Bahrain is set to implement Corporate Income Tax

• Bahrain is set to implement Corporate Income Tax (“CIT”).
• It is the only remaining country in the GCC (Gulf Cooperation Council) without a comprehensive CIT.
• The government is in the process of drafting the CIT law, and present it to the legislative authority in March 2024.

Bahrain to follow UAE’s lead 

Bahrain is preparing to introduce the Corporate Income Tax (“CIT”). This move follows the United Arab Emirates’ announcement of a Corporate Tax, which became effective on 1st June 2023. 

A significant meeting took place on 23rd May 2023, between H.E. Sheikh Salman Bin Khalifa Al Khalifa, Bahrain’s Minister of Finance and National Economy, and the Financial and Economic Affairs Committee of the Council of Representatives.

The main focus of the meeting was to discuss the expansion of tax coverage and the potential implementation of a CIT regime in Bahrain. 

“It is a global direction to impose Corporate Taxes and Bahrain is committed to complying with the move.

We firmly believe that companies should contribute to the sustainability of the economy and financial development of the country.

The issue is a matter of when, not if, as we continue to work with the OECD [Organisation for Economic Co-operation and Development] on getting things right as we ensure that it won’t have an economic impact that affects employment, economic growth and investments.”

Minister of Finance and National Economy – Bahrain. 

As per local news reports, the government is drafting a CIT law, with plans to present it to the legislative authority in March 2024.  

Bahrain’s Strategic Tax Vision

Bahrain’s decision to introduce a Corporate Tax regime aligns with the Pillar 2 global minimum tax initiative.

The Finance and National Economy Minister affirmed that Bahrain will impose Corporate Tax once there is an international agreement on the framework. 

The Organization for Economic Co-operation and Development (OECD) is actively working on a global Corporate Taxation structure, and Bahrain is committed to compliance with the global direction. 

Current taxation structure  

VAT: Bahrain imposes a 10% value-added tax (VAT) on most goods and services, which was introduced in 2019.

Excise Tax: Implemented in 2017, the excise tax applies to specific goods like tobacco products (100%), energy drinks (100%), and soft drinks (50%).

Bahrain charges import duties on most goods, with rates varying depending on the type of product.

Currently, Bahrain only imposes income, sales, capital gains, or estate tax on businesses (local and foreign) in the oil and gas sector. For these specific companies, a 46% tax rate is applied to net profits for each tax accounting period. 

The CIT is predicted to apply to all commercial activities, excluding entities engaged in hydrocarbon activities, and individuals earning employment or passive investment income, and provide small business relief, as they are already subject to a specific tax regime., as per a report from KPMG. 

Wrapping up  

Implementing a CIT regime in Bahrain will bring forth several compliance concepts, such as transfer pricing, consolidation rules, and limitations on interest deductibility.

Companies operating in Bahrain will encounter disruptions to the established norms once the CT regime is introduced. This would lead to substantial financial and commercial implications. 

On the other hand, it would create multiple tax-related job roles that Tax Professionals should be cognizant of.