On 7 March 2023, the Council of Ministers formally approved the Initiative for attracting multinationals to set up regional headquarters in Saudi Arabia. Earlier, the Regulations related to contracting by governmental entities with the foreign entities, which do not have regional headquarters in Saudi Arabia (Regulations) were approved by the Council of Ministers on 22 December 2022 under Decree No: 377 dated 03/06/1444 H.
Starting January 2024, the Regulations related to governmental agencies contracting with foreign entities not having their regional headquarters in Saudi Arabia will become effective. As a result, foreign entities not having their regional headquarters will find it difficult to bid for public projects. It is expected that many multinationals will set up regional headquarters in Saudi Arabia to continue undertaking public projects.
This short note covers the Regulations and highlights the requirements and conditions for setting up of Regional Headquarters in Saudi Arabia.
Restrictions Due to the Regulations
In essence, the Regulations stipulated conditions and restrictions for all governmental entities in regard of contracting with the foreign entities not having regional headquarters in Saudi Arabia (RHQ).
Government and public agencies will not be able to award contracts to such companies or invite them to bid for undertaking works or sell goods or provide services. The Regulations provide for certain exemptions and exceptions, yet, it mandates the governmental agencies to follow strict guidelines for availing any exemption or exception.
Exemptions to the Regulations
Exemptions shall apply to works and procurements wherein the total value of such work or procurement is less than SAR One Million or the works are to be executed outside of the Kingdom. Moreover, the public entities may award projects to a company not having RHQ if there is no other technically qualified entity or the proposal by such a company is competitive by 25% when compared to the next best competitive proposal.
Government agencies will also be able to invite entities not having RHQs to bid for works or supply goods or services if there are no companies qualified to undertake the subject projects or the company has an exclusivity in providing such works or goods or in case of any emergency. The agencies will be required first to refer to the Committee overseeing requests for according exemptions and exceptions before commencing the tendering process and the Committee will have the discretion to take decision on the request.
From January 2024, the foreign companies not having RHQ in Saudi Arabia will not be able to procure public projects unless they qualify to be exempted which will be subject to several conditions, scrutiny and approval by the Committee overseeing such requests.
Requirements for Setting Up a Regional Headquarters
There are certain conditions and requirements to set up and operate an RHQ, as per the Ministry of Investment Services Manual, Ninth Edition – 2022:
- The entity should exist in at least in two different countries (excluding Saudi Arabia and the country in which its headquarters is located).
- The RHQ shall be established as a separate legal entity in Saudi Arabia either as a company or as a registered branch of a foreign company.
- The RHQ shall not conduct any commercial operation other than customary RHQ activities.
- The RHQ shall be required to undertake all mandatory RHQ activities within six months of issuance of the License.
- The mandatory activities include (a) formulating and monitoring regional strategies (b) coordinating strategic alignment (c) embedding products and/or services in the region, (d) supporting acquisitions, mergers and divestments, and (e) reviewing financial performance.
- Under the mandatory activities obligations, the RHQ shall also be required to undertake management functions including (a) business planning, (b) budgeting, (c) business coordination, (d) identifying new market opportunities, (e) monitoring of the regional market, competitors, and operations, (f) preparing marketing plan for the region, and (g) operational and financial reporting.
- The RHQ shall be required to undertake at least three optional RHQ activities within one year of issuance of the license which encompass a variety of management, administrative, advisory, accounting & auditing, marketing, research and development, logistics, and functions.
- Failure to commence the mandatory and/or optional RHQ activities or hiring of the required number of employees within the stipulated time or ceasing to satisfy these requirements any time later will result in cancellation of the license.
- The RHQ employees undertaking the mandatory RHQ License activities must have the relevant skills and knowledge developed at the headquarters or another regional headquarters of the Multinational and at least three employees must be of Executive Director level and Vice-President level.
- The RHQ must employ at least 15 full time employees to conduct RHQ activities within one year of issuing the license.
If you have any additional questions about setting up a regional headquarters as a foreign entity, or would like to learn more, please contact us. With offices located in Jeddah, Dammam, and Riyadh, we are ready to support you anywhere across the Kingdom.
AlGhazzawi & Partners