ESR in Bahrain

Economic Substance Regulation

In order to meet the European Union criterion 2.2 and Base erosion and profit shifting (BEPS) Action 5 minimum standard of OECD, the Kingdom of Bahrain has imposed economic substance requirements on entities that carry on geographically mobile business activities. Therefore, the Ministry of Industry, Commerce, & Tourism (MOICT) and the Central Bank of Bahrain (CBB) have issued Ministerial Order number 106 of 2018 and Directive (OG/499/2018) respectively, which provide an initial guidance on demonstrating Economic Substance.

The purpose of the ministerial order is to enhance economic substance requirements in the Kingdom of Bahrain and clarify the requirements for any Traders carrying out certain types of Relevant Activities in or through Bahrain (other than those activities undertaken by licensees of the Central Bank of Bahrain).

The ministerial order came into effect on 1 January 2019 for new commercial registrations (CR) and existing CRs that apply to any of the relevant activities mentioned in this document. For all other CRs, this ministerial order will come into effect on 1 July 2019

 

Applicability

The following are considered as “Relevant Activities” under the Regulations:

 - Banking

 - Insurance

 - Fund management

 - Lease-finance

 - Headquarters

 - Shipping

 - Holding company

 - Intellectual property (IP)

 - Distribution and service centre      

 

Applicability Test

In order to meet the economic substance requirements, the entities will have to evidence that:

• Core Income Generating Activities (CIGA) are conducted in Bahrain. This includes in particular:
  - An adequate amount of OPEX
  - Qualified employees
  - Physical offices
• The entity is directed and managed from Bahrain (this includes in particular BoD meetings taking place in Bahrain at an adequate frequency with physical presence of a quorum of directors and actual strategic decisions taken during these, as well as keeping records in Bahrain)

 

Reporting to the relevant Authority 

The Economic Substance regulation requires all registered entities who are conducting any of the above activities to file an annual return with the MOICT / CBB (Central Bank of Bahrain), as applicable. Report needs to be submitted within 3 months from the financial year end (Reproting for the year ended 31 December 2019 is extended to 30 June 2020 from the original deadline of 31 March 2020).

 

Penalty for non-compliance

Failure to adhere to the requirements of the Regulation may result in a variety of sanctions being imposed by the MOICT with reference to the Law. These include:

• A written order requiring that the Relevant Company cease its failure to adhere to the Resolution within a designated time-frame;
• Suspension of the Relevant Company’s Commercial Registration (CR) for a period of up to six (6) months;
• Imposition of a fine of up to BHD 100,000; and/or
• Cancellation of the Relevant Company’s Commercial Registration (CR).

 

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