In February 2021, the Kingdom of Saudi Arabia (KSA) announced a new regional headquarter policy requiring foreign investors to set-up up their regional headquarter in the Kingdom by 2024 in order to participate in public tenders. In July 2021, KSA issued new country of origin rules regarding intra-Gulf trade. Under the new rules, GCC manufacturers generally need to show a minimum value add of 40% and 25% national workforce (workforce nationalisation) in the manufacturing process. This article discusses the latest developments regarding the Regional Headquarter policies, Country of Origin Rules and local content requirements with a special focus on the United Arab Emirates and KSA related trade.

1. What has happened so far?

The Kingdom of Saudi Arabia (KSA) has been traditionally served by the business hubs in the United Arab Emirates (UAE). Over the recent years, the oil & gas sector saw the build-up of local content policies in the form of localization or ‘value add‘ programs. For example, under Saudi Aramco’s In-Kingdom Value Total Add (IKTVA) program, suppliers are encouraged to build up manufacturing and service operations in the KSA rather than supplying from abroad. Similar programs have been implemented by Saudi Basic Industries Corporation (SABIC) and the Saudi Arabian Mining Company (MA’ADEN).

In February 2021, KSA announced that it would require foreign suppliers of goods and services to relocate their regional headquarters (RHQ) into the Kingdom in order to be eligible to take part in public sector procurement processes. In July 2021, KSA published re-vised Country of Origin Rules, leading to significant changes to intra-Gulf trade arrangements.

2. What is the status of KSA’s Regional Headquarter policy and what is the rationale behind it?

With the KSA’s ambitious move to modernize the Kingdom and make it less dependent on oil, the country eagerly pushes for the execution of several key initiatives to strengthen the economic basis.

The country is in the process of building a free zone almost the size of Belgium. Named NEOM, which is a combination of the Latin word “neo” (new) and the letter “M”, which is an abbreviation of the Arabic word “Mostaqbal” (future), the free zone shall establish the KSA as a Middle Eastern centre for world trade. NEOM will see the implementation of legal and tax structures that are more advantageous to international trade than KSA’s current legal and tax regime.

At the same time, the government has taken the decision to establish Riyadh as an economic powerhouse in the MENA Region, doubling its current population to approximately 15 million people by 2030. The Royal Commission for Riyadh City (RCRC) set the ambitious goal of attracting 500 foreign companies to establish their RHQs in Riyadh over the next ten years.

In February 2021, the government unveiled that it would require foreign companies to establish their RHQs in the Kingdom by 2024 to take part in public tenders. Ultimately, the government expects that such a move will generate additional jobs and increase local spending and expansion of the economic sector. However, as of today, it remains unclear how RHQs are to be defined, in particular, which functions would need to be established in the Kingdom. It was confirmed already that “nameplate” RHQs would not be recognized.

3. What are the recent changes to the Country of Origin Rules?

On 2 July 2021, Saudi Arabia published the Ministerial Decree No. 3852. The Decree sets out the national rules of origin for the eligibility of preferential duty when importing Gulf Cooperation Council (GCC) goods into Saudi Arabia. The Decision took effect on 2 July 2021.

In general, goods produced in the GCC countries are treated preferentially (as national goods) and receive duty exemptions in the case of imports into another GCC country.

Under Ministerial Decree No. 3852, new conditions are set out to qualify GCC manufactured goods as GCC national goods as follows:

The goods should be shipped with a valid Certificate of Origin;

  • In general, the goods should be transported directly from the manufacturing GCC country to KSA;
  • The GCC origin labelling requirements will have to be complied with;
  • In general, a minimum value add of at least 40% (calculated by identifying the difference between the ex-factory price and the CIF value of the non-originating material) is required; and
  • In general, the GCC manufacturer should involve at least 25% national workforce (workforce nationalisation) in the manufacturing process.

