Economic Substance Regulation in Bahrain

Economic Substance Regulation is introduced in the Kingdom of Bahrain with effect from the year 2019. The Action of implementation of Economic Substance Regulation in the Kingdom of Bahrain is to satisfy the European Union criterion 2.2 and Base Erosion and Profit Shifting (BEPS) Action 5 minimum norms.

The intention of the ministerial order to implement the Economic Substance Regulation in the Kingdom of Bahrain is to strengthen the requirements of economic substance of the companies operating in the Kingdom of Bahrain. The main aim of the Economic Substance Regulation in the Kingdom of Bahrain is to prohibit foreign companies from benefiting from different tax laws between countries by deliberately shifting profit to jurisdictions that levy little or no income tax.

When did the Ministerial Order on Economic Substance Regulation come into effect?

The ministerial order on Economic Substance Regulation for new commercial registrations (CRs) and existing CRs that relate to any of the relevant activities comes into effect on 1 January 2019. Economic Substance Regulation will come into effect for all other CRs as of 1 July 2019.

What are the relevant activities that fall under Economic Substance Regulations in the Bahrain?

The relevant activities are:

1. Distribution and service center activities
2. Headquarters activities
3. Holding company activities
4. Leasing activities (other than those activities undertaken by licensees of the Central Bank of Bahrain)
5. Shipping activities
6. Intellectual property activities in Bahrain
7. Banks (covered in CBB’s directive)
8. Financing companies (covered in CBB’s directive)
9. Insurance (covered in CBB’s directive)
10. Investment Business Firms (covered in CBB’s directive)
11. Fund Administrators (covered in CBB’s directive)

The Ministerial Order requires an entity that is carrying Relevant Activities to satisfy the Economic Substance Test in relation to each relevant activities it carries out. Such entities will also have to submit notifications and have reporting obligations under the Ministerial Order 106.

Whether the Economic Substance  Regulation is applicable only if the main activity of an entity is the Relevant Activity?

The term “Relevant Activity” does not require an entity to actively engage in the above-mentioned businesses. It would be a relevant activity even if engaged in collecting passive income from one of the afore mentioned activities. The Economic Substance  Regulation is applicable even if the entity is conducting any of the Relevant Activity as incidental or ancillary to the main activity.

Whether all companies need to file a report of Economic Substance Compliance?

Any commercial entity, which is not included in the aforementioned list of businesses is not a relevant activity and therefore not required to file Economic Substance Report.

How to know whether your Relevant Activity complied with Economic Substance Test?

The Economic Substance Test can be satisfied by verifying two categories of tests. These requirements are to be satisfied to prove that the licensee holds economic substance in the country while operating in the Kingdom of Bahrain and the businesses are genuine.

1. The first part of the test decides whether the entity in The Kingdom of Bahrain is performing its core income-generating activities (CIGA) in the Kingdom of Bahrain itself or not.
2. The second part of the test determines whether the direction and management of the entity is in The Kingdom of Bahrain or not.

Whether the relevant entity is conducting its core income-generating activities (CIGA):– The CIGA should be undertaken with:

• An adequate amount of annual operating expenditure.
• An adequate level of qualified full-time employees.
• An adequate number of physical offices.

Whether the relevant entity’s direction and management are located in Bahrain: – This should be satisfied by five requirements.

• Adequate number of meetings of the board of directors of the company concerned shall be held in Bahrain.
• At least a Board quorum must be physically present during meetings in Bahrain.
• Strategic decisions concerning the relevant entity shall be taken at the meetings referred to above and reported in the minutes of the meeting.
• All records and minutes of the relevant entity must be kept in Bahrain; and
• The Board of Directors as a whole shall possess the knowledge and expertise necessary to carry out its duties.

When the license holder should file the annual return?

The Ministerial Order no. 106 of 2018 concerning Economic Substance in the Kingdom of Bahrain requires all license holders who are doing any of the relevant activities to file an annual return with the Ministry of Industry, Commerce, & Tourism (MOICT). These returns are submitted through the Ministry’s Sijilat system on an annual basis within three months after the fiscal period ending.

What are the penalties for noncompliance?

The company may receive written notices of warning, be suspended from commercial registration, or face administrative fines of up to BD 1,000 (per day) for first-time non-compliance, or BD 2,000 per day subsequently, or striking off.

Are you falling under Economic Substance Regulations in the Kingdom of Bahrain?

If your company conducts any of the Relevant Activities in Bahrain, you are falling under Economic Substance Regulation. Hence you may need support from experts to conduct Economic Substance Test.

               The team at Emirates Chartered Accountants Group Bahrain  will assist you;

• To assess whether you are conducting any relevant activity or not
• To test whether Economic Substance Regulation is applicable or not
• To submit Notification; if applicable
• To Check whether Economic Substance Test is met or not
• To provide guidance to fill the gap if Economic Substance Test is not met.
• To submit the report on Economic substance Compliance.

We’d be happy to support you – Call us!