In December 2018, the Central Bank of Bahrain (the “CBB”) and the Ministry of Industry, Commerce and Tourism (the “MOICT”) issued economic substance directives/orders (the “Guidelines”) for respective entities that carries certain commercial activities in Bahrain. These Guidelines were laid to match with the international standards for tax transparency, fairness, compliance and information exchange and to give a tax compliant identity to Bahrain at the global stage.
On 1st July 2019, the transition period allowed for compliance with the Guidelines expired, therefore, now increased responsibility falls on the directors and management of respective entities to ensure compliance with the Guidelines.
The Guidelines are applicable to certain existing and new entities, which are involved in carrying out any of the following activities in Bahrain (including but not limited to): banking business; insurance business, fund administrators’, financing companies, investment business, distribution and service center activities, head office activities, holding company, leasing, shipping or intellectual property activities (the “Relevant Activities”). Further, in order for the Guidelines to be applicable, an entity should derive its core income from such Relevant Activities. Therefore, if the business activity of any entity is one of the Relevant Activity, but such activity is not its core income generating activity (“the CIGAs”), then such entity may not fall within the umbrella of the Guidelines.
Applicable entities are required to demonstrate compliance with the Guidelines and some of the key requirements are:
• All board members should be qualified, and knowledgeable.
• The board meetings are to be held in Bahrain (with certain physical presence) at adequate frequencies.
• All company records and minutes of meeting (including strategic decisions) are to be recorded and maintained in Bahrain.
• Having adequate number of qualified resident employees.
• Adequate level of expenditure to be incurred in Bahrain.
• Access to adequate “physical assets”, or premises in Bahrain.
• CIGAs should be undertaken in Bahrain.
• Frame and adopt adequate policies for operation, compliance, corporate governance, and risk management.
• Other requirements such as compliance with IFRS accounting principles, obtaining consent for certain actions from the regulator, notifying the regulator of certain activities and submitting report to the regulator.
It is advisable that the entities in Bahrain review their business activities and assess whether their entity falls under the scope of the Guidelines and undertake requisite steps to comply with the Guidelines. Non-compliance of the Guidelines may attract penalties of different nature.