In April of this year, the Kingdom of Saudi Arabia announced the launch of its first ever free zone. Designed to support the country’s economic development, and to serve Crown Prince Mohammed bin Salman’s Vision 2030 – which aims to diversify the economy away from fossil fuels – the free zone is expected to be the first of many to be set up in the country.
So, what are the Saudi special economic free zones, how is the government planning to make them attractive to investors and companies, and what kind of businesses are they designed for?
What is a free zone?
A special economic free zone is a vehicle that governments use to attract foreign direct investment and encourage economic growth. Normally taking on the character of an industrial park, they are usually located in restricted geographical areas. There are now several thousand free zones around the world and some countries, notably the UAE, have had considerable success using them.
Free zones usually offer special tax rates, including a 0% income tax, 0% value added tax and 0% corporation tax, among other incentives. These incentives are designed to attract businesses to set up in the country, employ local people, transfer skills, and therefore boost and diversify the entire economy.
Free zones tend to focus on attracting businesses from specific industries, in line with the government’s ideas about what sort of industries they would like to see more of in the economy. To set a company up in a free zone, applicants may need to specialise in specific designated industries.
This might include healthcare, technology, finance, textiles, import/export, media or anything else. Since free zones focus on one specific industry, it encourages a ‘hub’ of innovation – businesses and individuals who are working on similar problems compete and share ideas, and can therefore benefit from the kinds of networking opportunities that would be less likely to happen if businesses weren’t located in close proximity.
Overview of the Kingdom of Saudi Arabia’s free zones
At the time of writing, Saudi Arabia only had one operating free zone which was launched in April of 2021. Named the Integrated Logistics Bonded Zone (ILBZ), it is located near the King Khalid International Airport in Riyadh. The free zone is designed to attract multinational companies working in different parts of the logistics industry. It is intended to attract businesses in a variety of logistics support services and related industries, such as warehouse operators, fulfilment centres, maintenance and repair companies, inventory management and assembly businesses. Firms working in the recycling and waste management sectors will also be welcome to apply for a license.
The ILBZ free zone promises a wide variety of incentives to attract companies to relocate there. These include:
- No restrictions on foreign borrowing
- Unrestricted repatriation of profits and dividends
- Companies will have complete ownership of all assets including intellectual property
- 100% foreign ownership will be allowed
- 0% tax on income earned from normal business activities
- Relief from withholding tax related to non-residents’ activities
- No customs and import restrictions
- A 50-year tax exemption including
- No VAT
While the Integrated Logistics Bonded Zone is currently the only operating free zone in Saudi Arabia, the kingdom currently has plans for up to 20 more in the coming years, with four or five expected to be launched in the near future. Other forthcoming Saudi Arabia free zones will include hubs focusing on cloud computing, manufacturing, healthcare, biotechnology, and various other priority industries.
One particularly interesting free zone that is likely to come on board in the near future is the King Salman Energy Park (known as ‘SPARK’). Located between Dammam and Al Ahsa, it is expected to become home to some 300 commercial units, with the first phase completed this year. The free zone is expected to support the development of the energy industry, including ‘green’ energy production.
The Saudi government is investing heavily in the free zone concept. Announcements indicate plans to spend some 1.7 trillion rials on its development every year. It is expected that this will lead to at least 388 billion rials of foreign direct investment annually too.
The Saudi government hopes that investment in free zones will support the national economy, help the country become more competitive and increase employment. The SPARK free zone, for instance is expected to contribute $6 billion U.S. dollars to the economy every year and employ 100,000 people either directly or indirectly.
Rules and regulations in Saudi free zones
Since the Saudi free zones are relatively new, it remains somewhat unclear as to exactly what the rules will be or how they will be enforced. However, any business that plans to operate in a free zone will need to:
- Submit an annual confirmation to demonstrate compliance with the free zone’s rules. This is intended to avoid any kind of tax avoidance by companies who are already based in Saudi Arabia.
- Prepare books and records for each year with information on all permitted and non-permitted activities (if relevant).
- Follow rules about employment – staff working in Saudi free zones are normally not allowed to perform any work outside the zone.
- Offer equal opportunities to Saudi and non-Saudi nationals (there is no Saudi quota).
Why might you locate to a Saudi free zone?
The Kingdom of Saudi Arabia is currently going through a transformation and is attempting to expand its economy away from a traditionally heavy reliance on fossil fuel exports. The creation of free zones is just one part of the country’s economic plan which will also include the development of tourism, new cities, sports, increased employment and more efficient government.
There are several factors that might make the Saudi free zones attractive to multinational firms operating in GCC nations. These include:
- Population: At around 35 million people, the Kingdom of Saudi Arabia has by far the largest population in the whole of the GCC. Multinationals moving to this market will have free access to the country’s large economy without any extra import tariffs.
- Access government contracts: Saudi Arabia is planning to change its rules about government contracts so that only businesses currently located in Saudi Arabia can win government work. Currently many firms that offer services to the Saudi government are in fact based abroad. Therefore, the free zones might make moving to Saudi Arabia attractive for businesses that work on some kinds of Saudi government contracts.
- Market opportunity: For multinational firms that do not yet have a foothold in the Middle East or the GCC, moving to Saudi Arabia and choosing a free zone could be beneficial. As one of the region’s leading powers – and with clear plans to diversify the economy – the free zones make for a very attractive incentive for businesses that might be moving to the region.
Next steps with Creative Zone
If you believe your business could potentially benefit from setting up in the ILBZ or another Saudi free zone, you will need to verify that you meet all relevant entry requirements, including performing the prescribed activities.
To set up a business in the ILBZ, it will be beneficial to work with a local partner who understands the rules and can help you interpret whether Saudi free zones are right for your business. Creative Zone has years of experience supporting businesses set up across the GCC. We can help guide you through the entire process of setting up a business in Saudi Arabia, from company formation to post launch business support.
