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Bahrain issues Guidance Notes with respect to the Bahrain Economic Substance Rules

Published: 28/01/2020

In 2019, Al-Tamimi published a news update to highlight the issuance by the Ministry of Industry, Commerce and Tourism (“MOICT”) of Resolution No. (106) of 2018 regarding the requirements of validating the actual economic substance of entities’ activities in the Kingdom of Bahrain (“Resolution”). The Resolution prescribed the requirements to be met by entities in Bahrain in terms of economic substance in Bahrain (the “Rules”).

The MOICT have now published detailed guidance notes with the aim of serving as a preliminary guide to relevant entities on the scope and application of the Rules (the “Guidance Notes”). This information article will summarise some of the key clarifications and reconfirmations appearing in the Guidance Notes.

 

Relevant Entities

The Guidance Notes reconfirm that the Rules apply to commercial entities in Bahrain which engage in the following commercial activities (“Relevant Entities”):

  • Distribution and service centre activities
  • Headquarters activities
  • Holding company activities
  • Leasing activities (other than those activities undertaken by licensees of the Central Bank of Bahrain)
  • Shipping activities
  • Intellectual property activities in Bahrain

The Guidance Notes however re-clarify that commercial entities which engage in the following commercial activities regulated by the Central Bank of Bahrain (“CBB”), are required to abide by the CBB Directive (OG/499/2018) (this information article will however only focus on the Rules, and not the requirements to CBB regulated entities with reference to the relevant CBB Directive, which will be addressed in a separate client update to be circulated by Al-Tamimi):

  • Banks (covered in CBB’s directive)
  • Financing companies (covered in CBB’s directive)
  • Insurance (covered in CBB’s directive)
  • Investment Business Firms (covered in CBB’s directive)
  • Fund Administrators (covered in CBB’s directive)

 

Some key clarifications and confirmations provided by the Guidance Notes

Some key clarifications provided by the Guidance Notes include the following:

  • Active/Passive activities. The Guidance Notes reconfirms that the Rules apply to commercial entities in Bahrain which engage in the relevant commercial activities, irrespective of whether they passively or actively practice those activities.
  • Purely domestic entities. Any Relevant Entity which has no overseas activities, is not required to satisfy the requirements of the Rules (however is still required to notify the MOICT).
  • Two-part Test. The Guidance Notes reconfirm the two-part test required to be satisfied to demonstrate a substantial economic presence in Bahrain. Part 1 relates to a Relevant Entity’s Core Income Generating Activities; Part 2 focuses on whether a Relevant Entity’s direction and management are located in Bahrain.
  • Outsourcing. The Guidance Notes reconfirm that whilst outsourcing of activities by Relevant Entities is not prohibited by the Rules, there are certain restrictions and requirements which apply in this regard, including a prohibition on the outsourcing of any core income generating activities to any entity or person outside of Bahrain.
  • Approval requirements. The Guidance Notes reconfirm that a Relevant Entity must also obtain advance approval from MOICT with respect to the following:
    • Establishment of offices outside Bahrain
    • Change of shareholders
    • Appointment of directors
  • Notification requirements. The Guidance Notes reconfirm that a Relevant Entity must inform MOICT within 30 days of the following occurring
    • Resignation of directors and officers responsible for managing the Relevant Entity;
    • Change of information with regard to the place of business or office in Bahrain; and
    • Change in constituent documents and business plans of the Relevant Entity.
  • Filing of annual returns. All Relevant Entities are required to file an annual return with the MOICT within three (3) months of a Relevant Entity’s financial year end. The form of the return has also been published by the MOICT, as an appendix to the Guidance Notes. The annual return is required to include details such as:
    • Details of Core Income Generating Activities (CIGA) of Relevant Entities;
    • Structure of the board (number, names, nationality, experience);
    • Number and place of board members’ meetings
    • Strategic decisions, including where they are taken;
    • Number, experience, qualification, duration of employment and type of contracts of employees;
    • External auditor name and terms of contract with services provided;
    • Annual operating expenditures / income;
    • Physical address / offices of the company;
    • Confirmation (with explanation) that an adequate set of internal policies and controls for company operation are maintained;
    • Confirmation that they are maintaining adequate and proper books of accounts that contains type of business, amount and type of gross income, and amount and type of expenses;
    • Detailed business plan which allow to clearly ascertain the commercial rationale of holding IP assets in Bahrain (where relevant)
    • Confirmation with adequate supporting evidence that decision making is taking place in Bahrain.
    • Confirmation with supporting explanations and documents that there were adequate premises, number of staff, income, expenditure incurred
    • Confirmation with supporting explanations and documents about any outsourced activities.
    • Notification as to the resignation of directors and officers responsible for managing the Relevant Entity.
    • Details of the immediate and ultimate parent company, and ultimate beneficial owner of the Relevant Entity, together with details of their jurisdiction of tax residence.

 

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 Entity cease its failure to adhere to the Resolution within a designated time-frame;
  • Suspension of the Relevant Entity’s Commercial Registration (CR) for a period of up to six (6) months;
  • Cancellation of the Relevant Entity’s Commercial Registration (CR).
  • Imposition of financial penalties.
  • Imposition of criminal sanctions.

 

What should you do next?

It is important for your Bahrain based businesses to:

  1. Understand the economic substance requirements and the obligations to be adhered to ensure that your business is compliant;
  2. Undertake a “health check” on your existing level of economic substance in Bahrain; and
  3. Ensure that they do file the required annual return within the designated timeframe (within three (3) months of a Relevant Entity’s financial year end).

 

How can we help?

As the largest law firm in the Middle East & North Africa 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.

 

Key Contacts:

Rad El Treki
Head of Corporate Structuring – Bahrain
r.eltreki@tamimi.com

Yara Frotan
Trainee Lawyer, Corporate Structuring
y.frotan@tamimi.com