Tax regulatory framework in Bahrain

Bahrain has long enjoyed its status as a tax-free jurisdiction until the introduction of excise tax in late 2017, followed by introduction of value-added tax (VAT) in 2019. The country is now home to a rapidly evolving tax landscape, with several notable tax and reporting regulations introduced since 2017.

Bahrain is well established as a financial centre in the region, and in recent years the authorities have diversified the economy to include technology, manufacturing and logistics. Bahrain welcomes overseas investment, allowing 100% foreign ownership in many sectors. Adding to its draw, the country is consistently ranked as one of the best places in the GCC for expatriates to live and work.

Tax Administration

Bahrain has a limited corporate income tax (CIT) regime, at a rate of 46%, which applies only to entities engaged in the exploration, production or refining of hydrocarbons.

The country does not impose capital gains tax, withholding taxes (WHT) or other taxes on the repatriation of profit. Excise tax on tobacco products, sweetened carbonated drinks and energy drinks was introduced in Bahrain in late 2017, a move that was followed by the introduction of VAT at the start of 2019 – making Bahrain the third GCC country to implement VAT after the UAE and Saudi Arabia.

VAT and other taxes are administered by the National Bureau for Revenue (NBR), which was established by the Ministry of Finance and National Economy in 2018. As a member of the OECD base erosion profit shifting (BEPS) inclusive framework (IF), Bahrain has committed to aligning its laws with the IF and implementing the BEPS minimum standards.

VAT

VAT was introduced in Bahrain at the standard rate of 5% on January 1, 2019. The country doubled the VAT rate to 10%, effective January 1, 2022 with a transition period of 12 months. This move allows businesses to charge VAT at a rate of 5% during the 2022 calendar year, subject to certain requirements.

The standard VAT rate is 10%, with a limited number of services – such as margin-based financial services and real estate services – exempt from the tax. Zero-rating may apply on goods and services including basic food items, medical products, education and transport. Supplies in the oil and gas sector are also zero-rated, subject to the relevant conditions.

Registration

Entities with an annual taxable turnover exceeding BH37,500 ($99,500) are required to register within 30 days of the date that the threshold is exceeded or is expected to be exceeded. This is a rolling test, so businesses must look at the previous 12 months and the 12 months ahead to assess whether they have exceeded or will exceed the established limit.

For non-resident businesses for which the place of supply of goods or services is Bahrain, there is no registration threshold. In essence, non-resident businesses that supply goods or services to non-VAT-registered customers in Bahrain are required to register within 30 days of their first sale if the location of supply is in the country, regardless of the value of the transaction. Entities may choose to register voluntarily if the annual taxable turnover exceeds or is expected to exceed BH18,750 ($49,700).

Return Filing

Businesses with taxable turnover exceeding BH3m ($8m) must file monthly VAT returns, while other businesses are required to file VAT returns quarterly. Resident businesses with a taxable turnover of less than BH100,000 ($265,000) may apply to the NBR to file on an annual basis. VAT returns are to be submitted through the online NBR portal. Submission and payments should be made by the last day of the month following the end of the tax period.

CIT

While Bahrain has not yet made any announcements on the potential introduction of a broader CIT, the following regulations are in place as of April 2022: a) Economic substance rules (ESR): This regulation imposes substance requirements for Bahraini entities undertaking geographically mobile activities in, from or through Bahrain. This aims to target corporate structures that shift income or profits to entities in jurisdictions with no or low tax regimes. The ESR apply to entities (corporations, branches and partnerships) that fall under one or more of the following categories:

• Distribution and service centres;

• Headquarters;

• Holding companies;

• Leasing;

• Shipping;

• Intellectual property (IP);

• Banks;

• Financing;

• Insurance;

• Investment firms (Central Bank of Bahrain [CBB] categories 1 and 2); and

• Fund administrators. Some of these activities are regulated by the CBB. Therefore, CBB-regulated entities will need to report to the central bank.

