whether they will exceed the standard threshold of 375,000 SAR, requiring them to register for VAT in KSA.

Concluding thoughts

There is currently no tax exemption available for RHQ activities. The taxation of RHQ activities therefore has no specific angle to it. The attention point mainly turns towards Transfer Pricing and the appropriate arm’s length remuneration for RHQ activities. Given the potential mix of strategic, management and back office activities, these arrangements need to be analysed and appropriately remunerated.

We will potentially see more clarification from ZATCA or from MISA on the aspects of the RHQ program soon, and definitely more interest, given the very fast growth KSA is currently going through, and the multitude of megaprojects and smaller projects being developed.

As we have seen in the UAE for Qualifying Free Zone Persons, even if benefits are granted (0% in the case of the UAE), transactions need to comply with transfer pricing. Therefore, even if eventually RHQ’s are granted a tax holiday, the transfer pricing principles will remain very relevant.

Over recent years, Mergers and Acquisitions (M&A) activities in the Middle East have held steady, despite the challenging economic climate across the world.

Such feat can be credited to the economic strategies implemented by the countries in the region. The United Arab Emirates (UAE) has remained the top market for M&A activity, with 155 deals worth $17.2 billion (AED 63 billion) in the first nine months of 2022, according to reports.

Saudi Arabia has also launched initiatives that had a positive impact on M&A, such as Vision 2030, the privatization of state-owned assets, and industry consolidation.

With favorable business and UAE corporate tax policies, the Middle East has become a prosperous hub for trade and investment, leading to a steady stream of M&A activity as businesses seek to access new markets and generate additional revenue streams.

In this article, we provide insights on some of the basic concepts of how to manage the tax aspects of M&A transactions. We also discuss the nuances of the law pertaining to the direct and indirect tax regime in the UAE, and how these impact M&A.

Why conduct a Tax Due Diligence?

Conducting a tax due diligence helps to assess possible tax risks associated with the target company that the buyer plans to acquire, or the seller wishes to sell.

From the buyer’s point of view, a tax due diligence is required for the following reasons:

• Ability to assess the target’s tax compliance,
• Evaluation of any tax exposures or contingencies, and
• Estimation of any potential tax costs or benefits of the transaction.

From the seller’s point of view, a tax due diligence is required for the following reasons:

• Ensuring proper addressal of historical tax exposure to help reduce the risk of any future tax disputes or penalties,
• Increase the value of the deal, and
• Understand the tax implications of the transaction and potential tax planning opportunities.

A Tax due diligence can create value. A clean slate for the target, will reduce uncertainty, and therefore increase the deal value.

Negotiating the deal and managing risk

Deals can be structured in a variety of ways, of which the simplest ones are the negotiation of outright Asset Purchase Agreements or Share Purchase Agreements.

Some of the matters that the buyer may pay attention to following a due diligence are:

• Adjustment of purchase price,
• Negotiation of representation and warranties,
• Inclusion of specific indemnity clauses, and
• Removal or restructuring of tainted structures until the risks are mitigated, or resolution of tax disputes before the deal is concluded.

Some of the matters that the seller may pay attention to are:

• Maximize the after-tax proceeds from the sale,
• Structuring the deal in the most efficient way possible, and
• Removing uncertainty on certain positions.

Often a tax ruling is highly critical in respect of the structuring of the deal itself. Having the tax authority rubberstamp the transactions helps in avoiding any future disputes.

A popular method is also to insure against the risks discussed above and to procure ‘Warranty and Indemnity Insurance’ (W&I Insurance). Essentially, W&I Insurance provides cover for losses arising from a breach of warranties and claims under tax indemnities.

This way, the benefit for the seller is that they access the sale proceeds immediately, rather than, for instance, having an amount blocked in an escrow. In turn, the buyer is protected from any unknown tax related loss, from the insurer directly, especially when the buyer is not convinced about the financial standing of the seller after closing.

From the insurer point of view, they require a thorough analysis of the tax due diligence report. This will determine any points of uncertainty, and to ensure that the scope of the insurance coverage is limited to the extent of their satisfaction, before quoting for a premium.

Read more on the importance and practice of obtaining tax insurance in the Middle East here.

Another important reason for protection against legal liabilities (during M&A transactions as well as more generally) is that sometimes, non-compliance may even trigger liability for the Directors and other executives of the company. In one of our earlier articles, we discussed the interplay with the personal liabilities of the Directors.

