Taxing times ahead: what foreign investors need to know about Bahrain’s tax reform

Shiraz Khan
Al Tamimi & Company, Dubai
s.khan@tamimi.com

Anuj Bhasin
Al Tamimi & Company, Dubai
a.bhasin@tamimi.com

Introduction

The Kingdom of Bahrain, historically dependent on its abundant oil and gas reserves, is on the cusp of a significant economic transformation. In response to declining oil production, Bahrain has proactively diversified its economy, establishing itself as a dynamic business hub within the Gulf Cooperation Council (GCC). Recent tax reforms, including the introduction of value-added tax (VAT) and a domestic minimum top-up tax, underscore Bahrain’s aim of achieving long-term economic resilience.

Overview of taxes in Bahrain

Direct taxes

Corporate income tax

Corporate income tax is a form of direct tax levied on the income of resident and non-resident entities.

Currently, there is no corporate income tax in Bahrain applied to businesses, except for businesses that operate in the oil and gas sectors. Businesses that derive profits from the extraction or refinement of hydrocarbons in Bahrain are subject to tax at a rate of 46 per cent on their net profit for each accounting period, regardless of the residence of the taxpayer.

In December 2023, the Bahrain Tax Authority held discussions with the Bahraini Parliamentary Financial and Economic Affairs Committee on the implementation of corporate income tax in Bahrain. It is anticipated that Bahrain will introduce corporate income tax by 2025.

Domestic minimum top-up tax (DMTT)

On 1 September 2024, Bahrain announced the introduction of a DMTT for multinational enterprises (MNEs), effective from 1 January 2025.[1]

In line with the Organisation for Economic Co-operation and Development (OECD)’s Pillar Two framework, the DMTT will be applicable at the rate of 15 per cent on the taxable profits of large MNEs, with consolidated revenue over €750m. The DMTT will be payable by the Bahraini constituent entity of the MNE that meets the revenue threshold test.  

Withholding tax

Withholding tax is a tax deducted at source on payments made by a payor in a particular jurisdiction to a person residing outside of that jurisdiction.

Currently, there is no withholding tax in Bahrain on payments made by Bahraini residents to a person outside Bahrain. However, the position may change with the implementation of corporate income tax in Bahrain. If Bahrain imposes withholding tax, the applicable rates could be reduced under the double tax treaties that Bahrain has concluded with over 40 countries.

Remittance tax on expatriate remittances

A remittance tax is a tax on money remittances made by a resident to a non-resident or to a place outside of that jurisdiction.

In January 2024, Bahrain’s Parliament approved legislation to impose a two per cent tax on expatriate remittances. However, the Bahrain Shura Council rejected the legislation on remittance tax. Although the proposal to impose a remittance tax on expatriate remittances has been set aside for now, it will be interesting to see whether Bahrain attempts to tax expatriate remittances again in future.

Personal income tax

Personal income tax is levied on an individual’s wages, salary or other types of income. 

Currently, there is no personal income tax in Bahrain. However, with the implementation of corporate income tax in Bahrain, individuals carry on a business in Bahrain may be subject to corporate income tax.

Indirect taxes

VAT

VAT is a consumption tax imposed on the supply of goods and services and is charged on the value added at each stage in the supply chain.

Bahrain has signed the GCC VAT agreement, a unified agreement between the GCC countries that provides a common framework that should be followed by each GCC country in implementing their domestic VAT legislation.

In line with the GCC VAT agreement, Bahrain implemented VAT effective from 1 January 2019.[2] VAT is imposed in Bahrain on the import and supply of goods and services in Bahrain at the standard rate of ten per cent unless the supply is specifically zero rated or exempt from VAT. Similar to most countries that have VAT or goods and services tax (GST) in place, an asset transfer that qualifies as a business transfer is not a supply for VAT purposes under the Bahrain VAT legislation and foreign investors looking to acquire assets in Bahrain should carefully structure the asset transfer transaction to mitigate the impact of VAT.

Excise tax

In the GCC, excise tax is imposed on specific goods that are considered harmful for human consumption and to the environment.

Bahrain signed the GCC excise tax agreement, a common agreement between GCC countries that sets out the broad principles that should be followed by each GCC country in implementing their domestic excise tax legislation.

Bahrain implemented excise tax on tobacco and tobacco products, carbonated drinks and energy drinks, effective from 30 December 2017.[3] Excise tax is imposed in Bahrain at the rate of 100 per cent or 50 per cent (depending on the type of excise good) on: the production of excise goods in Bahrain, where such production was in the course of doing business; the import of excise goods; and the release of excise goods for consumption in Bahrain, where excise tax has not been paid previously.

Customs duty

Customs duty is a form of levy imposed on the import of goods.

The GCC countries have a unified customs duty regime and customs duty is imposed at the first point of entry of goods into the GCC. In Bahrain, customs duty applies to most imported goods at a rate of five per cent based on the cost, insurance and freight (CIF) invoice value. However, some items are subject to a different rate. Alcoholic drinks are subject to customs duty at a rate of 125 per cent and tobacco is subject to a rate of 100 per cent. Other duty rates include 20 per cent on certain categories of goods, such as paper and aluminium products.

Real estate transfer tax/stamp duty

There is no real estate transfer tax in Bahrain.

However, stamp duty is imposed on the transfer of real estate at two per cent of the property value. If the stamp duty is paid within 60 days of the transaction date, the duty is reduced to 1.7 per cent. The responsibility to pay real estate registration fees is placed on the buyer of the property.

Payroll tax

There are no payroll taxes in Bahrain.

However, employers are required to make social insurance contributions of 12 per cent for Bahraini national employees and three per cent for non-Bahraini workers, based on the employee’s basic salary and fixed recurring allowances. In addition, employers are required to withhold and remit their employees’ social security contributions, namely seven per cent for Bahraini national employees and one per cent for non-Bahraini employees. The maximum monthly earnings subject to social insurance contributions is capped at BHD 4,000 per month.

Municipality tax

There is a ten per cent municipality tax levied on the rental of commercial and residential property to expatriates.

Concluding thoughts

Bahrain has undergone significant tax reforms as it diversifies and looks to reduce its dependence on hydrocarbons. The introduction of VAT, excise taxes, the potential introduction of corporate income tax and the adoption of the DMTT signals a major shift in Bahrain’s fiscal policy. These changes are crucial for the country’s economic stability.

Businesses need to keep abreast of the evolving tax environment in Bahrain. In particular, businesses should understand the new rules and assess the impact on their operations.