Kingdom of Bahrain

Doing Business in Bahrain

Introduction

Situated in the heart of the Arabian Gulf, 24 kilometres off the eastern coast of Saudi Arabia, lies the Kingdom of Bahrain (Arabic: Mamlakat al-Bahrayn). Bahrain is an archipelago of approximately 36 small islands covering a total land area of 711sq. km. The largest of these is Bahrain Island (578sq.km.) from which the Kingdom takes its name. It is connected by causeways to Muharraq, the second largest island, and to Sitra, where most of the industrial units are located. A causeway of about 30 km stretches across to the eastern coast of Saudi Arabia, increasing trade and traffic between the two countries. To the south-east lie sixteen smaller islands, which comprise the Hawar group. The largest of these is 19km long and 1.5km wide. There are numerous other small islands in the archipelago, mostly uninhabited, best known for the rich variety of migrating birds that live there for part of the year.

The capital and largest city is Manama, with a population of approximately 300,000.

The climate in the Kingdom of Bahrain is pleasant from October until April, with temperatures ranging from 10°C to 30°C and rainfall being erratic, but averaging 7cm per year. Humidity is high in July, August and September with daytime temperatures averaging 39°C. The Kingdom has a number of natural springs mainly along the northern coast. These are gradually being depleted, but significant volumes of water are now generated from desalination plants.

Government and Political Powers

The Kingdom of Bahrain is a constitutional monarchy, headed by the King, His Majesty Shaikh Hamad bin Isa Al Khalifa. He is the eldest son of the previous Amir, Shaikh Isa bin Salman Al Khalifa, and became Head of State on February 1999, upon the death of his father. He is the eleventh member of the Al Khalifa family to rule the Kingdom since the first Shaikh Ahmed Al-Fateh Al Khalifa ascended the throne in 1782. The Crown Prince, HH Shaikh Salman bin Hamad Al Khalifa, the eldest son of the King and the Commander-in-Chief of the Bahrain Defence Force, is next in line for succession.

The constitutional monarchy of the Kingdom of Bahrain provides for a two-chamber parliament which consists of an appointed and an elected chamber. The Cabinet, headed by a Prime Minister, is appointed by the King. When British troops pulled out of Aden in 1967, Bahrain was briefly the centre of Britain’s Middle East military command, but the following year the British Government announced its intention to withdraw forces from East of Suez by 1971. All existing agreements with Britain were terminated on independence, although both countries pledged continuing friendship and goodwill. The National Day, 16 December, is officially celebrated as Independence Day.

Bahrain joined the Arab League and the United Nations, committing itself fully to the policy of development of the country for the benefit of all Bahrainis, and the promotion of greater unity and cooperation within the Arab world.

Population and Language

The Kingdom’s population, according to the latest estimates has reached 1,332,000 in 2014 of which foreigners account for about 55%. Arabic is the native language of Bahrain. English is widely understood and commonly used by all nationalities, especially in the fields of business and commerce. Farsi, Hindi and Urdu are also widely spoken.

Currency

The unit of currency in Bahrain is the Bahraini Dinar (BHD), which, although freely convertible, is in practice pegged to the US dollar at the rate of USD 2.6490 = BHD 1.

Legal System

The Kingdom of Bahrain has an independent legal system administered by the High Judicial Council, which oversees Bahraini courts. The Kingdom has developed its system of legislation along the lines of the civil model, drawing also from Egyptian doctrines and other European civil codes. In the event that the legislation is not applicable, a judge deduces the basis of his judgment from the principles of Shari’a Law and the provisions thereof, and in the absence of any such provision, custom is applied. In the absence of custom, the tenets of natural justice or the principles of equity and good conscience are applied. Commercial transactions are governed by contract between the parties and a well developed body of legislation.

Personal affairs of Muslim citizens, such as marriage, divorce and inheritance are dealt with under the principles of Shari’a.

Legislation is considered and adopted by the Cabinet of Ministers and enacted by Royal Decree. Judges are appointed by Royal Decree. Bahrain’s highest court is the Court of Cassation (Mahqamat At Tameez) to which cases are referred via the Appellate Court from the Court of First Instance.

Business Entities

The Kingdom of Bahrain’s Commercial Law is largely derived from the Napoleonic Code, as in most other Middle Eastern countries. There are several types of business organisation, some of which may be relatively new to those used to Anglo-Saxon legal systems.

The type of investment vehicle that is eventually chosen by foreign investors will depend on the industry or service they wish to offer, the geographical market and whether the import of goods or manufacturing is involved.

Obtaining contracts from government and quasi-governmental organisations is usually on a tender system.