The Decree allows for some flexibility in case GCC manufacturers are unable to meet the value add or workforce nationalisation requirements (Art. 3). Under these conditions,

  • a minimum value add of 20%; or
  • a minimum workforce nationalisation rate of 10%

would require to be compensated for by the corresponding percentage of the other element. In other words, if a GCC manufacturer fails to comply with the 40% value add requirement, he needs to ensure that a minimum of 20% value add is achieved. If a GCC manufacturer would for example achieve a value add of 35%, he would need to ensure a workforce nationalisation minimum of 30% (= 25% general workforce nationalisation threshold + 5% top-up due to missing the general value add threshold (=40%-35%). A corresponding mechanism is applied regarding workforce nationalisation threshold percentages.

Goods manufactured in free zones are considered foreign goods and, therefore, will not be eligible for preferential treatment (Art. 15). It should be noted that goods that are produced outside of free zones are generally not eligible for preferential treatment if transferred through a free zone.

4. Why do “local content” requirements become increasingly important in the GCC?

Local content is the value of domestically generated goods, services, and workforce that are from the country where the product is made rather than being imported. Local content requirements are policies imposed by governments that require companies to use domestically manufactured goods or domestically supplied services to operate in an economy.

In 2018, the Saudi government established the Saudi Local Content and Government Procurement Authority (LCGPA). The LCGPA has been given the mandate to develop local content policies. In general, KSA manufactured goods will receive a 10% price premium. Under the “Additional Price Premium Initiative”, the authority granted an additional 20% price premium for specific KSA manufactured goods and thereby, bringing the overall competitive advantage for KSA manufactured goods up to 30%. The policies are based on the country’s Government Tenders and Procurement Law (GTPL), which came into effect on 1 December 2019. According to the GTPL, the LCGPA is tasked with the development of local content requirements for the Kingdom’s public procurement.

In the UAE, the Ministry of Industry and Advance Technology (MoIAT), was tasked in September 2021 with the roll-out of the rebranded “National In-Country Value Programme.” The rationale behind the MoIAT taking over the ICV Programme is to have a central federal authority responsible for local content. As with the KSA, the UAE gives preferential treatment to local manufacturers (generally 10%), stipulated in the procurement legislation of the respective emirate. With the MoIAT now being responsible for the nationwide roll-out of the ICV Programme, it is expected that local content requirements will be rolled out further in the UAE.

GCC countries successively rolled out local content programs initially for the oil & gas sector through so-called ’value add’ programs. These programs now see an expansion into other industry sectors and public procurement, as the GCC countries aim to diversify their economies to prepare for a post-oil era.

5. Conclusion

Investors located in the UAE and operating their KSA business out of the UAE should take into account these recent developments as they have an impact on established business operations and strategies in the MENA region.

It is too early to say whether the RHQ policy will come into force with the rigor communicated earlier this year. However, it is rather unlikely that the Kingdom will step back from earlier announcements. The enactment of the Country of Origin rules shows a similar rationale as do the RHQ policy announcements in view of strengthening the KSA’s economy. The new Country of Origin rules will have a direct impact on UAE onshore manufacturing and industrial production. This is especially true as the stringent workforce nationalisation thresholds are difficult to be observed given the general shortage of UAE nationals in the workforce in the manufacturing industry, thus causing a factual and non-temporary impediment. Therefore, exports from the UAE to KSA may be subject to customs duty (up to 25% for certain products), causing a competitive disadvantage for the manufacturing location of the UAE. Other countries that have developed a substantial national workforce, such as Oman, may use these rules to their advantage, attracting manufacturing and industrial production away from the UAE. In parallel, general local content-related developments require investors to pay attention to multiple local content policies in the UAE and KSA. The non-existence of mutual recognition will force investors to decide on market positioning.

Based on the above, it is time to reassess conventional manufacturing strategies, such as using the UAE as a manufacturing hub for the KSA. Until the GCC Unified Rules of Origin come into force, UAE manufacturers will need to address the potential competitive disadvantages of their manufacturing policies.



Dr. Constantin Frank-Fahle, LL.M.
Founding Partner
T  +971 (0) 2 694 8585

Michael Hackenbruch
T  +971 (0) 2 694 8585

This publication does not necessarily deal with every important topic or cover every aspect of the topics with which it deals. It is not designed to provide legal or other advice. | © emltc Ltd. 2021

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