Legislative changes boost Bahrain's competitiveness

Bahrain’s new Law for the Encouragement and Protection of Competition (Competition Law) was published in the Official Gazette on July 19, 2018, and its provisions – with the exception of Chapter 2 – came into effect on February 1, 2019. Chapter 2 establishes and relates to the Authority for Encouragement and Protection of Competition, and came into force on August 1, 2018. While the authority had not yet been formed as of October 2019, Decree No. 8 of 2019 stipulates that the Consumer Protection Directorate of the Ministry of Industry, Commerce and Tourism will assume the functions and powers of the authority in this interim period.

The provisions of this legislation, Law No. 31 of 2018, apply to any act or arrangement that results in hindering competition in Bahrain. Provisions of the Competition Law also apply extraterritorially to economic activities that have an effect on competition in Bahrain.

In accordance with Article 3 of the Competition Law, all arrangements that target or result in hindering competition in Bahrain are prohibited, particularly arrangements that target or result in the following:

• Affecting the prices of products by raising, reducing or fixing by sham, fictitious transactions or any other means;

• Limiting production, marketing, technical advancement or investment;

• Sharing markets or sources of supply;

• Knowingly disseminating incorrect information about products and prices;

• Colluding on bids for auctions or tenders;

• Fabricating a sudden abundance of products leading to unreal prices that affect other competitors; and

• Colluding on purchase rejection, sale or provision from a specific facility or facilities to prevent or obstruct activities of the same. Any arrangement which falls under these descriptions will be deemed null and void.

The following arrangements are specifically excluded:

• Arrangements that lead to a notable improvement in the production or distribution of products;

• Arrangements that lead to promoting technical or economic development in the field of producing or distributing products;

• Arrangements that grant a fair share of any resulting benefit to the product’s consumers;

• Arrangements that do not enable the elimination of competition in a large segment of the product’s market; and

• Other arrangements that do not impose restrictions on competition. In line with Article 8 of the Competition Law, a market player may be considered as having prevailing status in an area if it enjoys economic leverage that enables it to deter any effective market competition, which grants it the ability to independently perform from its competitors and clients, and consequently from its product consumers. Unless otherwise proven, a particular market player may be considered as having prevailing status if its share in a specific product market exceeds 40%. A group of market players, two or more, is considered as having prevailing status if the collective share of the group in a specific product market exceeds 60%.

However, a player may be considered as having prevailing status in a specific product market even if its share does not correspond to these percentages. Any player that enjoys prevailing status in the market is prohibited – whether solely or in conjunction with one or more others – from undertaking any action or refraining from any act that entails misuse of their status, in particular:

• Direct or indirect imposing of sale or purchase prices, or any other trading terms;

• Restricting production, marketing or technical advancements, leading to damage to consumers;

• Discrimination in contracting or agreeing in any form with vendors or clients when the contracting terms are the same, whether in prices, quality, products or any other transaction;

• Abstaining, without a justified reason, from the sale or purchase of a specific product with any facility, sale of products for less than the actual cost, permanently suspending transacting with a facility leading to the exclusion of competitive facilities from the market, or inflicting losses to make it difficult for them to continue business. Criminal penalties for violating the Competition Law range from fines of BD100 ($265) to BD50,000 ($133,000), and imprisonment for one month up to one year. Provisions of the Bahrain Civil Code apply to civil liability ensuing from a violation of the Competition Law.

Data Protection Law

Law No. 30 of 2018 promulgating the Personal Data Protection Law (PDPL) was published on July 19, 2018 and came into force on August 1, 2019. Prior to the implementation of the PDPL, there was no single codified data protection law in force in Bahrain. Scattered provisions were instead isolated in different laws covering certain aspects of confidentiality and privacy, making the PDPL a much-needed development to bring the country’s legislation more in line with the EU’s General Data Protection Regulation. The PDPL is applicable both within Bahrain and extraterritorially.

The law establishes the Personal Data Protection Authority (PDPA), which has the power to carry out inspections and investigations into possible violations of the PDPL, issue orders to stop violations, fine violators and award compensation to data owners who have incurred damage as a result of violations of the PDPL. However, a formal PDPA had not yet been formed as of October 2019, and no implementing regulations of the PDPL had been published to date.

The terms personal data and data have been defined widely in the PDPL, and include any information or image in any form of an individual that can be directly or indirectly identifiable by any means. Sensitive data includes any data that reveals, directly or indirectly, an individual’s race, ethnicity, political or philosophical views, religious beliefs, union affiliation, criminal record or any data related to their health or sexual life, and should be processed with more care as specified by Article 5 of the law. Processing is also broadly construed, and includes any treatment of data by both automatic and non-automatic means, including the collection, organisation, storage, modification, use or disclosure, publishing, making available to third parties and destruction of such data.

