Bahrain has long enjoyed its status as a tax-free jurisdiction prior to the introduction of excise tax in late 2017, followed by the introduction of value-added tax (VAT) in 2019. The kingdom is now home to an evolving tax landscape, with several notable tax and reporting regulations introduced since 2017.
Bahrain is well established as a financial leader in the Middle East, and in recent years the authorities have diversified the economy by promoting technology, manufacturing and logistics. The country welcomes international investment, allowing 100% foreign ownership in various sectors. Additionally, Bahrain is consistently ranked as one of the best places in the GCC for expatriates to live and work.
Tax Administration
Bahrain currently has a limited corporate income tax (CIT) regime, at a rate of 46% that applies only to entities engaged in the exploration, production or refining of hydrocarbons. The kingdom does not impose capital gains tax, withholding taxes or other taxes on the repatriation of profit. An excise tax on tobacco products, sweetened carbonated drinks and energy drinks was introduced to the country in 2017. This was followed by the introduction of VAT starting on January 1, 2019. Bahrain was the third country in the GCC to adopt VAT, following its implementation by the UAE and Saudi Arabia in 2018.
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. Bahrain is a member of the OECD base erosion profit shifting (BEPS) inclusive framework, and thus is committed to aligning national regulations and processes with the framework, and implementing the BEPS minimum standards.
VAT
VAT was introduced in Bahrain at the standard rate of 5% in 2019. The country then doubled the rate to 10% on January 1, 2022 with a transition period of 12 months. This allowed businesses to charge VAT at 5% during the 2022 calendar year, subject to certain requirements.
The standard VAT rate is 10%, with certain goods and services subject to VAT at 0%. A limited number of supplies – such as margin-based financial services and real estate – are exempt from VAT. Zero-rating may apply on goods including basic food items, medical supplies, education and transport. Supplies in the oil and gas sector are also zero-rated, subject to certain conditions.
Registration
Entities with an annual taxable turnover exceeding BD37,500 ($99,500) are required to register within 30 days of the date the threshold is exceeded or is expected to be exceeded. This is a rolling test, so companies must look back 12 months and ahead the next 12 months to assess whether they have exceeded or will exceed the threshold.
For non-resident businesses where the place of supply of goods or services is Bahrain, there is no registration threshold. In essence, non-resident businesses making taxable supplies to non-VAT registered customers in Bahrain are required to register within 30 days of their first supply if the place of supply is Bahrain, regardless of the value of the transaction. Entities may choose to register voluntarily if the annual taxable turnover exceeds or is expected to exceed BD18,750 ($49,700).
E-Invoicing
In 2022 the NBR invited proposals from service providers in order to support the agency with the review and enhancement of the legal framework for the launch of e-invoicing. The NBR also held focus group sessions on the implementation of e-invoicing for large taxpayers in various sectors. The focus group sessions aimed at providing an overview of the potential e-invoicing operating model and gathering feedback from industry representatives. Given these developments, it is expected that Bahrain will follow other countries around the world and look to implement e-invoicing in the coming years.
Return Filing
VAT returns are to be filed monthly for businesses with taxable turnover exceeding BD3m ($8m) or quarterly for other businesses. Resident businesses with a taxable turnover of less than BD100,000 ($265,000) may apply to the NBR to file on an annual basis. VAT returns are to be submitted online through the NBR portal: submission and payments should be made by the last day of the month following the end of the tax period.
CIT
On May 23, 2023 Bahrain’s minister of finance and national economy said that CIT would soon be implemented in Bahrain. The kingdom is likely to enact a standard CIT regime that should apply to all commercial activities. However, entities engaged in the exploration, production or refining of hydrocarbons are set to be exempt from CIT, as they are already subject to a specific tax regime. The following regulations were in place as of mid-2023: 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 profit to entities in jurisdictions with no or low-tax regimes. ESR apply to entities such as corporations, branches and partnerships that are fall under one of the following categories:
• Distribution and service centres;
• Headquarters;
• Holding companies;
• Leasing;
• Shipping;
• Intellectual property;
• Banks;
• Financing companies;
• Insurance;
• Investment firms (Central Bank of Bahrain [CBB] categories 1 and 2); and
• Fund administrators. Some of the above activities are regulated by the CBB, and, therefore, those entities are required to report to the CBB.
Entities undertaking one or more relevant activities must meet the economic substance tests to prove that they have genuine commercial operations and management within the kingdom. The deadline to file the economic substance return for entities is three months from the end of the financial year. b) Ultimate beneficial ownership (UBO): UBO disclosure rules identify the natural person(s) with controlling ownership of an entity. The requirement for companies incorporated in Bahrain and branches of foreign businesses (excluding CBB-licensed entities) established in the kingdom to provide details of their UBOs is a tool that the government enacted to demonstrate transparency and compliance with international regulations.
