The Kingdom’s bold move will prove to be another crucial step in the growth of the Kingdom, as we have continuously seen in recent years. Namely, the new RHQ Requirement is expected to provide for an increase in foreign investment and employment opportunities, as well as the emergence of new industries and sectors in the Kingdom. This Requirement is aimed at facilitating the Kingdom’s 2030 investment goal of injecting over SAR 12 trillion into the national economy and becoming one of the top 15 economies worldwide.
To avoid legal complications in conducting business within the Kingdom, foreign entities should seek to establish their RHQ in the Kingdom. To validly establish an RHQ in the Kingdom, foreign entities must ensure the RHQ sufficiently provides the following functions: strategic direction, management functions, and three optional RHQ activities.
Strategic direction entails, among other things, developing regional strategies, reviewing the financial performance of the company, and providing services or products within the Kingdom. Management functions include, among other things, business and marketing planning, financial reporting, and budgeting. Additionally, there are numerous optional RHQ activities, however, a foreign company need only implement three activities. Optional activities include research and development, auditing, logistics and supply chain management, accounting, and legal.
More recently, in December 2022, the Council of Ministers of the Kingdom adopted a resolution providing some clarity to the public in relation to the 2021 decision – the new guidelines as released(the “Guidelines”).
The Guidelines apply to all contracts between the KSA Government and any company without its RHQ in the Kingdom (as per Article 3). Article 4 of the Guidelines, however, provides two narrow exemptions to its application. Article 4 exempts businesses that provide goods and services that do not exceed one million (1,000,000) Saudi Riyals in cost, as well as entities that provide goods and services outside of the Kingdom.
Article 8 provides the most important umbrella rule of the Guidelines. Article 8 states that the KSA Government cannot invite companies without an RHQ in the Kingdom to contract with them unless (1) there is an emergency that cannot be mitigated without contracting with the specific company, or (2) the goods and services are exclusive to that company and there is no valid alternative for the government (a company with similar goods/services headquartered in the Kingdom).
Moreover, foreign entities with specialized technical know-how and those with exceptionally low operating expenses may be able to avoid the aforementioned general rule. The Guidelines do not forbid companies that do not have their RHQ in the Kingdom from submitting bids for public offers (as per Article 6).
For most companies, however, such bids may prove to be futile as the government only accepts such submissions in two scenarios: either (1) the submission constitutes the only acceptable offer, by virtue of all other offers lacking the technical requirements; or (2) after review, the government agency determines that the submission is technically superior to all other submissions and would cost 25% less than the second-best submission. We note that foreign entities that do not bid on any government contracts are unaffected by this RHQ Requirement.
The new Guidelines further cement the Kingdom’s vision in putting its economic interests at the forefront. Although the Guidelines cover a few exceptions for companies without its RHQ in the Kingdom to contract with the KSA Government, these exceptions are limited in their application and do not take away from the incentives of relocating to the Kingdom. This is particularly true since the vast majority of foreign companies that aim to do business in the Kingdom wish to operate locally and seek to conduct business in excess of 1 million Saudi Riyals. Moreover, very few companies will provide exclusive services or goods without valid alternatives for the KSA Government in the Kingdom. However, for the few companies that do provide exclusive products, there may be an important exception of concern to them in Article 8.
In light of these changes, many companies have already moved their MENA headquarters to the Kingdom (mostly in the capital, Riyadh), including PepsiCo, Siemens, Deloitte and over 40 other international corporations. These companies, and others who will follow suit, may be incentivized to move their RHQ to the Kingdom for various commercial reasons. A foreign entity with an RHQ in the Kingdom not only enjoys the benefit of contracting with the KSA Government, but also receives the following benefits: a 10-year exemption from compliance with employee Saudization rates; an exemption for RHQ employees from the Kingdom’s accreditation requirements (provided they are accredited elsewhere); and the RHQ will be able to obtain unlimited work visas in the Kingdom for foreign employees.
As of today, the date on which companies with an RHQ outside of the Kingdom will be unable to contract with the KSA Government (the January 1, 2024, deadline) is fast approaching. Consequently, the public expects to see numerous other companies quickly following suit and setting up their RHQ in the Kingdom.
Tony Khoury is a partner in KN Legal. His robust practice concentrates on projects and corporate transactions across the Middle East. He can be reached at [email protected]. Abdulrahman Alrikhaimi is an associate at KN Legal with experience in commercial transactions. He can be reached at [email protected].