Article 3 of the PDPL requires that any personal data collected must be processed fairly, for a legitimate and clear purpose, and must not be subsequently processed for other purposes. It should be ensured that any data processed is at all times accurate and updated when necessary. Importantly, once the purpose for which the data was collected is fulfilled, it should not be stored in any identifiable form. Beyond this point, it must be converted into an anonymised, encrypted format.

Consent of the data owner must be obtained before processing their data, and must be given clearly by individuals of full legal capacity and on their own free will after being fully informed about the purposes for processing their data. Some exceptions to this are:

• Processing data to conclude a contract on behalf of a data owner;

• Fulfilling an obligation required by law or court order; or

• Protecting the vital interests of the data owner. If a party seeks to transfer any personal data outside of Bahrain, they may only transfer such data to countries which are deemed by the PDPA to have sufficient data protection laws. A list of these countries has not yet been published. Some of the exceptions to this are when:

• The data owner has given their consent;

• The data is from a public register; or

• Prior authorisation has been obtained from the PDPA. The PDPL allows for criminal penalties and administrative fines in some circumstances, notably in cases including but not limited to:

• Processing sensitive personal data in violation of the law;

• Transferring personal data outside Bahrain to a country or region in violation of the law;

• Processing personal data without notifying the PDPA;

• Hindering or suspending the work of the PDPA’s inspectors or any investigation which the authority is going to make; or

• Inspectors disclosing any data which they are allowed to have access to due to their job, or which they used for their own benefit or for the benefit of others unreasonably and in violation of the law. Such acts may result in imprisonment of up to one year and/or a fine between BD1000 ($2650) and BD20,000 ($53,000), so it is imperative that parties ensure their data processing procedures and policies comply strictly with the PDPL.

Protected Cell Companies Law

The last several years have seen the introduction of a series of laws designed to further develop Bahrain’s financial sector, facilitate local and foreign investment, and promote the country as a simple, secure and cost-effective place to do business in the Middle East. The suite of new legislation introduced since 2014 includes three rounds of amendments to the Commercial Companies Law in 2014, 2015 and 2018, the introduction of the Financial Trusts Law and the Protected Cell Companies Law (PCC Law) in 2016, and the 2018 Investment Limited Partnerships Law.

The PCC Law, Law No. 22 of 2016, was developed by the Central Bank of Bahrain (CBB) in coordination with the Bahrain Economic Development Board. It is the first of its kind in the GCC, adding to the range of structures available by allowing a new and innovative mechanism for structuring and raising finance for investment. Main features of a protected cell company (PCC): A PCC is a distinct legal entity regulated by the CBB that is made up of a core and one or several parts called cells. The cells of the company do not have their own legal personality, and are governed by a single board of directors that is responsible for overseeing the operation and management of the PCC and all of its cells as a whole. The PCC Law allows for both the creation of new PCCs and the conversion of existing companies into PCCs, provided the CBB has given its approval for the same. Once established and approved by the CBB, there is no limit to the number of cells a PCC can create. While though there is no minimum capital requirement for establishing the core or for any of the cells, the CBB shall regulate the minimum capital requirement where applicable. The most distinguishing feature of a PCC is its separation of assets and liabilities. By segregating the assets and liabilities of a company cell from the core and other cells, such assets are only available to the creditors and shareholders of that particular cell. As such, the mechanism strengthens investors’ rights and powers to protect their assets from the wider company and its creditors. Notably, the PCC Law also allows PCCs to give transacting third parties rights of recourse to both the assets of the company core and the appropriate cell for any liability that may arise from such transaction.

Importantly, PCCs may only undertake certain activities as listed in Article 3 of the PCC Law. Such activities are limited to:

• Private investment undertakings;

• Collective investment undertakings;

• Securitisation;

• Insurance captives; and

• Any other financial services subsequently allowed by the CBB. Benefits of the PCC Law to investors: Immediate benefits of the PCC company structure include improved efficiency of company administration, cost savings and improved investor confidence. PCC companies are flexible and easy to establish, operate and liquidate, and there is no minimum capital requirement. Existing companies may be converted into PCCs and once the PCC is established, repeat transactions or other common operations among the cells can be processed in a more efficient and cost-effective manner.

The most notable advantage of the PCC structure is that the insolvency of one cell does not ordinarily affect the solvency of either the core or any other cells. As such, the structure allows investors to easily limit exposure to creditors and shareholders between cells and the core, and individual cells may enter into a range of transactions without fear of placing the PCC’s assets as a whole at risk.

The PCC Law forms an important part of the recent reforms to Bahrain’s Companies Law framework. The law was not introduced until late 2017 and, as such, fully gauging its effects on Bahrain’s investment landscape has been a bit difficult to date. Nevertheless, such reforms bring Bahrain firmly in line with international best practices and affirm its reputation as an accessible destination for local, regional and global investors.

