In order to attract foreign investment, Saudi Arabia announced a ruthless move in 2021, starting January 1, 2024, the Saudi government will not sign new contracts with foreign companies if they do not have a regional headquarters in Saudi Arabia. Now the deadline is approaching, but there are still many companies struggling and waiting.
In recent years, Saudi Arabia has been diversifying its economy to achieve its Vision 2030 economic goals, and the Saudi government hopes to leverage the potential of its market to accelerate the transformation of its economy by forcing multinational companies to relocate their regional headquarters from elsewhere in the Middle East.
Although the new policy was announced in 2021, it was not announced until the end of 2022 that the specific measures were announced, although there are still many ambiguities in the policy. The "simplicity and crudeness" of the rules of the game has made many multinational companies difficult: on the one hand, Saudi Arabia's current business environment is not as good as that of Dubai and Bahrain in the United Arab Emirates, and on the other hand, they are even more reluctant to give up the big cake of Saudi Arabia.
Niu Song, a researcher at the Institute of Middle East Studies at Shanghai Outer Chinese University, told the first financial reporter that in view of the overall advantages of the GCC countries in the economic development pattern of the Middle East and the geographical cluster advantages, the "opponents" of the Saudi Arabian "regional headquarters" plan are actually other GCC countries, which will naturally have a certain impact on these countries.
He further explained that Saudi Arabia has a clear size advantage over other GCC countries, and coupled with the preferential policies it provides, relevant companies will inevitably consider it comprehensively at their own level.
Regional Headquarters Program
In February 2021, Saudi Arabia abruptly announced that the government would stop signing contracts with companies, institutions or sovereign wealth funds with regional headquarters in countries other than Saudi Arabia starting in 2024. At the same time, he said that the move is to encourage multinational companies to set up their regional headquarters in Saudi Arabia, which is conducive to creating jobs, improving payment efficiency and ensuring the quality of goods and services procured by the government.
Dubai, United Arab Emirates, has always been the "commercial capital" of the Middle East Gulf region, and it is also the city with the highest concentration of multinational companies to set up regional headquarters in the Middle East.
However, in the first year of the new policy, 24 multinational companies announced that they would move their regional headquarters to Riyadh, the capital of Saudi Arabia, including well-known companies such as Deloitte and PepsiCo. However, some industry insiders pointed out the "secret", in fact, some companies have already set up offices in Saudi Arabia before, and all they have done is to change the name of the office to the regional headquarters, and the actual business of the regional headquarters is still in Dubai or Bahrain.
Although Saudi Arabia announced its policy in 2021 and said that the relevant rules would be published that year, it was not until December 27, 2022, that the Saudi government published the Regulations on Contracts between Government Agencies and Entities and Their Affiliates that Do Not Have a Regional Headquarters in Saudi Arabia.
This means that there is only one year left for multinational companies to make decisions and relocate. However, there are still many ambiguities in the above regulations, such as whether foreign companies that only do business in Saudi Arabia need to set up a regional headquarters in Saudi Arabia before they can take orders from the government.
As if to see the hesitation of many multinationals, Saudi Arabia announced a package of tax incentives in December, including a 30-year zero-income tax credit for multinationals whose regional headquarters moved to Riyadh. This policy was jointly issued by the Saudi Ministry of Investment, the Ministry of Finance, and the General Directorate of Zakat (Religious Tax) Taxes and Customs to encourage and support foreign companies to set up regional headquarters in the Kingdom.
The fact that a company can be exempted from income tax for 30 years in one go has caused a sensation in the market at once. However, after calming down, many companies found that this preferential measure was not as good as they imagined.
For regional headquarters, the relevant laws and regulations of Saudi Arabia stipulate that they cannot carry out any commercial activities, that is, generate commercial income, but can engage in internal consulting, training, marketing and other headquarters functional activities. Therefore, there are not many benefits that enterprises can enjoy by taxing regional headquarters that are not involved in commercial operations.
However, the Saudi government was unequivocal about the implementation of the new policy, with Economy and Planning Minister Faisal Al Ibrahim telling the media in October that Saudi Arabia is still implementing the regional headquarters plan according to the January 1, 2024 deadline, and urging multinational companies to speed up the relocation process.