Joint-Stock Company (Sharika Musahima)

Joint-stock companies can take the form of closed stock companies or public stock companies. The closed stock company may be 100% foreign-owned, while the foreign ownership of a public stock company is restricted to a maximum of 49%. Every company in Bahrain should have its head office in the country. The minimum share capital of a closed stock company is BHD 250,000 (EUR 448,750; USD 662,250).

Limited Liability Company (Thaat Masouliya Mahdooda)

A limited-liability company consists of two or more shareholders who are responsible for the debts of the company to the extent of their individual interests in the capital.

However, the number of shareholders in a limited-liability company cannot exceed 50, and the transfer of shares is restricted. The minimum share capital is BHD 20,000 (EUR 35,900; USD 52,975).

The Commercial Companies Law states that a minimum of 51% of the shares of a limited-liability company should be held by nationals of Bahrain and that the head office should be in Bahrain. One hundred percent foreign ownership is possible.

A limited-liability company may not engage in activities such as insurance, banking or investment.

General Partnership (Musharaqa Aama)

A general partnership is an association of two or more persons trading together under a specific collective trade name for commercial purposes, in which the partners assume joint liability, to the extent of their entire property, for the partnership’s debts. There are no provisions in the law concerning the minimum or maximum capital required of a partnership or the maximum number of partners allowed. However, the partnership should have a minimum of two partners.

Limited Partnership (Musharaqa Mahdooda)

A limited partnership consists of general partners who are fully liable to the extent of their entire property for the debts of the partnership, as well as limited partners who are liable to the extent of their interest in the capital. A limited partnership is subject to the same formation procedures as a general partnership, but the trade name must not include the name of any limited partner to the same formation procedures as a general partnership.

Partnership Limited by Shares (At Tawseaa Bil As Hum)

A partnership limited by shares combines certain features common to a limited partnership and other features similar to those of a company. A partnership limited by shares consists of one or more general partners who are responsible for the debts of the partnership to the full extent of their share in the capital, together with other partners whose liability is limited to their investment in shares.

Single Person Company (Sharikat al Shaks al Wahid)

Single Person companies are limited-liability companies whose capital is fully owned by a single natural or corporate person. The liability of the owner is limited to the extent of the capital invested in the company. The capital of a single-shareholder company should not be less than BHD 50,000 (EUR 89,750; USD 132,450). In other respects, a single-shareholder company is governed by the same regulations as a limited-liability company.

Branch of Foreign Company

Branches of foreign companies and representative offices are allowed in Bahrain. However, a Bahraini in the same area of business must act as a sponsor unless the branch or office is being set up in Bahrain to act as a regional goods or services distribution centre.

The Minister of Industry & Commerce must be satisfied, prior to registration, that the parent company is a viable financial entity and that it will assume full responsibility for the liabilities, commitments and obligations of business entities. Foreign banks that wish to set up branches in Bahrain must also obtain the approval of the Central Bank of Bahrain (“CBB”).

However, approval can be granted by the Minister of Industry & Commerce, for the setting-up of companies that are fully owned by non-Bahrainis. The reporting currency may be other than the Bahrain dinar. The business activities of such a company must be stipulated by the Minister of Industry & Commerce. The Minister may also exempt such a company from the minimum required capital and authorise board meetings and general assembly meetings to be held outside Bahrain.

Commercial Law

Commercial transactions and activities in general are regulated by the Commercial Code, which includes a detailed provision in respect of general bankruptcy procedures.

Government and Political Powers

The Kingdom of Bahrain is a constitutional monarchy, headed by the King, His Majesty Shaikh Hamad bin Isa Al Khalifa. He is the eldest son of the previous Amir, Shaikh Isa bin Salman Al Khalifa, and became Head of State on February 1999, upon the death of his father. He is the eleventh member of the Al Khalifa family to rule the Kingdom since the first Shaikh Ahmed Al-Fateh Al Khalifa ascended the throne in 1782. The Crown Prince, HH Shaikh Salman bin Hamad Al Khalifa, the eldest son of the King and the Commander-in-Chief of the Bahrain Defence Force, is next in line for succession.

The constitutional monarchy of the Kingdom of Bahrain provides for a two-chamber parliament which consists of an appointed and an elected chamber. The Cabinet, headed by a Prime Minister, is appointed by the King. When British troops pulled out of Aden in 1967, Bahrain was briefly the centre of Britain’s Middle East military command, but the following year the British Government announced its intention to withdraw forces from East of Suez by 1971. All existing agreements with Britain were terminated on independence, although both countries pledged continuing friendship and goodwill. The National Day, 16 December, is officially celebrated as Independence Day.

Bahrain joined the Arab League and the United Nations, committing itself fully to the policy of development of the country for the benefit of all Bahrainis, and the promotion of greater unity and cooperation within the Arab world.

