Foreign Investment in Bahrain
Our Associate, Nawra Abdulla provides an overview of foreign investment in Bahrain.
Nawra Abdulla ([email protected]) – Associate
This article provides an overview of foreign investment in the Kingdom of Bahrain, highlighting the fundamental steps that are required to establish a business in Bahrain by a foreign investor with a brief explanation of the available restrictions that may be imposed against foreign nationals and the possible exceptions to the said restrictions.
Foreign investment in Bahrain.
Bahrain is a business-friendly environment with a flexible regulatory framework to foreign investors. it is a spot of attraction to investors due to its central location in the gulf region, low establishment and operational costs, minimal indirect taxes for private enterprises and individuals, and given that most industries do not require local participation. Consequently, Bahrain has been ranked the first in the GCC in 2020 for inward Foreign Direct Investment stocks (FDI) related to Gross Domestic Product (GDP). Unlike other countries, foreign investors in Bahrain can have 100% ownership across most sectors without the need of a local partner. Nonetheless, a sector-related restriction may be imposed on foreign investment on some sectors and activities. Said activities may have a complete or partial restriction upon the determination of the concerned government entity. A complete restriction on foreign nationals is imposed on some activities that are ONLY permitted to be carried out by Bahrainis. Such restrictions apply in public transportation companies, publishing and distribution of newspapers, brokerage in real estate, foreign manpower supply and employment offices. A partial limitation can be imposed on some activities requiring Bahrainis to hold 51% of the company’s shares in order for locals to have a greater say over the business. While other commercial activities only require a local participant in the company regardless of their shareholding percentage. Consequently, these are protection measures to maintain and protect the national security and public order against any threat or harm that can result from conducting international business operations within the Kingdom. This mechanism is also used to safeguard the local market against international competition to maintain national sovereignty.
Requirements of establishing a company in Bahrain.
Corporate companies in Bahrain are governed by Decree Law No.21/2001 Promulgating the Commercial Companies Law (CCL) which regulates the formation of a company with a foreign capital in Bahrain. Any business established in Bahrain must be registered with the Ministry of Commerce and Industry (MOIC). In pursuance to Article 4 of the CCL which stipulates “each company established in Bahrain shall be domiciled in Bahrain and such company shall be of Bahraini nationality, but this does not necessarily entail that the company is entitled to the rights exclusive to Bahrainis”. To start a business, investors must obtain a commercial registration alongside the necessary business licenses and/or approvals. Businesses are considered legally established once registered under the MOIC. A commercial registration will then be issued in order to start conducting the business activity. Investors are required to obtain certain approvals and/or business licenses from the relevant authorities depending on the commercial activity. The application can be submitted through the online portal of Sijilat.
Registration and formation of the company.
As established under Article 345(a) of CCL “a license may be issued approving the incorporation of companies provided for in this Law which are fully or partially owned by non-Bahraini partners to conduct business activities which are strictly conducted by Bahrainis or those which non-Bahrainis may conduct without a Bahraini partner owning the majority of shares in the company or to carry on any of those activities according to the company’s capital or the regions which the company uses as headquarters to conduct its business activities”. Thus, foreign investments are permitted to a limited extent in Bahrain, a license is obtained to conduct business in the Kingdom unless the activity falls into the restricted activities that are required to exclusively be undertaken by Bahrainis or with local participation.
Legalisation of constitutional documents.
Constitutional and foreign documents must be legalised or apostilled before incorporating the company. This is a crucial step that foreign investors shall consider in the formation procedure. Documents are accepted in only Arabic or English, and other languages can be submitted with a translation form. Foreign documents must be legalised or apostilled depending on the country. Constitutional documents must be signed before a notary when it comes to establishing a company in Bahrain. Any foreign investor must present a legalised or apostilled power of attorney, in the form of a corporate resolution for the purpose of completing the formalities before the notary. An apostille certificate/stamp proves the authenticity of a document making it valid internationally, only 116 countries that are members to the Hauge Apostille Convention can apostille documents, otherwise, legalising the documents is the alternative if the country is not a signatory to the convention.
Additional requirements.
