Saudi Arabia Regional Headquarters Update

Saudi Arabia

CMS is a leading international law firm with an office in Riyadh, in the Kingdom of Saudi Arabia (KSA). The Corporate Law team in the KSA has launched a series of articles entitled Explore Investment in Saudi Arabia focussing on doing business in the KSA.

In this article, our experts in Corporate Law, using insights gained in the course of assisting our clients to establish legal entities in the KSA, explore the latest position in the evolving landscape of the Regional Headquarters (RHQ) Program that was formally launched in February 2021. Since then, there have been a number of updates that have further elaborated on the program's goals and implementation strategy.

Prohibition on government agencies contracting with companies that do not have a RHQ

On 27 December 2022 the KSA Council of Ministers approved the Regulations of Government Agencies Contracting with entities that do not have a RHQ in the KSA and their related parties (the Regulations). The Regulations came into effect on 1 January 2024 and, subject to certain exemptions, prevent all government agencies, when carrying out their works and securing procurements, from contracting with companies that do not have an RHQ in KSA and their related parties.

We set out further details below on the following aspects of the Regulations:

1) Exemptions

The Regulations do not apply to government works or procurements with an estimated value below SAR 1 million (this threshold may be subject to future adjustments). Additionally, they are not applicable to works executed outside KSA.

The Regulations also establish specific circumstances under which government agencies can contract with companies lacking an RHQ within KSA, including their related parties. These circumstances are as follows:

  • where there is only one technically acceptable offer;
  • if, an offer submitted by a company without its RHQ in the KSA, is the best offer from a technical perspective and has a value of less than 25% or more than the value of the second-best offer received by that government agency;
  • in relation to works to be executed, there is no more than one qualified company that has its RHQ in KSA to undertake such works;
  • an emergency situation that can only be dealt with by inviting or directly contracting with companies that do not have an RHQ in KSA. The regulations define an emergency situation as a situation in which a threat to public safety, public security or public health is serious and unexpected or in which a breach threatens loss of life or property; or
  • the works or procurements in question can only be serviced by companies without an RHQ in KSA.

To utilise the exemptions outlined above for contracting with a company without an RHQ (or their affiliates), government agencies are required to prepare a report. This report must detail the justifications for awarding the contract to a company lacking an RHQ.  A copy of this report must be submitted to the Supreme Committee of the Saudi Program to Attract the Regional Headquarters of International Companies and the General Secretariat of the Local Content and Government Procurement Authority within 30 working days following the contract's signing.

2) Definition of companies that do not have a RHQ in the KSA

The Regulations define companies that do not have an RHQ in the KSA as “foreign companies that do not have an RHQ in the KSA and have an RHQ in the Middle East and North Africa  (MENA) Region and are included in the list to be prepared and maintained by the MISA”. The list prepared by MISA is not publicly available however we understand that most companies on that list have been contacted by MISA to advise them of the need for them to establish a RHQ in the KSA. Even if a company falls outside this definition, it may still be possible for such company to apply to establish a RHQ in the KSA.

The standard position is that in order to apply for an RHQ license the applicant must be a multinational corporation with subsidiaries in two jurisdictions (in addition to their home jurisdiction and the KSA), as well as a RHQ or presence in the MENA region. Having a presence in MENA is typically construed broadly to include corporate vehicles of any kind (including LLCs, branches, and rep offices).

Notwithstanding the published requirements, we understand that MISA is taking a flexible approach and approving applications for RHQs from entities which do not have a RHQ in MENA and/or entities which have subsidiaries globally but not necessarily in MENA.

3) Definition of related party of an entity that does not have a RHQ in the KSA

The Regulations also restrict government agencies from contracting with any related parties to those companies that do not have their RHQ in the KSA. The Regulations define a related party as any agent for companies that do not have an RHQ in the KSA, or any distributor, supplier or provider of their goods or services with respect to those goods and services.

4) Scope of the definition of government agencies

It should be noted that the Regulations apply to all government agencies and not only those that are subject to the KSA Government Tenders and Procurement Law that came into force on 29 November 2019. The Regulations define KSA government agencies as ministries, governmental entities, public bodies, departments, institutions and independent agencies with a public legal personality.

We understand that entities that are directly or indirectly majority owned by the KSA government, as well as other eminent larger private KSA companies, are likely to apply the RHQ requirement in respect of their own procurement policies, with some, as part of their tender process, potentially giving more weighting/points to entities which have a RHQ in the KSA.

Key features of a RHQ

The RHQ is not designed to be a revenue generating entity. Instead the RHQ’s function is essentially to oversee regional management and will not generally be client facing (i.e. the RHQ will manage internal operations, back-office tasks, and management only). Contracts with clients, sales and/or other commercial activities will all be undertaken via a separate operating entity in the KSA (OpCo) or by means of another valid method of doing business in the KSA (e.g. including without limitation, a commercial agent/distributor).

Example: a multi-national valve supplier trading with government entities in the KSA will require two legal entities:

  1. a trading company (OpCo); and
  2. the RHQ.

(This example is subject to the multi-national company satisfying the applicable licensing requirements to undertake trading activities in the KSA and also satisfying the licensing requirements for establishing a RHQ in the KSA).

The RHQ is required to provide strategic direction and management functions, as well as perform three optional activities.

  1. RHQ strategic direction functions include:
    1. Formulate and monitor the regional strategy
    2. Coordinate strategic alignment
    3. Embed products and/or services in the region
    4. Support acquisitions, mergers and divestments
    5. Review financial performance
  2. RHQ management functions include:
    1. Business planning
    2. Budgeting
    3. Business coordination
    4. Identification of new market opportunities
    5. Monitoring of the regional market, competitors, and operations
    6. Marketing plan for the region
    7. Operational and financial reporting
  3. The optional RHQ activities comprise of:
    1. Sales and Marketing Support
    2. Human Resources, and Personnel Management
    3. Training Services
    4. Financial Management, Foreign Exchange, and Treasury Centre Services
    5. Compliance and Internal Control
    6. Accounting
    7. Legal
    8. Auditing
    9. Research and Analysis
    10. Advisory Services
    11. Operations Control
    12. Logistics and Supply chain management
    13. International Trading
    14. Technical Support or Engineering Assistance
    15. Network Operations for IT System
    16. Research and Development
    17. Intellectual Property Rights Management
    18. Production Management
    19. Sourcing of Raw Materials and Parts

The RHQ is required to employ at least 15 employees in the KSA including 3 C-Suite level executives. For many SME businesses, the need to have 15 employees assigned to the RHQ is a difficult requirement to satisfy. In the past we have seen that the MISA has, on a case-by-case basis granted temporary exemptions from certain RHQ requirements. Currently, the approach of the MISA appears to be to say all RHQs are required to do their best to satisfy the applicable requirements, and to the extent that they are unable to do so, they must apply to MISA for exemptions 9 months after the RHQ has been established.

Next Steps

It is expected that further regulations pertaining to RHQs in the KSA will be published by the KSA government in due course which may further modify the landscape for RHQs in the KSA.

If you would like to understand more about the RHQ programme and its potential implications for your business going forward, we would be delighted to receive your enquiry. Please reach out directly to our team on the ground Rizwan Osman (Partner, Head of Corporate (Saudi Arabia)), Harry Taylor (Associate) and Reem Alsmail (Associate) via their contacts details below.