Population and Language

The Kingdom’s population, according to the latest estimates has reached 1,332,000 in 2014 of which foreigners account for about 55%. Arabic is the native language of Bahrain. English is widely understood and commonly used by all nationalities, especially in the fields of business and commerce. Farsi, Hindi and Urdu are also widely spoken.

Currency

The unit of currency in Bahrain is the Bahraini Dinar (BHD), which, although freely convertible, is in practice pegged to the US dollar at the rate of USD 2.6490 = BHD 1.

Legal System

The Kingdom of Bahrain has an independent legal system administered by the High Judicial Council, which oversees Bahraini courts. The Kingdom has developed its system of legislation along the lines of the civil model, drawing also from Egyptian doctrines and other European civil codes. In the event that the legislation is not applicable, a judge deduces the basis of his judgment from the principles of Shari’a Law and the provisions thereof, and in the absence of any such provision, custom is applied. In the absence of custom, the tenets of natural justice or the principles of equity and good conscience are applied. Commercial transactions are governed by contract between the parties and a well developed body of legislation.

Personal affairs of Muslim citizens, such as marriage, divorce and inheritance are dealt with under the principles of Shari’a.

Legislation is considered and adopted by the Cabinet of Ministers and enacted by Royal Decree. Judges are appointed by Royal Decree. Bahrain’s highest court is the Court of Cassation (Mahqamat At Tameez) to which cases are referred via the Appellate Court from the Court of First Instance.

Business Entities

The Kingdom of Bahrain’s Commercial Law is largely derived from the Napoleonic Code, as in most other Middle Eastern countries. There are several types of business organisation, some of which may be relatively new to those used to Anglo-Saxon legal systems.

The type of investment vehicle that is eventually chosen by foreign investors will depend on the industry or service they wish to offer, the geographical market and whether the import of goods or manufacturing is involved.

Obtaining contracts from government and quasi-governmental organisations is usually on a tender system.

Joint-Stock Company (Sharika Musahima)

Joint-stock companies can take the form of closed stock companies or public stock companies. The closed stock company may be 100% foreign-owned, while the foreign ownership of a public stock company is restricted to a maximum of 49%. Every company in Bahrain should have its head office in the country. The minimum share capital of a closed stock company is BHD 250,000 (EUR 448,750; USD 662,250).

Limited Liability Company (Thaat Masouliya Mahdooda)

A limited-liability company consists of two or more shareholders who are responsible for the debts of the company to the extent of their individual interests in the capital.

However, the number of shareholders in a limited-liability company cannot exceed 50, and the transfer of shares is restricted. The minimum share capital is BHD 20,000 (EUR 35,900; USD 52,975).

The Commercial Companies Law states that a minimum of 51% of the shares of a limited-liability company should be held by nationals of Bahrain and that the head office should be in Bahrain. One hundred percent foreign ownership is possible.

A limited-liability company may not engage in activities such as insurance, banking or investment.

General Partnership (Musharaqa Aama)

A general partnership is an association of two or more persons trading together under a specific collective trade name for commercial purposes, in which the partners assume joint liability, to the extent of their entire property, for the partnership’s debts. There are no provisions in the law concerning the minimum or maximum capital required of a partnership or the maximum number of partners allowed. However, the partnership should have a minimum of two partners.

Limited Partnership (Musharaqa Mahdooda)

A limited partnership consists of general partners who are fully liable to the extent of their entire property for the debts of the partnership, as well as limited partners who are liable to the extent of their interest in the capital. A limited partnership is subject to the same formation procedures as a general partnership, but the trade name must not include the name of any limited partner to the same formation procedures as a general partnership.

Partnership Limited by Shares (At Tawseaa Bil As Hum)

A partnership limited by shares combines certain features common to a limited partnership and other features similar to those of a company. A partnership limited by shares consists of one or more general partners who are responsible for the debts of the partnership to the full extent of their share in the capital, together with other partners whose liability is limited to their investment in shares.

Single Person Company (Sharikat al Shaks al Wahid)

Single Person companies are limited-liability companies whose capital is fully owned by a single natural or corporate person. The liability of the owner is limited to the extent of the capital invested in the company. The capital of a single-shareholder company should not be less than BHD 50,000 (EUR 89,750; USD 132,450). In other respects, a single-shareholder company is governed by the same regulations as a limited-liability company.

Branch of Foreign Company

Branches of foreign companies and representative offices are allowed in Bahrain. However, a Bahraini in the same area of business must act as a sponsor unless the branch or office is being set up in Bahrain to act as a regional goods or services distribution centre.

