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Tuesday 19 October 2021 19:43
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BAHRAIN ECONOMIC SUBSTANCE RULES

BAHRAIN ECONOMIC SUBSTANCE RULES

The Ministry of Industry, Commerce and Tourism (“MOICT”) has confirmed that this is a national obligation and that the MOICT’s internal portal will be updated in the near future so that any company that is not complying with the Economic Substance Rules and the Law will have a violation placed against its commercial registration (“CR”).

The MOICT will carry out annual reviews to ensure compliance with the Economic Substance Rules. The Economic Substance Rules place certain obligations on various types of entities incorporated or registered in Bahrain, requiring that such entities have an actual economic presence in Bahrain.

The Economic Substance Rules currently only apply to companies that undertake distribution activities, service centers, activities of head offices, activities of holding companies, shipping activities, intellectual property activities, and leasing activities (“Relevant Companies”). In our experience, many start-ups and SMEs located in Bahrain have commercial activities that potentially render them to be Relevant Companies.

As such, it is key to understand the extent of the relevant obligations imposed on such Relevant Companies by the Key Obligations for Relevant Companies All such Relevant Companies will fall within the ambit of the Economic Substance Rules and should comply with the following requirements:

Management / Shareholder Meetings

Meetings of the Board of Directors or Shareholders of Relevant Companies are required to be physically held in Bahrain, with a quorum of attendees being in physical attendance in Bahrain.

Strategic Decisions

The strategic decisions of the Relevant Companies shall be specified in the meetings of the Board of Directors or Partners, and these decisions shall be recorded in the minutes of the meetings.

Record Keeping

All records that relevant companies are required by law to maintain (including minutes of meetings), must be available and easily accessible in Bahrain. In addition, adequate accounting records and books must be maintained in Bahrain, with such accounting records to be prepared in accordance with the International Financial Reporting Standards (IFRS) and to include as a minimum:

(i) details of activities;
(ii) the amount and type of gross income; and
(iii) the amount and type of expenses and assets.

Employees

Relevant Companies must have a sufficient number of qualified employees residing in Bahrain; working full-time.

Operating Expenses

Relevant Companies must have an adequate level of annual operating expenses incurred in Bahrain.

Outsourcing

Where a Relevant Company outsources activities to third parties, then the Relevant Company must ensure that the outsourcing provider’s activities, staff, finances, and workplaces are located in Bahrain.

Internal Policies

All Relevant Companies are required to develop and maintain appropriate internal policies and controls for operations, compliance, corporate governance, and risk management. Such policies should be regularly reviewed to ensure their continued suitability.

MOICT Approvals

All relevant companies are required to obtain the prior approval of the MOICT with respect to any of the following:

• Establishment of offices outside of Bahrain;
• Change of shareholders; and
• Appointment/removal of directors or managers.

Annual Compliance Confirmation

All Relevant Companies must upon applying for a new commercial registration or upon renewing their commercial registration, file a report to the MOICT submitting documentation showing that the entity has complied with its requirements under the Economic Substance Rules. To the best of our knowledge this requirement is not currently being enforced by the MOICT (and the form of a report, and mechanism to submit such report, does not currently exist) however we do expect it to be implemented in the near future.

Penalties for Non-Compliance

Failure to adhere to the requirements of the Bahrain Economic Substance Rules 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 Economic Substance Rules within a designated time-frame;
• Suspension of the Relevant Company’s Commercial Registration (CR) for a period of up to six (6) months;
• The imposition of a fine of up to BHD 100,000; and/or
• Cancellation of the Relevant Company’s Commercial Registration (CR).

What should you do next?

It is important for your Bahrain based businesses to (i) understand the economic substance requirements and the obligations to be adhered to ensure that your business is compliant; and (ii) undertake a “health check” on your existing level of economic substance in Bahrain.

How can we help?

If you would like to further discuss the contents of this update and find out what it means for your business, please contact Al Tamimi & Company in Bahrain.

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