Legal entities carrying on business activities in or through Bahrain are now required to demonstrate that substantial economic activity is undertaken in Bahrain.
As part of KPMG’s ongoing efforts to raise awareness of key industry developments, KPMG in Bahrain is calling out all commercial registration (CR) holders in Bahrain to assess their economic substance.
The Minister of the Ministry of Industry, Commerce and Tourism and the Central Bank of Bahrain (CBB) issued a Ministerial Decision no. 106 on 27 December 2018 and a Directive on 22 November 2018 respectively (hereinafter collectively referred to as ‘Economic Substance Legislation’) setting out the economic substance requirements to be satisfied by in-scope entities carrying on relevant activities.
The Economic Substance Legislation being introduced is a game changer from an international tax perspective. According to the new mandate, legal entities carrying on business activities in or through Bahrain are now required to demonstrate that substantial economic activity is undertaken in Bahrain. “The introduction of economic substance in Bahrain was in alignment with the recommendations imposed by the European Union (EU). Similar move was made by UAE, Bahrain is indeed moving towards aligning itself with the international standards from a tax perspective.” Philippe Norre, Partner and Head of Tax and Corporate Services at KPMG in Bahrain, commented.
According to Nik Faiziman Affandi, Manager in Tax and Corporate Services at KPMG in Bahrain, “economic substance requires profits to be matched with the economic activities generating those profits. What used to be a favorite tax avoidance strategy by multinational corporations by incorporating a Special Purpose Vehicle (SPV), in an low or zero-tax jurisdiction that is merely acting as a conduit company, economic substance legislation aims at counter-acting the tax effects of such strategy and ultimately, providing more tax transparency and tax fairness globally through automatic exchange of information and mandating entities to have substantial economic activity to substantiate their profits respectively. SPVs that are literally dormant and shell companies but with abundance of profit that is untaxed may soon be a history”.
The new requirement is applicable from 1 January 2019 on traders applying for new commercial registrations as well as Central Bank of Bahrain (CBB) licensees. However, a transitional period of six months was granted for legal entities registered/incorporated prior to 1 January 2019.
“Failure to comply with the new regulation can lead to substantial fines between BD1,000 and BD100,000, to suspension of CR and/or imprisonment for non-compliance. Therefore, businesses should start reviewing their activities today and evaluate the level of additional substance required to be satisfied, if any.” Norre added.
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