Bahrain's Tax-Free Status: What's The Current Situation?

Bahrain is known for its liberal economic policies, which actively encourage foreign investment and trade. The country offers a unique business environment with full tax exemption, zero customs duties, and the possibility of 100% foreign ownership across most sectors without the need for a local partner. Additionally, Bahrain has world-class infrastructure, excellent connectivity, low operating costs, and business-friendly laws, making it an attractive destination for foreign direct investment.

However, it's important to note that Bahrain introduced a Value-Added Tax (VAT) in 2019, with a standard rate of 5% from 2019 to 2021, which increased to 10% in 2022. This VAT applies to most goods and services, with certain exceptions.

With its tax-friendly policies and incentives, Bahrain continues to be an attractive destination for businesses seeking a competitive edge and a favourable operating environment.

Bahrain's tax-free zones

Bahrain is a tax-free haven with minimal customs duties and full foreign ownership across most sectors. The country boasts three Free Trade Zones (FTZs), each with its own unique advantages and focus sectors.

The first is the Bahrain Logistics Zone (BLZ), located near Khalifa bin Salman Port. BLZ is ideal for re-exporting and logistics operations, offering no annual rental costs and a 50% reduction on utility bills, as well as exemptions from national labour hiring requirements. Companies in BLZ can access plots starting from 2,000 square meters at an average cost of US$10 per square meter annually.

The second FTZ is the Bahrain International Investment Park (BIIP), which spans 247 hectares, making it well-suited for large manufacturing and export-led services. Land rental rates are incredibly low at just US$1.33 per square meter. Like BLZ, BIIP operates 24 hours a day and is strategically positioned between Bahrain International Airport and the new Shaikh Khalifa Sea Port.

While not a traditional free zone, Bahrain International Airport (BIA) offers unique advantages such as 100% foreign ownership and a bonded cargo terminal that allows for the delayed payment of duties. BIA specialises in cargo sales, trans-shipments, break-bulk cargo handling, and customs clearance within a 19,000 square meter terminal.

In addition to these three FTZs, Bahrain also has special free zones such as the Sheikh Khalifa bin Salman Port (KBSP) and the Bahrain Investment Wharf (BIW). KBSP is a premier transhipment hub for the Northern Gulf, while BIW is a hybrid industrial investment park with business spaces, logistics zones, IT centres, commercial spaces, and residential development.

The benefits of setting up a business in Bahrain's Free Trade Zones include full foreign ownership, tax exemptions, easy company formation, access to a skilled workforce, proximity to international markets, and modern infrastructure. However, companies operating within these zones are generally confined to doing business within their boundaries unless they partner with a local sponsor.

Foreign company ownership

Bahrain is one of the most open investment destinations in the Middle East, with liberal economic policies that actively encourage foreign investment and trade. The country offers a unique business environment with full tax exemption, zero customs duties, and the possibility of 100% foreign company ownership across most sectors without the need for a local partner.

Bahrain's free zones are renowned for providing an ideal business environment, offering purpose-built infrastructure, specialised facilities, separate rules and regulations, and exclusive connectivity to ports and other major industrial areas. The country's three Free Trade Zones (FTZs) are tailored to cater to different sectors of the global market, with unique infrastructural advantages and strategic positioning. These zones include the Bahrain Logistics Zone (BLZ), Bahrain International Investment Park (BIIP), and Bahrain International Airport (BIA).

In terms of foreign company ownership, Bahrain offers a range of business structures that allow for flexibility in running a company. Here are some of the available options:

