Combating shell companies: A strategic step towards a sustainable economy
In a significant regulatory step aimed at enhancing transparency and ensuring added economic value, the Zakat, Tax and Customs Authority in the Kingdom of Saudi Arabia has introduced a draft regulation on “Actual Economic Requirements” for special economic zones. This draft, presented through the “Istilaa” platform, aims to link tax incentives granted to investors to the existence of genuine and tangible economic activity on the ground, thus putting an end to the practices of “shell companies” that exploit benefits without contributing to the local economy.
General context: Special economic zones and Vision 2030
This step is central to the Kingdom’s ambitious Vision 2030 strategy, which aims to diversify income sources and establish the Kingdom as a global logistics and investment hub. The special economic zones launched in recent years are a cornerstone of achieving these goals, offering tax and regulatory incentives to attract quality investments in vital sectors. However, the success of these zones hinges on ensuring they become centers of genuine production and innovation, not merely tax havens for entities that exist only on paper. The new regulations aim to align local practices with the best international standards for combating Base Erosion and Profit Shifting (BEPS), spearheaded by the Organisation for Economic Co-operation and Development (OECD).
Key requirements for companies' "physical presence"
The draft regulations require investors in special economic zones to meet a set of essential conditions to ensure their eligibility for tax incentives, starting from the first fiscal year of operation. These requirements include:
- Headquarters and physical assets: The investor must have a suitable headquarters and sufficient physical assets within the boundaries of the special economic zone, commensurate with the nature and size of his activity.
- Operating expenses: The company must incur real operating expenses within the territory, reflecting the existence of actual operations.
- Human resources: Employing a sufficient number of full-time staff who are actually present in the area, with qualifications appropriate to the qualifying activities.
- Management and Direction: Key activities should be managed and directed from within the region, with at least one manager appointed who resides in the Kingdom, board meetings held in person within the Kingdom, and strategic decisions documented in official minutes.
Strict controls on intellectual property companies
The authority has established stricter controls for activities related to intellectual property, given its widespread use in global tax planning. The regulations stipulate that at least 50% of the managers of these companies must be permanent residents of the Kingdom. The draft also cautions against granting any tax incentives for income generated solely from the "marketing" of intellectual property assets, requiring that risk management and strategic decisions related to these assets be core business operations within the region.
Importance and expected impact
This regulation is expected to have multiple positive impacts at the local, regional, and international levels. Locally, it will ensure that government incentives are directed toward supporting genuine investments that create jobs and contribute to GDP, while also enhancing the integrity of the tax system. Regionally and internationally, this step will bolster the Kingdom's reputation as a transparent and reliable investment destination that adheres to global standards, attracting high-quality, long-term investments seeking a stable and robust business environment, rather than companies solely focused on tax evasion.
