Draft Economic Substance Requirements for Saudi Arabia's Special Economic Zones
The Kingdom of Saudi Arabia released draft Economic Substance Requirements Regulations for investors operating in Special Economic Zones (SEZ). To access SEZ tax and customs incentives, investors must demonstrate genuine economic activity within the zone. The draft introduces requirements around people, premises, expenditure, and governance, with enhanced rules for intellectual property (IP) activities.
Why This Matters
Access to SEZ tax and customs incentives depends on demonstrating genuine economic activity within the zone. This shifts the focus from formal structures to how activities are carried out in practice and how they support the income generated in the zone.
Key Points
Core Requirement
Investors must demonstrate that SEZ activities are genuinely carried out within the zone, with people, assets, and expenditure located in the zone.
Substance Indicators
- Adequate premises and assets in the Zone suitable for the activities carried out.
- An adequate number of full-time employees physically present in the Zone, proportionate to the activities carried out, including personnel engaged through contracting companies.
- Operational expenditure incurred in the Zone commensurate with the activities carried out.
- Activities directed and managed from within the Zone, including:
- At least one director responsible for the activities resides in the Kingdom.
- Management with the necessary qualifications.
- Board (or equivalent) meetings where strategic decisions are made and recorded, with a quorum in the Kingdom.
IP-Specific Requirements
- At least 50% of the directors managing the activities must be residents of the Kingdom.
- A detailed business plan demonstrating the commercial rationale for holding IP in the Zone.
- Detailed employee information, including experience, contracts, qualifications, and duration.
- Strategic decisions made, and risks related to IP managed and borne, in the Zone.
- Activities that are not limited to marketing IP.
Compliance Obligation
- Annual Economic Substance Return is required.
Point of View
The draft regulation is a positive development that strengthens the credibility of Saudi Arabia’s SEZ incentive framework. Its principles-based design broadly aligns with international practice under BEPS Action 5, particularly in linking tax benefits to real economic activity.
At the same time, investors that prioritize tax certainty are likely to seek further guidance, particularly in the form of more specific benchmarks or thresholds to assess compliance in practice.
However, the extent of possible specificity remains uncertain. By nature, economic substance rules are anti-avoidance measures that rely on judgment and economic reasoning rather than fixed numerical criteria. For example, whether expenditure is commensurate with the nature of the activity may depend on the scale, complexity, and commercial context of the operations, rather than a predefined threshold.
Finally, practical circumstances also warrant consideration when applying these rules. In the current regional environment, where personnel mobility may be temporarily affected, questions may arise about how strictly physical presence requirements will be interpreted when absences stem from external factors rather than underlying business intent.
Overall, approach the rules with a focus on operational alignment and robust documentation, recognizing that compliance depends on demonstrating substance through a facts-and-circumstances analysis.
Recommended Actions
While further guidance may follow, companies should take early steps to prepare:
- Assess whether current SEZ operations meet the draft substance criteria.
- Review staffing models, outsourcing arrangements, and physical presence in the Zone.
- Strengthen governance processes, including board meeting practices and documentation.
- Prepare for the annual Economic Substance Return and supporting evidence.
- For IP activities, ensure that business plans and risk management frameworks clearly demonstrate that intellectual property is supported by real activities and decision-making in the zone (often referred to as the “nexus principle”).
Given the principles-based nature of the rules, a brief internal review can help identify gaps before the regulations are finalized.