In addition, Saudi Finance Minister Mohammed al-Jadan expressed a similar position.
Saudi Investment Minister Khalid Al-Falih said in November that the Saudi regional headquarters program has been effective, and as of November, 180 well-known global companies have opened regional headquarters in Saudi Arabia, exceeding the target of attracting 160 companies by the end of the year, and about 10 companies are currently applying every week.
Khalid Al-Falih also acknowledged that the regional headquarters program is a long-term project, and Saudi Arabia welcomes enterprises to invest in Saudi Arabia and jointly build a good investment ecosystem. At present, the world is geopolitically tense and economic development is facing headwinds, and Saudi Arabia's stable political and economic system provides a friendly and stable environment for global investors. Considering the current situation in Europe and the Middle East, Saudi Arabia is undoubtedly the best place to invest.
Al-Falih also said that since the implementation of Vision 2030, that is, since 2016, Saudi Arabia's foreign direct investment (FDI) has achieved double-digit growth every year, attracting a total of US$33 billion in foreign direct investment in 2022, ranking 10th in the world.
In the Joint Statement of the People's Republic of China and the Kingdom of Saudi Arabia issued in December 2022, Saudi Arabia "appreciates the importance attached to and the permission given to the establishment of regional headquarters in Saudi Arabia".
Intensify regional economic competition
Mohammed al-Jadan appealed to multinational companies from the perspective of practical interests, saying that Saudi Arabia will prepare for major events such as the 2029 Asian Winter Games and the 2030 World Expo, which has many opportunities for multinational companies in Saudi Arabia.
On the evening of 28 November, the Bureau International des Expositions (BIE) announced that member states had voted to select Saudi Arabia as the host country for the 2030 Registered World Expo. The Saudi government says it will allocate $7.8 billion to host the best expo ever. The year 2030 is symbolic for Saudi Arabia, as it marks a key milestone in Vision 2030, which will diversify the kingdom's economy to some extent.
However, from the perspective of corporate revenue, Saudi Arabia's corporate income tax rate is 20%, which is higher than that of many neighboring Gulf countries. For example, Bahrain is currently the only Gulf country that does not have a widespread corporate income tax, while the UAE will only start to levy corporate income tax on companies with annual profits of more than US$100,000 from June 2023, with a tax rate of 9%, while companies located in the free trade zone can still be exempted.
At the same time, many business executives are reluctant to leave Dubai or Bahrain and move to Saudi Arabia. They believe that the lack of high-quality housing and international schools, as well as a more conservative social climate, may reduce the standard of living for themselves and their families.
Niu Song told the first financial reporter that the implementation of the regional headquarters plan, on the one hand, will promote the GCC countries to carry out differentiated competition in attracting foreign enterprises to a certain extent. On the other hand, it will also cause unease in countries such as the United Arab Emirates and Bahrain, after all, the business of the relevant companies is facing "taking sides" under the "regional headquarters" scheme.
In this context, the UAE has also accelerated policy changes and continuously introduced new policies, hoping to retain and attract foreign talents with a more relaxed social atmosphere. In April 2021, the UAE adopted the strategy of "attracting and retaining global talent", with the goal of placing the UAE among the top 10 in the world in terms of global talent competitiveness and ensuring that the UAE has sufficient talent pool to develop a knowledge-based economy.
Under this strategic framework, the UAE has launched a number of initiatives to attract talent, such as the 10-year Golden Visa. Investors, entrepreneurs, and professionals with expertise can apply for this visa. According to statistics, nearly 80,000 golden visas were issued in the UAE in 2022.
In September 2021, the UAE government also announced that it would launch 50 new projects to boost economic and social development in phases to further attract talent and investors. For example, the "100 Programmers a Day" program aims to attract 3,000 programmers to the UAE's workforce every month, and attract IT talent to set up programming companies in the UAE through a series of incentives and benefits.
However, Niu Song believes that on the whole, Saudi Arabia and the United Arab Emirates and other Gulf countries are not a "zero-sum game" in the economic field. With the opening up of Saudi Arabia, it has promoted the transformation of the overall business environment in the Middle East and the Gulf region, and has also brought a lot of opportunities to the UAE and other Gulf countries.