• Branch of a Foreign Company: Foreign companies can establish branches in Bahrain to carry out business operations. These branches can be operational offices or representative offices. Operational branches can engage in banking and insurance activities with approval from the Central Bank of Bahrain and require a local partner. Representative offices, on the other hand, are restricted to marketing and promotional activities.
• Bahrain Shareholding Company (BSC): This type of company requires a minimum of seven shareholders, with shareholders liable for the company's debts only to the extent of their share value. The minimum share capital is BHD1 million, and there must be at least five directors. Foreign investment in a BSC requires special approval from the Minister of Industry and Commerce, who determines the percentage of investment.
• Bahrain Shareholding Company (BSC) Closed: Also known as a Closed Joint Stock Company, this structure requires a minimum of two shareholders. Shares cannot be offered to the public, and shareholders are liable for the company's debts to the extent of their share value. The minimum share capital is BHD250,000, and there must be at least three directors. A Closed Joint Stock Company can be 100% foreign-owned, depending on the business activity.
• With Limited Liability Company (WLL): WLLs are comparable to Limited Liability Companies and are the most common form of business vehicle in Bahrain. They must have between two and 50 shareholders, and shareholders are responsible for the company's debts only to the extent of their share in the capital. The minimum share capital is BHD20,000, and the company must appoint at least one general manager. WLLs can be 100% foreign-owned, depending on the business activity.
• Single Person Company (SPC): SPCs are fully owned by a single individual or corporate entity, with the owner liable for the company's debts only to the extent of their capital investment. The minimum share capital is BHD50,000, and there must be at least one director. Foreign and non-GCC nationals can own SPCs as long as there are no restrictions on the business activity.
• General Partnership: A general partnership is formed between two or more individuals or entities, with all partners jointly responsible for the partnership's debts and liabilities. There is no minimum share capital requirement, and at least one manager is needed. General partnerships can be 100% foreign-owned, depending on the business activity.

Overall, Bahrain offers a highly attractive environment for foreign company ownership, with tax exemptions, low operating costs, and flexible business structures.

Business setup process

Bahrain is a tax-free zone with minimal customs duties and 100% foreign ownership in most industries. The country has three main Free Trade Zones (FTZ): Bahrain Logistics Zone (BLZ), Bahrain International Investment Park (BIIP), and Bahrain International Airport (BIA). Here is a step-by-step guide on how to set up a business in Bahrain:

Preparation of Incorporation Documents:

The first step is to prepare the necessary incorporation documents, including a detailed business plan and articles of association. These documents outline the structure and nature of the business.

Company Name Reservation:

Reserve a unique company name through the Bahrain Commercial Registration Portal. The name should be indicative of the business activities.

Document Notarisation:

Have the incorporation documents notarised at the public courts to verify their authenticity and legality.

Corporate Bank Account Opening:

Open a corporate bank account in Bahrain. This is a prerequisite for handling business transactions and is often required before completing other registration steps.

Business Licence Application:

Apply for the necessary business licence(s) corresponding to your company's activities. This is crucial for legally operating in the free zone.

Tax Registration:

Register the company with the Bahraini tax authorities to ensure compliance with local tax regulations, even if the company will benefit from tax exemptions.

Work Visas:

If you intend to hire foreign employees, including yourself, apply for the necessary work visas. This involves providing proof of employment and fulfilling other immigration criteria.

Directors and Shareholders:

For a free zone company in Bahrain, you will need at least two directors and a minimum of one shareholder, which can be an individual or a corporate entity.

Additional Considerations:

• The entry process to free zones is competitive, and companies must demonstrate sufficient economic benefits to Bahrain's economy.
• Free zone companies are typically confined to doing business within the zone unless they partner with a local sponsor.
• The standard incorporation time is six weeks, and licensing costs are $230 (excluding BIA).
• Each free zone has specific benefits, such as no annual rental costs, reduced utility bills, and exemptions from national labour hiring requirements.

Import and export regulations

Bahrain is known for its liberal economic policies, actively encouraging foreign investment and trade. The country offers a unique business environment with full tax exemption, zero customs duties, and the possibility of 100% foreign ownership across most sectors without the need for a local partner.

There are three Free Trade Zones (FTZs) in Bahrain, each catering to different sectors of the global market, with unique advantages in infrastructure and strategic positioning. These zones are predominantly used for import, export, logistics, and material processing.