From Current structure (As Is) to Target structure (To Be)

Effective tax structuring is essential to mitigate the tax-related risks that can arise in M&A transactions—such as tax compliance, tax disputes, and transfer pricing. It usually involves carefully designing the structure of the transaction in a tax-efficient manner while ensuring compliance with applicable laws and regulations.

Pre-deal structuring may happen to make the Target more attractive, and Post-deal structuring may happen to align the acquisition better with the operation model of the buyer.

M&A and Direct Tax

M&A transactions have a profound accounting and valuation impact, both for the buyer and the seller. This in turn leads to a potential tax impact. For example, the M&A deal may revalue the assets and liabilities of the company, or the sale of shares may trigger a capital gain, a potential tax exposure.

Many jurisdictions have provisions under their law to reduce the impact of M&A transactions from a tax point of view, or otherwise address certain relief on certain types of  reorganisations.

For example, under the UAE CIT Law, transfers of business are considered to be tax neutral and benefit from a temporary exemption of taxes, subject to conditions. This is the case where (i) businesses within the same ‘Qualifying Group’ are restructured (Article 26 UAE CIT law – we will not be covering these aspects here) or (ii) where the M&A transaction is eligible for a specific business restructuring relief (Article 27 UAE CIT Law).

The specific business restructuring relief allows sellers not to have to account for any potential capital gains (or losses) as a result of the transaction. Certain conditions need to be met, as shown below in Table 1.

Further, the conditions for availing the above benefits are as follows:

• Value of shares received shall not exceed net book value of assets transferred or liabilities assumed (less the value of any other form of consideration received),
• The transfer is undertaken as per the applicable laws of the UAE,
• The taxable persons are either:
  • Resident persons, or
  • Non-Resident persons with a Permanent Establishment (PE) in the UAE,
• Neither the transferor(s), nor the transferee(s) are ‘Exempt persons’ or ‘Qualifying Free Zone Persons’,
• The Financial Years of all the Taxable Persons end on the same date,
• The Taxable Persons prepare their financial statements using the same accounting standards,
• The transfer is undertaken for valid commercial or non-fiscal reasons which reflect economic reality.

In terms of the consequences, in both situations for this benefit to accrue, the following must be observed:

• The assets and liabilities shall be treated as being transferred at their net book value such that neither a gain, nor a loss arises,
• Any unutilised Tax Losses incurred by the Taxable Person (transferor) prior to the Tax Period in which the transfer is completed may be carried forward to the Taxable Person (transferee), subject to conditions to be prescribed by the Minister. The law itself provides one condition. Where the taxable person transfers an independent part of its business, the unutilised loss carry forward benefit is only attributable to the extent of the independent part of the Business being transferred (this benefit is also subject to the change-in-control provisions discussed later).

The tax-neutral benefit is not available, and therefore there is a clawback, when any of the following occurs within 2 years from the date of the transfer:

• The shares or other ownership interest in the taxable person (transferor or the transferee) are disposed of (in whole or in part) to a Person that is not a member of the Qualifying Group to which the Taxable Person(s) belong(s), or
• There is subsequent transfer or disposal of the (independent part of) the business.

If any of the above activities occur within two years, the transfer of the (independent part of the) business shall be treated as having taken place at Market Value at the date of transfer, what is popularly known as the ‘claw-back provision’.

The unutilised tax loss carry-over benefit is also subject to the transferee conducting the same or similar Business or Business Activity, following a change in ownership of more than 50%. Relevant factors to decide if the Business or Business activities conducted are same or similar include:

• The transferee uses some or all of the same assets as before the ownership change;
• The transferee has not made any significant changes to the core identity or operations of its Business since the ownership change; and
• Where there have been any changes, it is a result of the development or exploitation of assets, services, processes, products or methods that existed before the ownership change.

M&A and Indirect Tax

From an indirect tax point of view, it is important to note a difference between an ‘Asset Deal’ and a ‘Share Deal’.

An ‘Asset Deal’ is where the buyer acquires specific assets of the target company. The buyer does not acquire ownership of the target company itself. Instead, the target company continues to exist, and the buyer becomes the owner of the specific assets.

A ‘Share Deal’, on the other hand, is where the buyer acquires the target company by purchasing its shares. This gives the buyer full ownership and control of the target company, including all of its assets and liabilities.

Within ‘Asset deal’, there are two types of deals – (i) normal sale of assets (sale of assets) (ii) sale of assets as part of the Transfer of Going Concern (TOGC) (sale of business).