The Minister of Industry & Commerce must be satisfied, prior to registration, that the parent company is a viable financial entity and that it will assume full responsibility for the liabilities, commitments and obligations of business entities. Foreign banks that wish to set up branches in Bahrain must also obtain the approval of the Central Bank of Bahrain (“CBB”).

However, approval can be granted by the Minister of Industry & Commerce, for the setting-up of companies that are fully owned by non-Bahrainis. The reporting currency may be other than the Bahrain dinar. The business activities of such a company must be stipulated by the Minister of Industry & Commerce. The Minister may also exempt such a company from the minimum required capital and authorise board meetings and general assembly meetings to be held outside Bahrain.

Commercial Law

Commercial transactions and activities in general are regulated by the Commercial Code, which includes a detailed provision in respect of general bankruptcy procedures.

Investment in Bahrain

Attractions

The Kingdom has many attributes that encourage investment by foreign investors. Its political stability, excellent communications facilities, easy access to the Saudi Arabian market, relatively skilled work force with a good standard of spoken English, low cost of fuel and power, absence of personal and corporate taxation, and lack of exchange and profit-repatriation controls are factors that make it the ideal place for many businesses to locate their manufacturing or service functions for the region, or simply the regional head office.

In brief, simplified administrative and legal systems and procedures, along with rapid industrialisation, assure excellent opportunities for potential foreign investors considering Bahrain as a Middle Eastern hub for business activity.

Investment incentives also include:

  • 100% foreign ownership allowed for certain categories of business.
  • No VAT nor any form of sales tax on goods or service.
  • Duty-free access to the Gulf Cooperation Council States (subject to conditions).
  • Sustained low inflation.
  • Strategic geographical position in a market of 100 million people.
  • ‘Fast-track’ seven-day commercial registration procedure for new companies.
  • A liberal and high standard of living.
  • A well-developed multilingual labour force at one-third the cost of those in industralised countries.
  • No customs duties on imports of raw materials, semi-finished commodities brought for further processing, imports required for development projects, machinery for manufacturing, or on goods imported for re-export.

Tourism and Hospitality

Bahrain’s natural tourism assets are largely under-exploited relative to other Middle Eastern destinations at present but a number of projects are in the pipeline intended to boost the sector’s supply and stimulate demand.

The Government has sought to enter partnership arrangements in various tourism-related projects most notably in the Zallaq area on the west coast and at the southern tip of the island with Durrat Al Bahrain. Although these partnership arrangements have been slow to bear fruit, the private sector is increasingly investing in new hotels and resorts in key locations and the Government has stepped in to provide major tourism resources such as the Bahrain International Racing Circuit. Despite a crackdown on alcohol sales and bands intended to encourage family-oriented tourism, Bahrain remains a relatively liberal country and this will undoubtedly assist the process of tourism development in the future.

The Tax System

There is hardly any direct taxation in Bahrain on either businesses or individuals. There is no personal income tax, gift or inheritance tax, or wealth tax. The only direct taxation of corporate income is on profits arising from the extraction of petrochemical products. There is also no value-added tax or sales tax. The only taxation revenue derived by the Government is the tax on petrochemical extraction mentioned above and customs and import duties.

Taxes on Business

Corporate Income Tax

Petrochemical Extraction: The only instance of corporate income taxation in Bahrain is on profits derived from the extraction of petrochemical products.

Withholding Taxes

There are no withholding taxes on the repatriation of profits or dividends, royalties, licence fees or group charges. However, if the investor operates in other countries in the region, the withholding-tax rules in those countries will need to be taken into account in the regional business structure.

Taxes on Individuals

There is no personal taxation system for income, capital gains, gifts or inheritances in Bahrain and, furthermore, no requirements to file any form of tax return.

Other Taxes

Custom duties are levied on imported goods at the rate of 5%, with the exception of tobacco products (100%) and liquor (125%).

Hotels pay a tourism levy of 5% of turnover to the Government. Other Government fees related to the issues of work permits for foreigners, identity cards, driving licences, vehicle registration and inspection, amount to approximately BHD 250 (EUR 450; USD 650) per year, per person.

Local Taxes

Local taxes, which appear on electricity bills, are charged at 10% of the monthly rent paid for the property under occupation.

Social Security Contributions

Social insurance contributions payable by the employer are levied on all salaries of foreign workers at 3% and on those of Bahraini workers at 12%. The latter also contribute 6% from their salaries representing the employee’s share of contributions. In addition, a 1% salary contribution has been introduced by the Government to fund the national unemployment insurance scheme.

Double Taxation Agreements

Bahrain has double taxation agreements with more than thirty countries.

Disclaimer
Whilst every effort has been made to ensure that the details contained herein are correct and up-to-date, it does not constitute legal or other professional advice. IQTESADI does not accept any responsibility, legal or otherwise, for any errors or omission.