Import Requirements and Documentation

Importers or their local agents must complete a customs bill of entry before importing goods into Bahrain. It is recommended that importers use a registered, licensed clearing agent to expedite the import procedures. The importer is required to submit a customs declaration form along with the following documents:

• Shipping agent delivery order from the shipping agent line to the importer/consignee (with valid commercial registration)
• Three copies of the original invoices from the exporter addressed to the importer
• Two copies of the packing list with detailed weights, packaging, and goods classification for each item within the shipment
• Original certificate of origin from the relevant chamber of commerce of the country of origin of goods
• Copy of the insurance policy
• Original bill of lading
• Import permit/approval from the relevant authority for restricted goods
• Bank advice/guarantee (if applicable)
• A statistical declaration if the final destination of the goods is within GCC countries

Customs Clearance Procedures

After submitting the customs declaration form using the eCAS Customs Clearing System, the following steps must be completed:

• Pay the duty and fees at the cashier desk in the customs point where the goods will be cleared
• Submit all relevant documentation to the customs clearing officer
• Pay the relevant cargo handling fees and make an appointment for the movement of the cargo at the port operator desk
• The port operator will move the container to the relevant inspection point
• Customs will risk-assess the goods, and an inspection may be carried out
• Goods will be cleared and allowed to leave the customs point

Prohibited and Restricted Imports

Bahrain prohibits the import of certain goods based on the Unified Customs Law and other relevant laws. These prohibited items include:

• Used tires
• Wireless communication devices
• Weapons and ammunition
• Books, audio, and video
• Alcoholic beverages and tobacco products (subject to high customs duties)

Additionally, there are restricted goods that require permits, valid licenses, or approval documents from the relevant regulatory authority before importation. These include:

• Live wild animals, including horses (excluding circus or performance animals)
• Animals, birds, and their by-products
• Animal or vegetable fertilizers
• Insecticides and fungicides
• Meat and meat products
• Fish and seafood products
• Fruit and vegetables
• Radioactive chemicals and active isotopes
• Food products (processed and unprocessed)
• Unadulterated ethyl alcohol, iso-propanol
• Handcuffs made from iron/steel
• Arms, ammunition, explosives, and military weapons
• Magazines and publications
• Optical and magnetic audio-visual media
• Items infringing on intellectual property rights
• Telecommunications, radio, and television receiving and broadcasting equipment

Export Regulations

Bahrain also has regulations regarding the export of goods. Prohibited and restricted goods are subject to local laws, international agreements, and treaties. Ivory and articles of ivory, poultry, and fortified red meats are among the items prohibited from export.

Company taxes

Bahrain has no corporate tax, except for the oil and gas industry, which is taxed on profits from exploration, production, processing, or refining. The country also has a value-added tax (VAT) of 10% as of January 1, 2022. Additionally, there is a municipal tax of 12% on the rental of commercial property.

Bahrain's Free Trade Zones (FTZs) offer several tax advantages to companies operating within them. These zones include the Bahrain Logistics Zone (BLZ), Bahrain International Investment Park (BIIP), and Bahrain International Airport (BIA). Companies in these zones benefit from full tax exemption, zero customs duties, and no annual rental costs.

The BIA, while not a traditional free zone, allows for 100% foreign ownership and has a bonded cargo terminal that permits delayed payment of duties. The BLZ and BIIP also offer incredibly low land rental rates, with the latter being significantly larger and well-suited for large manufacturing operations.

To register a company in Bahrain, including in the FTZs, there are several steps to follow:

• Prepare the necessary incorporation documents, including a detailed business plan and articles of association.
• Reserve a company name through the Bahrain Commercial Registration Portal.
• Notarise the incorporation documents at the public courts.
• Open a corporate bank account in Bahrain.
• Apply for the necessary business licenses corresponding to the company's activities.
• Register the company with the Bahraini tax authorities, even if it will benefit from tax exemptions.
• Apply for work visas if hiring foreign employees.
• Ensure at least two directors and one shareholder for the company.

It is worth noting that companies operating within the FTZs are typically confined to doing business within the zone's boundaries unless they partner with a local sponsor. Additionally, the entry process is competitive, requiring companies to demonstrate sufficient economic benefits to Bahrain's economy.

Frequently asked questions