As per the clarification provided by the UAE FTA, a sale of assets is normally subject to VAT as a taxable supply. This is because only the specific assets, and not the entire business itself is transferred.

On the other hand, where the assets are sold as part of a transfer of a business as a going concern (“TOGC”), the transfer is not a ‘supply’ and no VAT is charged. For example, if the transferor sells the factory building, all the machines and transfers the rights from the employment and supply contracts, this is considered as a TOGC, and is not considered a ‘supply’ for VAT purposes. A similar understanding is given in the guidances to the Saudi Arabian VAT law, which explains the same concept referring to as a ‘Qualifying Transfer’. We have summarised the difference between an ‘Asset Deal’ and a ‘Share Deal’ in the below table:

Conclusion and Final Thoughts:

Tax advisors play a crucial role in structuring M&A deals. Over recent years, the GCC tax landscape has become increasingly complex. This is the result of a number of contributing factors, such as the introduction of VAT, frequent changes in local legislation, the implementation of the Base Erosion and Profit Shifting (BEPS) standards, increased transparency and disclosure measures (Ultimate Beneficial Ownership (UBO) reporting requirement, Common Reporting Standards / Foreign Account Tax Compliance Act (CRS/FATCA) standards, and a range of other changes.

In addition, taxpayers may have noticed an increased focus on enforcement by the tax authorities, which is evidenced by an uptake in tax audits and disputes.

We have tackled how new tax rules impact M&A deals before in one of our previous webinars, noting how tax advisory plays a critical role in M&A transactions, as tax issues can have a significant impact on the success of the deal and the post-merger integration process.

The UAE Ministry of Finance has designed a carefully balanced CIT system and has tried to avoid adversely affecting M&A transactions.

Going forward, the tax department’s involvement in the transaction will be much more important, and like in other jurisdictions, tax can sometimes make or break a deal.

The UAE CIT applies as from June 2023, but the involvement of the tax teams in the M&A deals from a UAE CIT point of view, has already started. The FTA will no doubt develop an important ruling practice important for the legal certainty around M&A Transactions.

International sports bodies typically insist on obtaining widespread tax exemptions as a precondition to awarding the hosting rights to a bidder. This also applies for events organized by the Fédération Internationale de Football Association (FIFA). FIFA’s biggest event, the Football World Cup, will kick off later this month in Qatar.

Obtaining tax exemptions is such a sensitive topic for sports organizations that there have even been instances where the events have entirely moved to another country because a country was unable to grant the exemption. For example, the T20 Cricket World Cup was moved from India to the United Arab Emirates (UAE) and Oman last year because the Indian Government did not offer the exemptions in time.

In Qatar, even though Qatar has Free Zones, only the Qatar Financial Centre (QFC) issues its own tax framework. It applies next to the general tax framework applicable in the rest of the State of Qatar. We will be looking at these frameworks in this article.

Claiming Tax Exemptions (Substantive Aspects)

For mainland Qatar, Ministerial Decision No. 9 of 2022 (Ministerial Decision) issued earlier this year on 25 August 2022 = provides details on the exemptions available to different parties, based on Government Guarantee No. (3) dated 22 February 2010 (Government Guarantee) issued by the State of Qatar to FIFA.

The most comprehensive exemption benefits are provided to FIFA itself and its affiliates (whether residents or non-residents). They are totally exempt from any taxes.

Contractors are granted a limited exemption to the extent of all taxes on import, export or transfer of goods, services and rights related to the activities of the World Cup, if the goods are imported for their use by:

• The Contractors themselves in Qatar,
• The Contractors, with the possibility of re-exporting the goods,
• The Contractors, with the possibility to donate to sports entities, charitable foundations etc.

Individuals employed or appointed by the following, are also exempt from individual taxes on payments, fringe benefits or amounts paid or received in relation to the World Cup, until 31 December 2023:

• FIFA,
• FIFA’s affiliates,
• Continental or National Football Associations,
• Event broadcasters,
• Suppliers of goods,
• Works contractors and
• Service providers.

This exemption also covers Personal Income Taxes for those individuals who enter and exit Qatar between 60 days before the first match (21 September 2022) until 60 days after the final match (16 February 2023), as long as they do not permanently reside in Qatar. This exemption may be void of much effect, given the absence of Personal Income Tax in Qatar.

An Exemption from Excise tax is to be obtained by way of refund, by providing documents like purchase invoices and bank details.

