Bahrain introduces new Economic Substance Rules
The Bahrain Minister of Industry, Commerce and Tourism, HE Zayed bin Rashid Al Zayani (“Minister”) has recently issued Resolution No. (106) of 2018 regarding the requirements of validating the actual economic substance of traders’ activities in the Kingdom of Bahrain (“Resolution”). The Resolution has been issued in accordance with Decree-Law No. (27) of 2015 regarding the Commercial Register and its amendment No. (52) of 2018 (“Law”). 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 Resolution 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 Resolution.
The Resolution places certain obligations on various types of entities incorporated or registered in Bahrain, requiring that such entities have an actual economic presence in Bahrain. The Resolution currently only applies to companies that undertake distribution activities, service centres, activities of head offices, activities of holding companies, shipping activities, intellectual property activities, and leasing activities (“Relevant Companies”).
Key Obligations for Relevant Companies
All such Relevant Companies will fall within the ambit of the Resolution 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 the Bahrain, with 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 which 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 the 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 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.
Penalties for non-compliance
Failure to adhere to the requirements of the Resolution 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 Resolution within a designated time-frame;
- Suspension of the Relevant Company’s Commercial Registration (CR) for a period of up to six (6) months;
- 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?
As the largest law firm in the Middle East and with strong corporate structuring experience across all industry sectors in the region, Al Tamimi & Company is well placed to assess the impact of the recently introduced Resolution on your organisation and assist you in complying with the Resolution.
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.