Major companies respond to Saudi Arabia's request to set up regional headquarters

Unlock Editorial Digest for Free

FT editor Roula Khalaf chooses her favorite stories in this weekly newsletter.

Many multinationals have heeded Riyadh's ultimatum to set up regional headquarters in Saudi Arabia or risk losing lucrative government contracts, but major banks have been conspicuous by their absence.

According to Saudi Arabia's Investment Ministry, 350 companies around the world, including PepsiCo, Boeing, PricewaterhouseCoopers and Unilever, have complied with the decree and obtained regional headquarters licenses, while others such as Boeing have also applied. But big-name banks such as Citibank, Deutsche Bank, Goldman Sachs and HSBC have yet to announce this.

Large financial services firms typically operate their Middle East operations within wider geographical areas including Europe and Africa, and bankers told the Financial Times that some are uneasy about the regulatory implications of setting up regional headquarters in the Gulf kingdom.

“It's not just about whether to put people in Saudi Arabia, it's about what the regulatory framework is,” said a senior financier at an international bank. The financier added that Saudi Arabia “is not a financial centre.”

The Saudi decree, dubbed “Plan Headquarters,” comes into effect this year as Riyadh continues to pour money into ambitious development plans under Crown Prince Mohammed bin Salman. The spending boom has made the Saudi capital a magnet for those keen to participate in these deals.

Saudi Arabia has warned companies that they will be ineligible for new government business if they fail to open a Saudi regional headquarters with at least 15 employees, including executives overseeing other countries.

But the problem remains. Unlike the Dubai International Financial Center, an offshore banking center that has its own regulatory framework, Riyadh's King Abdullah Financial District does not have its own regulator. Instead, the Saudi Central Bank and its Capital Markets Authority regulate different components of the banking industry.

Saudi Arabia's Investment Ministry said the kingdom was working to harmonize and strengthen its framework, with banks including Northern Trust starting to open regional headquarters. The ministry also said it was “in final discussions with a number of other financial entities” to do the same.

Prince Mohammed, the kingdom's day-to-day leader, wants the kingdom to become a regional financial and trade hub (a status enjoyed by Dubai) and ensure that businesses that profit in the kingdom are based there.

Dozens of multinational manufacturers, including PepsiCo and Eli Lilly and Company, have complied with the edict from the program's headquarters. Consulting and auditing firms doing business with the Saudi government have also taken the step. “We take this issue very seriously,” said an executive at a global consulting firm. “This is a matter of life and death for us.”

But like the big banks, professional services specialists such as law firms and public relations firms have been slower to move, citing concerns about the tax implications of moving partners to regional entities with no intention of generating revenue.

Michael Bessey, director of the Middle East and North Africa practice at Albright Stonebridge Group, a consulting firm that advises clients on regional headquarters issues, said the regional headquarters rules “have more in mind for companies selling products than companies selling services. mentality”.

“For many service companies, whoever you classify as a regional headquarters [is] Passive income will be generated. . . This appears to be in violation of the rules of the regional headquarters which stipulate that it must be a non-revenue generating entity,” he said.

The Department of Investment said it “has been in ongoing discussions with companies in the sector to develop fit-for-purpose solutions”. “This is less about compliance and more about incentivizing companies to grow and develop and capture value from investment opportunities in Saudi Arabia,” the ministry said.

A senior lawyer based in the UAE said the Saudi agency told them “they were happy for it to be a nameplate type of thing, in line with the spirit of the regulation”.

The ministry said regional headquarters licenses will be issued at a rate of 10 per week but will not issue a public list.

Riyadh considered a naming and shaming approach, with an official memo stating that the list of non-compliant companies would be “published” on a government website. It was later softened, saying the names of the laggards would be “circulated” among government departments.

The powerful Public Investment Fund and state-owned energy giant Saudi Aramco, which is spearheading the development, are also not counted as government agencies, meaning they can follow their own procurement rules, the Investment Ministry said.

Executives said they would be more likely to start the regional headquarters process if PIF or Saudi Aramco were included. “If other local content requirements serve as a precedent, the regional headquarters requirement may be extended to state-owned enterprises,” Bessey said.

Others point to the growing recognition among global businesses that compliance with the plan is inevitable as long as the Saudi spending spree continues. “There's no doubt about it,” said the UAE-based lawyer. “The rush to Riyadh has begun.”