 Claiming The Exemptions – Logistical Aspects

For exemptions granted by the General Tax Authority (GTA), there is no requirement to register with the GTA. Instead, FIFA (through the Supreme Committee for Delivery and Legacy (Supreme Committee)) prepared a list of exempted entities and individual, containing data such as the nature of contracted works, term and value of the contract, and the residency of the contracting party.

The Supreme Committee then provides the GTA the relevant documentation (Articles of Associations of companies, addresses of individuals etc.) in regard to the organisation or individuals for whom the Tax Exemption is applied.

For claiming customs duty exemptions with the General Authority of Customs (GAC), (and unlike the procedure with the GTA), the claimants need to register with the GAC.

Here too, FIFA approves the list for the Supreme Committee to provide to the GAC to entitle those entities to exemptions from customs duties and fees.  Based on this list, the GAC provides the listed entities amongst others with facilities in regard to electronic customs clearance.

In this regard, the GAC also earlier this year launched a ‘Sports Events Management System’ to facilitate customs procedures during sporting events, including the World Cup. This system provides electronic services for the clearance of goods, including easy registrations, accelerated customs procedures, and the inclusion of a special unit to facilitate approvals for incoming shipments. 

There may be some interesting questions on the applicability of the Ministerial Decision, including:

• To what extent are the activities ‘directly or indirectly’ related to the activities of the World Cup? For example, does it include online betting platforms involved in placing bets on the matches? Would it include businesses that are involved in ancillary aspects to the World Cup such as general tourism consequent to the World Cup?
• Would match fee or advertisement / sponsorship / award income earned by the footballers in relation to the World Cup also be covered under the Ministerial Decision?
• Where an event broadcaster obtains substantial advertisement income from brand sponsors during the broadcast of the match or match related activities, is such income also exempt from taxes?

QFC – Tax Exemption Regime for the World Cup 

The QFC in its Concessionary Statement of Practice (Statement) explicitly provides that a QFC entity which is a:

• FIFA subsidiary – is exempt from Corporation tax and any other charge, levy, penalty or interest related thereto;
• FIFA Host Broadcaster or a Local Organizing Committee (LoC) Entity – is exempt from Tax ‘in relation to taxable profits that are derived from activities carried on for the purposes of the World Cup’.

The major conditions for such QFC entities to claim the exemption are as follows:

• Such QFC entities have genuine economic substance in Qatar,
• The QFC entity operates in terms of the license and upon authorization of the Qatar Financial Centre Regulatory Authority (QFCRA),
• An Advanced Ruling has been applied for by the QFC entity and granted by the QFC, confirming the exempt status of such QFC entity,
• The QFC entity is included in the list provided by FIFA to the QFC Tax Department,
• The sole or main purpose of such QFC entity is not avoidance of tax,
• The QFC Tax Department is satisfied that granting the exemption is not in breach of international tax principles set out in the BEPS Project minimum standards.

The potential activities that can be developed in the QFC are limited, and therefore not all types of businesses can set up in the QFC.

No VAT – No VAT Exemption

Even though Qatar is a part of the GCC VAT Agreement and committed to implement VAT in the same vein as its neighboring countries of the UAE, Kingdom of Saudi Arabia (KSA), Bahrain and Oman have done, it has not yet enacted any legislation.

Therefore, there is currently no need for a VAT exemption for the World Cup. Who knows, VAT may be introduced shortly after the organization of the World Cup?

Exemptions Worth the Trouble?

Granting tax exemptions for international sporting events are sometimes controversial. The public in some hosting countries do not always believe they receive a return on investments from the event. While Qatar has spent substantial amounts of money on the construction of infrastructure, the effect of the tax exemptions is rather limited, and at least for Qatar, it seems to have been worth the investment. In any case, the exemptions are a precondition, without which a country cannot bid. After the UAE had hosted the FIFA Club World Cup a number of times, Saudi Arabia will now be looking at hosting the Asian Winter Games in 2029. Those countries have given similar tax concessions to the international organizations managing the events.

For future possible events in the UAE, it will also be interesting to see how the sporting organizations and the tax authorities will deal with the Corporate Income Tax (CIT) which is to be introduced in the UAE in June 2023. The relationship may be anything between an unbridled and full-fledged exemption (if the UAE is willing to do so), or it may lead to rather interesting tax claims (like the Formula 1 case on Permanent Establishment (PE) in India a few years ago, which was decided by the courts in the tax authority’s favor). Time alone can tell.