Bahrain - Economic Substance Regulations

Overview

The Economic Substance regulations for Geographic Mobile Activities in the Kingdom of Bahrain (the “Regulations”) were issued by the Ministry of Industry, Commerce and Tourism (MOICT) on 23 December 2018 via the Ministerial order No. (106) of 2019, and a Guidelines document (the “Guidelines”) completed by FAQs has now been published, clarifying certain aspects of the Regulations.

The Regulations require entities falling within their scope (which excludes entities with no overseas activities) to satisfy certain economic substance requirements and to report on these matters within three month from their financial year end.

The purpose of the Economic Substance rules is to bring specific requirements for businesses to demonstrate the actual economic activity in the Bahrain. The Bahrain is in line with other jurisdictions that are parties of the OECD Inclusive Framework and have similar tax environments, i.e. no or only nominal tax (NOONs), which have also introduced ES regulations recently (for example, UAE, Cayman Islands, Mauritius and British Virgin Islands).

The first reporting will thus have to take place on 31 March 2020 for entities whose financial year 2019 closed on 31 December.

These Regulations apply to entities (corporations, branches and partnerships) formed under MOICT legislations conducting one or more of the following activities:

● Distributions and service centres

● Headquarters

● Holding

● Leasing

● Shipping

● Intellectual property

● Banks

● Financing companies

● Insurance

● Investment business firms

● Fund administrators

The Economic Substance Test

1) The ‘Directed and Managed’ Test: The entity will need to be directed and managed in the Bahrain with regards to the relevant activity (for example: frequent board meetings, quorum of directors physically present, minutes of all board meetings kept in the country, etc.)

2) The ‘Core Income Generating Activities (CIGA)’ Test: The entity that performs any of the relevant activities for the purpose of the ES rules will need to demonstrate that the relevant CIGAs have been undertaken in the Bahrain. The criteria for the CIGA Test vary depending on the relevant activity in question.

3) The ‘Adequate’ Test: The entity will need to have an adequate number of qualified employees in the Bahrain, incur adequate expenditure in the jurisdiction and have adequate physical presence in the country. The applicability of the ‘Adequate’ test will be dependent of the particular facts and should vary on a case by case basis. The Bahrain regulations foresee that a guidance will be issued to clarify any expression or concept covered by the law, including the meaning of ‘adequate’.

Reporting requirements

The Regulations require entities falling within their scope to satisfy certain economic substance requirements and to report on these matters within three month from their financial year end.

When to file?

The first reporting will thus have to take place on 31 March 2020 for entities whose financial year 2019 closed on 31 December.

What are the consequences?

If companies fail to meet the Economic Substance requirements; the CBB - can suspend, revoke or deny renewal of a CR or licence or levy significant fines (up to BD100,000).

How we can assist you?

1. Impact assessment

Assessing which entities and activities are within the scope of the economic substance rules. This is a critical first step for all Bahrain businesses to determine what to notify to the Regulatory Authorities, and what economic substance requirements need to be met.

2. Gap analysis and action plan

Undertake a gap analysis that maps the current (operational) substance and corporate governance infrastructure against what is required under the regulations

3. Reporting

Assisting you in the preparation and submission of your annual notifications and economic substance declarations to the Regulatory Authorities.