VAT Law

Almost a year after its introduction in the UAE and Saudi Arabia, value-added tax (VAT) was officially introduced in Bahrain on January 1, 2019 in accordance with the 2017 Unified Agreement for Value-Added Tax of the Cooperation Council for the Arab States of the Gulf.

The legal framework for VAT, an indirect tax on consumer spending which forms part of Bahrain’s Economic Vision 2030, is set out in Royal Decree No. 48 of 2018, supplemented by Resolution No. 12 of 2018 on the issuance of the Executive Regulations of the Value Added Tax Law, issued under Law No. 48 of 2018 (VAT Law).

Similar to the VAT framework in other GCC member states, the application of VAT extends to goods and services made or rendered within Bahrain, as well as to imports, and shall be applied at the standard rate of 5% unless the law provides for a specific exemption from the same. A National Bureau for Revenue (NBR) has also been established and is responsible for the implementation and administration of VAT in Bahrain.

It is important to note that 2019 is a transitional year for VAT in Bahrain. Specific rules have been put in place to this effect until December 31, until which suppliers of goods and services shall enjoy the flexibility of a temporary increase to mandatory VAT registration thresholds, a three-phased mandatory VAT registration deadline depending on the value of goods or services supplied, longer tax reporting periods and special treatment for taxable transactions entered into prior to 2019.

From January 1, 2020 the permanent legal framework governing VAT in Bahrain will be implemented in its entirety. VAT applies at a prima facie rate of 5% on the supply of goods and services, if such supply is made:

• By a taxable person (i.e., a person or business who supplies goods and services, or receives goods or services from a non-resident in accordance with the reverse charge mechanism, or is an importer);

• In Bahrain; and

• The supply is not specifically exempt from VAT or subject to the zero-rate. In order to prepare for the introduction of VAT, all taxable persons as described above should perform a preliminary estimate of their expected annual revenue for each commencing year, then apply to the NBR for VAT registration within 30 days if the expected values of their annual supplies exceed the applicable mandatory threshold. From 2020, such threshold shall be set at BD37,500 ($99,500).

Any VAT collected on the supply of goods and services must be retained by the supplier and subsequently paid to the NBR within 30 days of the end of each tax period. VAT invoices must also be provided to customers of the supplier within 15 days of the end of each tax period. Taxable individuals and businesses should ensure they are well prepared for these time frames in order to allow for sufficient cash flow and compliance with the law.

Certain goods and services are exempt from VAT, either through the application of a 0% VAT rate or by total exemption. In such cases, no VAT is chargeable by the supplier nor payable to the NBR. For example, the sale or lease of vacant land and buildings, goods and services for disabled persons, and gifts carried by travellers are exempt from VAT.

Other goods and services may be subject to VAT at a rate of 0%, including:

• Oil, gas and oil derivatives;

• The supply and import of food products;

• Transport;

• Construction of new buildings;

• The supply and import of certain medicines and medical equipment;

• The supply and import of investment gold, silver and platinum with a purity level not less than 99% that is tradeable on the global bullion market (subject to obtaining a certificate);

• Educational services, including the supply of related goods and services to nurseries, preschools, and primary, secondary and higher education institutions;

• Supply of goods under a Customs duty suspension scheme; and

• The supply and import of pearls and precious stones (subject to obtaining a certificate). Penalties: Penalties for non-compliance are severe, thus taxable individuals are advised to ensure they understand all the VAT obligations and time frames relevant to their situation. Taxable suppliers who fail to register for VAT may face penalties up to BD10,000 ($26,500). A penalty of up to BD5000 ($13,300) may be imposed on any person who:

• Prohibits employees responsible for implementing the law to be carried out;

• Fails to notify the NBR of changes to details of information;

• Fails to display prices of goods or services inclusive of VAT;

• Fails to provide information at the NBR’s request;

• Fails to comply with conditions related to issuing the tax invoice; and

• Violates any other provision of the VAT Law. In addition, the following actions may be regarded as tax evasion, which may result in a period of imprisonment in addition to any fines imposed:

• Failing to register for VAT within 60 days of the registration deadline;

• Failing to pay VAT within 60 days of the payment deadline;

• Failing to provide a tax invoice to a customer; and

• Charging VAT on non-taxable items. Implications of VAT for businesses: Following the introduction of VAT, further developments in taxation in Bahrain may be expected in the coming years in furtherance of Economic Vision 2030, including the possible introduction of remittance tax, expatriate tax and corporate tax.