Entities undertaking one or more of the relevant activities must meet the economic substance tests to prove that they have genuine commercial operations and management in Bahrain. The deadline to file the economic substance return for entities in the country is three months from the end of their financial year. For example, for the financial year ending on December 31, 2020, the deadline was March 31, 2021. However, the NBR introduced a new online portal in August 2021 and extended the deadline to September 18, 2021. Businesses that had already filed their returns needed to refile through the online portal. Going forwards, the deadline will continue to be three months from the end of the financial year. b) Ultimate beneficial ownership (UBO): UBO regulations identify the natural person(s) who has a controlling ownership of an entity. The requirement for companies incorporated in Bahrain and branches of foreign companies (excluding CBB-licensed entities) set up in the kingdom to provide details of their UBOs is a tool that the government of Bahrain has enacted to demonstrate transparency and compliance with international regulations. It also includes those persons who exercise effective control over a legal person or arrangement, and have control on any commercial registration through means other than ownership. c) Country-by-country reporting (CbC): Though there are no transfer-pricing rules, Bahrain introduced CbC reporting from the financial year commencing January 1, 2021. CbC applies to all businesses that have a legal entity or branch in Bahrain and are members of multinational groups with annual consolidated revenue of at least BH342m ($907.2m). An entity that meets this threshold in the preceding financial year is required to file a CbC notification and/or a CbC report.

An entity subject to the CbC rules is referred to as a constituent entity (CE). Each CE of a multinational group resident in Bahrain for tax purposes is required to submit a notification by the last day of the group’s reporting financial year. The notification should identify whether it is the ultimate parent entity (UPE) of the group. Where the CE is not the UPE, the notification should include the identity and tax residence of the reporting entity. The CbC notification obligation applies to all resident entities that are part of a multinational group, regardless of whether it is headquartered in Bahrain.

As Bahrain is a non-reciprocal jurisdiction, the ministerial order does not include a requirement for a Bahrain resident CE of a multinational group headquartered outside Bahrain (UPE outside Bahrain) to submit the CbC under the secondary filing mechanism. Only a notification is required for these entities. d) Multilateral instrument: Bahrain recently endorsed the OECD’s Multilateral Convention to Implement Tax Treaty Related Measures for BEPS and deposited its instrument of ratification of the multilateral agreement. Bahrain has concluded 45 double taxation avoidance agreements with countries including the UK, Ireland, Bermuda, Singapore, South Korea, Luxembourg, Malaysia, France and Hungary.

On July 1, 2021 Bahrain became one of 130 IF countries to approve a statement providing a framework for international tax reform, including a proposal that businesses pay a global minimum tax of 15%. As Bahrain only has a limited CIT, it will need to make some key decisions in the short to medium term on issues such as whether to implement the income inclusion rule (IIR) and CIT on all businesses, or implement the IIR and CIT on selected businesses.

Bahrain is already committed to the IF, having introduced CbC rules and ESR. The country will want to ensure that it is not included in the EU blacklist of uncooperative jurisdictions. Therefore, it is likely that it will be seriously considering the implementation of the IIR and CIT.

Other Taxes

Other taxes in Bahrain include:

• Excise tax: An excise tax of 100% is charged on tobacco products and energy drinks, and 50% on soft drinks.

• Customs duties: The duties range from 5% to 125%, depending on the nature of product being imported.

• Property transfers: A 2% levy is imposed on the value of a property on the transfer or registration of real estate. If the levy is paid within 60 days of the transaction date, this rate is reduced to 1.7%.

• Tourism: A 5% levy is imposed on hotels and restaurants classified by the Ministry of Industry and Commerce (MoIC) as catering to tourists. Typically, this 5% levy, along with a 10% optional service charge, is passed on to the customer.

