Bahrain is a significant economic hub in the Gulf Cooperation Council (GCC) area and offers one of the most accommodating investment climates to draw in foreign companies. Bahrain’s currency is freely transferable and tied to the US dollar. That few businesses require local equity participation helps explain Bahrain’s position at the top of the GCC for foreign direct investment (FDI).
Notably, Bahrain does not levy variable stamp duties, capital gains taxes, or value-added personal or corporate income taxes (except for oil firms). Bahrain’s tax structure, which charges a rate of 10%, is also far lower than VAT rates in the rest of the Gulf and most of Europe.
Most commercial activities carried out by Bahraini firms and branches of international firms do not fall under the country’s ban on foreign ownership, and firms engaged in such activities are permitted to have 100% foreign ownership.
Moreover, while licensing requirements (for banks, telecoms, schools, engineers, etc.) may restrict some people from operating these otherwise 100% FDI companies and state security justifications may prevent a specific person from holding shares, requirements for a certain level of local shareholding are removed.
The restrictions on foreign ownership of enterprises are the main topic of this essay (or perhaps more accurately, the minimal number and impact of regulation).
In 2021, Bahrain Prime Minister Salman bin Hamad Al Khalifa issued a decree outlining the kind of business ventures that entities owned by foreign investors could engage in (FDI Resolution). The FDI Resolution is a cornerstone for luring foreign investment to Bahrain and gives Bahrain a competitive edge within the GCC.
Free trade agreements and FDI
The FDI Resolution specifies the percentage of foreign ownership allowed for each economic activity in Bahrain. However, only a small number of these activities are listed as subject to foreign ownership limitations.
Additionally, restrictions under other lists have been exempted from application to citizens of participating governments by specific trade agreements and treaties. These consist of:
- GCC Unified Commercial Treaty, which states that GCC natural and legal residents should be treated equally and without distinction or discrimination in all economic and investment operations in any member state and which was adopted by the GCC Supreme Council on December 31, 2001
- The Bahrain-US Free Trade Agreement, which was signed on September 14, 2004, came into effect on August 1, 2006, and allows US citizens and US-operated enterprises to conduct almost all economic operations in Bahrain, except a few that are limited to Bahraini nationals’ ownership only
- On October 27, 2003, Bahrain and the Republic of Singapore signed a bilateral investment promotion and protection agreement, which was ratified by Law No. 21 of 2004, and which benefits Singaporeans and their wholly owned Singaporean businesses
- On June 22, 2009, Bahrain and the other GCC nations signed a free trade agreement (FTA) with Iceland, Liechtenstein, Norway, and Switzerland (the ILNS countries), which has since been confirmed by Law No. 7 of 2012 and grants its citizens certain rights (the FTAs)
The FTAs offer a variety of special rights to permitted commercial operations, but they significantly depart from the local ownership criteria that would otherwise apply to those commercial activities.
One area of competence for the ASAR – Al Ruwayeh & Partners (ASAR) Bahrain legal practice is our specialization in FDI structuring to maximize the benefit to our clients operating in Bahrain. FTAs set some restrictions on which foreign citizens or corporations may benefit.
FTAs offer FDIs from treaty parties a significant chance to operate in Bahrain in commercial sectors that would otherwise be prohibited. Moreover, since each FTA predates the FDI Resolution, numerous multinational corporations had designed their entry into the GCC market to take advantage of the particular privileges provided by each FTA at a time when other GCC countries did not have access to such arrangements.
By distinguishing itself from actions done by other nations and preserving its leadership in the FDI sector within the Gulf region, Bahrain has taken another step ahead with the FDI Resolution.