Saudi Arabia will require B2Gs to have a regional headquarters before seeking public sector opportunities
In 2019, Saudi Arabia issued a notice requiring multinational companies to have their regional headquarters based in the kingdom in order to sell to the public sector. The legal and practical details of this regulation, which will be effective in 2024, recently became more clear. MNCs will need to not only understand the specifications of the regulation, but also internally align on the best new organizational footprint for the MENA region.
This insight bite provides a short summary of the technical details announced by the kingdom. It will be followed by a series of insight bites on the economic implications for Saudi Arabia and the rest of the region, as well as on the strategic considerations MNCs need to make while evaluating their new footprint.
MNCs looking to sell their goods and services to Government Authorities in Saudi Arabia will require a new Business License, which in itself requires setting up a legal entity known as a regional headquarters within Saudi Arabia that allows access to tenders. The new regulation will become effective starting in 2024, though B2G firms can expect to be questioned on this topic when dealing with Saudi government authorities in 2023 as the kingdom seeks to learn about MNCs’ long-term plans.
MNCs setting up their regional headquarters in Saudi Arabia will need to take at least five clear actions: two are mandatory, and three are optional. Failure to obtain a business license will leave companies shunned from public tenders and B2G opportunities (with some exceptions).
It seems companies will not be able to engage in commercial activities with the Regional Headquarters (RHQ) license and will need to have a separate entity to be able to invoice in the kingdom. Moreover, if companies have two legal entities, they may need to have entirely separate teams under them, but could be allowed to share an office.
Government Authorities (GAs) are defined as Saudi government ministries, authorities, agencies, establishments, commissions, and independent agencies that have public legal personalities. Companies owned in whole or partially by the Saudi government do not fall under the category—and as it stands are not subjected to the controls (restrictions). MNCs operating either directly or through partners are subject to the headlining regulation.
In order to apply for an RHQ license, MNCs are required to operate at least two other markets in the region from the new non-commercial entity. Thereon, firms will be required to undertake both Strategic Direction and Management functions as well as a minimum of three optional operational activities.
- Strategic Direction functions include:
- Formulate and monitor the regional strategy
- Coordinate strategic alignment
- Embed products and/or services in the region
- Support acquisitions, mergers, and divestments
- Review financial performance
- Strategic Management functions include:
- Business planning
- Business coordination
- Identification of new market opportunities
- Monitoring of the regional market, competitors, and operations
- Marketing plan for the region
- Operational and financial reporting
- Optional Operational Activities include:
- Sales and Marketing Support
- Training Services
- Financial Management, Foreign Exchange, and Treasury Center Services
- Compliance and Internal Control/Legal
- Research and Analysis/R&D
- Advisory Services
- Operations Control
- Logistics and Supply Chain Management
- International Trading
- Technical/Engineering Support
- Network Operations for IT System
- Intellectual Property Rights Management
- Production Management
While the details of the regulation require a minimum of 15 people to be employed by the regional headquarters, it seems the government may be interested in understanding the existing footprint of MNCs in the region—from their existing size of regional and local teams, revenue generation, and geographic footprint—to determine how realistic it is for a firm to add 15 employees.
Some exemptions are applied to the restrictions imposed on GAs transacting with MNCs without a business license. These include:
- MNCs transacting with Saudi GAs outside of the kingdom
- Transactions below SAR 1 million
- If there are no alternative services or products presented to GAs
- In a case of an emergency
- If it is technically the best bid or the most cost-efficient
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