• Social insurance: Employers are required to make a contribution of 3% for expatriates and 14% for Bahraini employees, the latter of which will increase by 1% each year starting on January 1, 2023 until reaching 20% in January 2028. The employee contribution for expatriates is 1% and 7% for Bahrainis, which will rise to 8% from 1 January 2023. The maximum monthly income subject to the contribution is capped at BH4000 ($10,600).

Setting up a Business

Bahrain is strategically located in the heart of the Gulf. It has an open commercial environment with competitive advantages, including some of the lowest business costs in the region. Bahrain invests significantly in integrated logistics, business and infrastructure, and has a mature regulatory environment, making it an ideal location for companies that want to operate in the GCC. Businesses can be established in the Bahrain International Investment Park (BIIP) and the Bahrain Logistics Zone (BLZ), both of which are designed to offer local, regional and international companies a base to operate and take advantage of the country’s position to cater to the wider Gulf market. Foreign investment and 100% foreign ownership are largely permitted, with a limited number of business activities reserved for Bahraini and/or GCC citizens and companies. For example, general trade and retail activities require 51% Bahraini ownership. Bahrain has numerous free trade agreements in place with countries including the US and Singapore, which enable foreign investors to establish 100% ownership entities. Further exemptions may be approved on a case-by-case basis.

Commercial Registration

All companies must be registered with the MoIC to obtain a commercial registration certificate before commencing business operations. The most common business entity structures in Bahrain are:

• Companies limited by liability: Full foreign ownership in a with limited liability (WLL) company is generally permitted, except for companies that undertake business activities that require a Bahraini partner to own at least 51% of company’s capital. The minimum share capital requirement for a WLL was removed. However, certain activities may still require a WLL to be formed with a minimum share capital. A WLL can now have one or more shareholders, with no limit on the total number. Previously, WLLs required a minimum of two shareholders and were permitted to have a maximum of 50 shareholders. The share capital of WLLs must be divided into equal shares. A WLL company can be a shareholder in another company.

• Bahrain shareholding company (BSC) (closed): This is a closed joint-stock company consisting of no fewer than two persons who subscribe for negotiable shares that are not offered to the public for subscription. The issued capital must not be less than BH250,000 ($663,100).

• Single person company (SPC): Although previously a common structure, SPCs have been merged with WLLs, with effect from April 1, 2021.

• Holding company: A holding company may take the form of a BSC (closed) or a WLL. The registration requirements will depend on the chosen legal form. A holding company must own more than 50% of the shares of its subsidiaries.

• Branch office: Branches may be registered as an operational, representative or regional office of the parent company. The parent company must bear all liability. Business operations are permitted only in an operational office, while representative and OBG would like to thank KPMG for its contribution to THE REPORT Bahrain 2022 regional offices are only permitted to undertake marketing and promotional activities. The aforementioned types of entities must be incorporated under the Bahrain Commercial Companies Law. Required documents to be submitted through Sijilat, the MoIC‘s online platform, include:

• Passport/ID copies of individual shareholders, or commercial registration details of corporate shareholders;

• Commercial address details;

• Draft memoranda and articles of association;

• Capital deposit certificate (after preliminary approval); and

• Financial auditor’s report or evaluation letter for in-kind capital, if any. Additional requirements may apply based on the nature of activities.

Accounting Requirements

Companies are expected to report the following:

• Financial statements: Companies must prepare their accounts in accordance with International Financial Reporting Standards.

• Audit requirements: All public and closed jointstock companies, WLLs and branches of foreign companies are required to have an annual audit. The auditors appointed at the annual shareholders’ meeting must be registered with the MoIC.

• Book year/accounting currency: The company must have a financial year that starts on January 1 and ends on December 31 each year, unless otherwise provided for in the company’s articles of association. The first financial year shall be an exception. It shall begin at the company’s incorporation date and end with the financial year end.

Currency & Monetary Restrictions

There are no foreign exchange control restrictions on repatriation of profit by way of dividends and other payments.