Corporate - Other issues

Last reviewed - 20 March 2024

Economic substance


Economic substance regulations were issued by the Ministry of Industry, Commerce, and Tourism (MOICT) on 23 December 2018. A guidelines document clarifying certain aspects of the regulations was published on 1 January 2020.

The regulations require entities falling within their scope (which excludes entities with no overseas activities) to satisfy certain economic substance requirements and to report on these matters within three months from their financial year-end. The first reporting was due on 31 March 2020 for entities whose financial year 2019 closed on 31 December. Economic substance submissions for the fiscal year 2020 should have been submitted between 3 May 2021 and 31 May 2021.

Entities to which the regulations apply

The regulations apply to entities (corporations, branches, and partnerships) formed under MOICT legislation that conduct one or more of the following activities:

  • Distributions and service centres.
  • Headquarters.
  • Holding.
  • Leasing.
  • Shipping.
  • Intellectual property.
  • Banks.
  • Financing companies.
  • Insurance.
  • Investment business firms.
  • Fund administrators.
  • Passive collection of income from one of the above activities.

Meeting economic substance requirements

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

  • Core income generating activities (CIGA) are conducted in Bahrain. This includes, in particular:
    • an adequate amount of operating expenses
    • qualified employees, and
    • physical offices.
  • The entity is directed and managed from Bahrain. This includes, in particular, board of director 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.

Holding companies

The guidelines clarify that pure holding entities (entities that carry out no other relevant activity than holding equity participations) will be considered to have adequate substance if they meet a simplified test (i.e. compliance with statutory obligations under commercial law, adequate level of qualified full-time employees resident in Bahrain, adequate offices/premises in Bahrain to hold and manage participations).

What is 'adequate'

The guidelines clarify that 'adequate' should be understood under its ordinary meaning (i.e. 'enough or satisfactory for a particular purpose'). What is adequate for a company will be dependent on the particular facts of the company and its business activity.

Intellectual property (IP)

Entities holding and managing IP will be facing a rebuttable presumption of failure of the economic substance test if the IP they hold and manage was obtained through purchase or funding of foreign research and development (R&D) and is licensed to foreign parties or monetised by them. Rebutting this presumption requires the provision of certain specific elements evidencing a high level of control exercised from Bahrain (e.g. business plan, employees information).

Outsourcing to third-party service providers and related companies

The guidelines confirm that a company conducting a relevant activity can outsource core income generating activities to a third party/related company. This acknowledges the reality that many groups have centralised resources and business infrastructure in one (or a few) company(ies) in a country and that many groups use third party service providers to conduct certain activities associated, in particular, with the operations of entities deriving passive income.

The guidelines state that the company that outsources activities must maintain adequate supervision of the outsourced activities and that these activities must be outsourced in Bahrain and not abroad.


Reporting will take place via the National Bureau for Revenue's online International Tax Information Exchange System. Regulated entities might also have to report separately to their regulator (e.g. Central Bank of Bahrain).

United States (US) Foreign Account Tax Compliance Act (FATCA) Intergovernmental Agreement (IGA)

On 23 January 2017, the United States and Bahrain entered into a Model 1 FATCA IGA. The United States and Bahrain had previously agreed in substance to an FATCA IGA with effect as of 30 June 2014.

Common Reporting Standard (CRS)

On 29 June 2017, Bahrain signed the CRS Multilateral Competent Authority Agreement (MCAA), committing to make its first exchange of information for CRS purposes by September 2018.