The introduction of VAT and other taxes will no doubt present challenges to businesses of all sizes, however, small and medium-sized enterprises who do not have a dedicated accounting department should be especially rigorous when it comes to familiarising themselves with the VAT rules and deadlines, and in implementing the necessary internal systems to ensure compliance with the same at all times.

Trusts Law

Legislative Decree Law No. 23 of 2016 promulgating the Financial Trusts Law (Trusts Law) replaces the old law passed in 2016 governing the same. It serves as a centrepiece of the series of legal reforms introduced in the last few years to develop the country’s investment potential, and promote Bahrain as a stable, flexible and competitive place to build and maintain wealth in the region, alongside the three updates to the Commercial Companies Law, and the establishment of the PCC Law and the Investment Limited Partnerships Law.

The new Trusts Law, developed by the CBB, is a practical and refined piece of legislation. Unlike the old law, it allows for the creation of all forms of trust structures, providing both individuals and organisations with a long-term holding vehicle for maintaining and securing assets. This is particularly useful in the domestic market, where large and established family businesses may have previously looked overseas to create trusts to protect the transfer of wealth from one generation to the next. Main features of the new Trusts Law: As is the case with comparable legislation in other developed jurisdictions, the Trusts Law allows for the creation of a trust by virtue of a trust instrument, which transfers ownership of assets such as property, rights, powers and discretionary authorities to a trustee or trustees. Such trustee must act in accordance with the powers and duties specified in the trust instrument, with a view to achieving the purpose of the trust and the interests of the beneficiary or beneficiaries. Under the law, trusts may be utilised for a variety of charitable and non-charitable purposes, including being structured as pension trusts, securitisation trusts or investment vehicles.

A trust, when created, will only be valid if created under a notarised trust deed and signed by the settlor and trustee(s), as the case applies. The deed must also specify the trust executor (who may be the same person as the settlor, but not the trustee) and, if applicable, the trust protector, who shall exercise the relevant functions allocated to it on the trust deed.

All trusts in Bahrain must be registered on the CBB’s trust register, however, such register may only be accessed through the issue of a court order or directly by concerned CBB employees, allowing for near complete confidentiality surrounding the trust. A trust deed will be deemed invalid and will not be registered by the CBB where formal trust creation requirements have not been met, where there is no duration specified, where no licensed trustee has been appointed, or where the trust has violated public morality or the law.

Trustees have the widest scope of powers and obligations under the Trusts Law and must act only for the benefit of the beneficiaries, for the purposes of the trust or in accordance with the settlor’s instruction or direction. Importantly, they must ensure that trust property is kept separately from their own assets at all times, can be easily distinguished from the same, and must continue to perform their duties under the trust deed upon resignation for as long as no other trustee is available. Furthermore, where the trust is terminated before its expiry date or where the trustee is removed or resigns, the trustee must, within reasonable time, distribute all trust property to its beneficiaries and inform the CBB of the same.

Unless expressly exempted in the trust deed, any trustee who breaches the provisions of the Trusts Law or their duties as a trustee will be held liable for:

• Loss or diminution of the trust property as a result of the breach;

• Any gain acquired by the trustee as a result of said breach; and

• Profit lost by the trust if such a breach did not occur. In the event of an actual or potential breach, the courts may order several remedial measures, such as obliging the trustee to perform its duties, preventing the trustee from committing a breach of the trust, ordering the trustee to amend the breach by paying back or compensating for damages arising from the breach, or ordering the trustee to be suspended from assuming trusteeship for a maximum of 10 years. The courts also retain the power to decrease or deny the trustee’s fees, invalidate acts made by the trustee, or order any other appropriate measures to be taken upon consideration of the individual circumstances of the breach.

A notable feature and benefit of the Trusts Law is its formal recognition of trusts established and governed by the laws of other jurisdictions. Parties to a trust agreement may effectively agree upon the law governing the trust and its ultimate dissolution, removing any risk of uncertainty for foreign investors who may otherwise be hesitant to set up a trust in Bahrain. Article 56 of the Trusts law provides that a Bahraini court may issue orders regarding the implementation, administration or enforcement of a foreign trust; the trustee’s powers; the trustee’s appointment, removal, remuneration or performance; the beneficiary; and the appointment or removal of the trust protector or executor. It should be noted, however, that foreign law trusts shall not be recognised if they are inconsistent with Bahraini law provisions, irrespective of the applicable law stated in the trust deed.

The Trusts Law presents a new opportunity for local and overseas individuals and organisations to maintain and build upon their assets in a secure, predictable and flexible legal environment. Since its introduction in late 2016 the CBB has, after having overseen the law’s implementation and having consulted industry leaders on their thoughts regarding the legislation, already made several adjustments to the terms of the law, ensuring that it remains flexible and effective for all the country’s investors.

OBG would like to thank Zu’bi & Partners, Attorneys THE REPORT Bahrain 2020