The regulation also includes persons who exercise effective control over a legal person or arrangement, and have control over any commercial registration through means other than ownership. c) Country by Country (CbC) reporting: While there are no transfer pricing rules, Bahrain introduced CbC reporting for financial years commencing January 1, 2021. The rules apply to all businesses with a legal entity or branch in Bahrain and are members of multinational groups with annual consolidated revenue of at least BD342m ($907.2m). Entities meeting this threshold in the preceding financial year are required to file a CbC notification and/or a CbC report.
An entity subject to 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 reporting financial year that shows whether it is the ultimate parent entity (UPE) of the group.
In cases 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 the kingdom.
As Bahrain is a non-reciprocal jurisdiction, the ministerial order does not include a requirement for a Bahrain resident CE of a multinational group based outside the country (UPE outside Bahrain) to submit the CbC under the secondary filing mechanism. These entities are only required to submit a notification. d) Multilateral instrument: In November 2020 Bahrain endorsed the OECD’s Multilateral Convention to Implement Tax Treaty Related Measures for BEPS and also deposited its instrument for ratification of the multilateral agreement. As of mid-2023 Bahrain concluded approximately 45 double taxation avoidance agreements with jurisdictions including Bermuda, China, France, Hungary, Ireland, Luxembourg, Malaysia, the Netherlands, Singapore, Seychelles, South Korea, Switzerland and the UK.
Additionally, on July 1, 2021, Bahrain became one of 130 inclusive framework member countries to approve a statement providing a framework for international tax reform, including the proposal that international businesses pay a global minimum tax of 15%, set to take effect in 2024. As Bahrain only has a limited CIT, it will need to make important 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 to implement the IIR and CIT on select businesses. If Bahrain makes no such moves, profit generated by companies in the kingdom could be subject to tax in other jurisdictions, and the country would lose out on potential taxation rights and revenue.
Bahrain is already committed to the inclusive framework, having introduced CbC and ESR. It will be important for the kingdom to continue to ensure that it is not included in the EU blacklist of uncooperative jurisdictions. Therefore, Bahraini businesses could expect the introduction of CIT, at least in the first instance, on multinational groups meeting the revenue threshold, from financial years commencing on January 1, 2024.
Other Taxes
Other taxes in Bahrain include:
• Excise tax: An excise tax of 100% applies on tobacco products, as well as energy drinks and at 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 the property on the transfer or registration of real estate. If the levy is paid within 60 days of the transaction date, the 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 12% for Bahraini employees. The employee contribution is 1% for expatriates and 7% for Bahrainis. The maximum monthly income, which is subject to the contribution, is capped at BD4000 ($10,600).
• Municipality: A municipality tax ranging from 7-10% is applicable on the rental amount.
Setting up a Business
Bahrain is strategically located in the heart of the Gulf. It has an open commercial environment with numerous competitive advantages, including some of the region’s lowest business costs. Bahrain invests significantly in integrated logistics, business and infrastructure, and has a mature regulatory environment – making it an ideal location for firms looking to operate in the GCC.
Businesses can be established in the Bahrain International Investment Park and the Bahrain Logistics Zone, both of which were designed to offer local, regional and international companies a base to operate and take advantage of the country’s strategic position to cater to the wider Gulf market.
Foreign investment and 100% foreign ownership are largely allowed, although some activities are reserved for Bahraini and/or GCC citizens and companies. For example, in general trade and retail activities, 51% Bahraini ownership is required. Sectors restricted from foreign involvement include those related to press and publications, Islamic pilgrimage, document clearance and workforce agencies.
Bahrain has free trade agreements in place with countries such as the US and Singapore, which enable foreign investors to establish 100% ownership entities. Further exemptions are reviewed case by case.
Commercial Registration
All firms must be registered with the MoIC to obtain a commercial registration certificate before commencing business. The most commonly used 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 the company’s capital. The minimum share capital requirement for a WLL has been removed. However, certain activities may still require a WLL to be formed with a minimum share capital. A WLL can have one or more shareholders, with no limit on the total number. Previously, WLLs required a minimum of two and could have a maximum of 50 shareholders. The share capital of WLLs must be divided into equal shares. A WLL company may be a shareholder in another company.
• Bahrain shareholding company (BSC) (closed): This is a closed joint stock company consisting of not 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 BD250,000 ($663,100).
• Single person company (SPC): All 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. Registration requirements will depend on the legal form chosen. A holding company must own more than 50% of the shares of its subsidiaries.
• Branch offices: Operational, representative, or regional office branches may be registered as an operational office, a representative office or a regional office of the parent company. The parent company shall bear all liability of its branch. Business operations are allowed only for an operational office, while representative and regional offices are only permitted to undertake marketing and promotional activities. The aforementioned forms 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
Businesses are expected to report the following:
• Financial statements: Companies are required to prepare accounts in accordance with International Financial Reporting Standards.
• Audit requirements: All public and closed joint stock companies, WLLs and branches of foreign firms 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 shall 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 end of the financial year.
Regulation for Financial Services
All regulatory requirements for financial services are overseen by the CBB.
Currency Restrictions
There are no foreign exchange control restrictions on the repatriation of profits by way of dividends or other payments.
Read More from OBG