Additional licenses may be required by the concerned authorities depending on the commercial activity of the company. All companies are required to disclose the Ultimate Beneficiary Owner (UBO) to prevent the financial crimes that might arise from international transactions such as money laundering and financing tourism. After obtaining all the required licenses and approvals, notarizing the constitutional documents is the final step before issuing the commercial registration with a license.
Restriction to full ownership.
The restrictions are mainly imposed upon certain activities that can exclusively be reserved for Bahraini nationals and companies. Resolutions issued by the Minister determine the proportionality of foreign capital and its permissibility. The Ministerial resolution No.40/2021 determines the commercial activities that are permitted to be undertaken by companies with foreign capitals, the said resolution lists out the category of commercial activities and their permissibility/restriction in a form of 5 schedules as follows:
Schedule 1: lists the commercial activities that can only be undertaken with 100% Bahraini ownership. As a protection mechanism to the traditional Bahraini activities (such as fishing) and other restrictions of nationalisation of persons and goods. These activities are generally excluded from international treaties.
Schedule 2: lists the commercial activities that can be held by a majority of Bahraini shares. A 51% requirement to these activities that can be included in international treaties such as Singaporean treaty and FTA between Bahrain and the US.
Schedule 3: lists the commercial activities that can be undertaken by foreign nationals with a requirement of at least 1% local participation. Sale and trade of goods, food service and trade craft.
Schedule 4: lists the commercial activities than can be fully owned by foreign nationals (multinational entities) accompanied by three conditions:
- A minimum of BHD 2 million of company’s capital
- The company shall exist in three global markets.
- The invested capital in Bahrain shall be at least BHD 1 million in the first year.
Schedule 5: commercial activities that can be fully owned by foreign nationals without any restriction.
Exception to the restriction.
Pursuant to Article 345(b) of CCL a restricted foreign investment can be permitted upon the approval of the Council of Ministers and Minister for commerce affairs that may grant the approval and exempt the foreign investment restriction once it is stablished to be beneficial for the country and its economic development. Thus, the concerned government entities have the discretionary power to approve the incorporation of a foreign company in Bahrain only if it has significant impact on the economic development within the country.
Tax.
Bahrain currently has no taxes on income, sales, capital gains or estate with the exception, in limited circumstances, to businesses (both local and foreign) that operate in oil and gas sectors or derive profits from the extraction or refinement of fossil fuels classified as hydrocarbons in Bahrain. Business in Bahrain are subject to VAT at the rate of 10% with respect to any services or goods supplied to end consumers or received from suppliers. VAT was introduced in January 2019 by virtue of Decree Law No.48/2018 on Value Added Tax.
Future proposal of corporate taxes.
Bahrain is considering a new approach to corporate income tax (CIT). The Minister of Finance and National Economy has recently confirmed the introduction of CIT in Bahrain during the parliamentary session on 23 May 2023. Bahrain is anticipated to implement a standard CIT regime similar to other jurisdictions. Nonetheless, this has not been effectively enforced yet.
Jurisdiction.
In accordance with Articles 4 and 5 of Law No. 6/2015 On Conflict of Laws in Civil and Commercial Matters with a Foreign Element, parties have freedom to decide the applicable law governing the contracts and other transactions within the business as long as the chosen law does not violate or contradict with public order of the Kingdom of Bahrain.
Concluding Remarks.
The Kingdom of Bahrain offers foreign investors a great opportunity to invest because of its minimal incorporation requirements and flexible investment procedures in most industries. Foreign nationals have full ownership of the company, unless they fall within the category of restricted activities which may include full or partial restrictions on industries that are only available to Bahraini nationals or may require a local percentage. The permission and proportionality of foreign investment in a company is governed by virtue of Ministerial Resolution No.40/2021 On Determining the Commercial Activities with that Companies with Foreign Capital May be Licensed to Engage In. The said resolution sets out five main categories of commercial activities and their restrictions on foreign nationals as stated above. Nonetheless, an exception to the restriction can be granted following the approval of both Council of Ministers and MOIC. The exception can only be granted if the company has a strategic economic significance or a profitable return to Bahrain’s economy.
For more information, please contact us on [email protected].