04 Jul 2024

Al Doseri Law authors The Legal 500’s ‘Doing Business In’ Bahrain chapter

Al Doseri Law has authored The Legal 500’s ‘Doing Business In’ Bahrain chapter, providing an overview of the legal system in the Kingdom of Bahrain, together with the economic and legal considerations for businesses operating in the jurisdiction.

Al Doseri Law’s chapter was published on 2 July 2024, and can be found here.

Business environment

Located off the coasts of Saudi Arabia and Qatar, the Kingdom of Bahrain provides a strategic island location in the Arabian Gulf, through which much of the world’s petroleum transits. This natural geographic advantage is being continuously enhanced by new, large-scale infrastructure projects. As the smallest economy of the six-member Gulf Cooperation Council (GCC), Bahrain’s total population approaches 1.6 million, which is comprised of around 760,000 Bahrainis and 820,000 non-Bahrainis. Bahrain is a member of the Gulf Cooperation Council (“GCC”), together with Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates.

Historically an important maritime hub, Bahrain has been a commercial centre for the region for millennia; a meeting point for ancient trading routes and travellers from all over the world.

As a nation, Bahrain has maintained a thriving business environment to the present day – whilst also using its vibrant, multicultural history to develop a prosperous tourism industry.

Almost a century ago Bahrain was the first country in the GCC to discover oil, and, several decades later, it was also the first to begin to diversify its economy to prepare for an era beyond oil. It is because of this history that when you come to Bahrain, you will meet Bahrainis with decades of expertise in areas such as financial services, IT, manufacturing and logistics – with a strong understanding of the industry, and the region’s markets.

In addition, Bahrain’s long track record of investment in education has meant that Bahrainis have always played an important role in the country’s economic development, and have preserved a strong entrepreneurial streak. The majority of Bahrainis work in the private sector, and a recent survey found that 70% of young Bahrainis were interested in starting their own business – twice as high as anywhere else in the region.

Bahrain has been recognised as a desirable business location by a number of international rankings:

  • The Heritage Foundation ranked Bahrain the most liberal business environment in the MENA region – and the 18th in the world- in its 2016 Index of Economic Freedom
  • KPMG’s Cost of Doing Business in Bahrain report, published in December 2015, found the overall cost of doing business in Bahrain to be significantly lower than in Dubai and Qatar
  • The 2015 HSBC Expat Explorer Survey ranked Bahrain as 4th in the world for most desirable destinations for expatriates, and first in the region
  • Bahrain’s networked readiness has been ranked amongst the top 30 countries internationally

The investment climate in Bahrain has long been recognised by international agencies and investors as both positive and stable. Providing access to a vibrant economy, Bahrain maintains a business-friendly environment and continues to offer a liberal approach to attracting foreign investment and business. Bahrain is actively promoting a startup culture and empowering the private sector to play a more significant role in driving economic growth.

Bahrain does not apply ownership restrictions to most commercial activities undertaken by foreign companies or their branches – such commercial activities can be 100% owned by foreign shareholders. The Kingdom offers valuable opportunities for businesses and excellent market access to other growing GCC economies. Notable business incentives offered by Bahrain include:

  • Low establishment and operational costs
  • Few indirect taxes for private enterprises and individuals
  • Highly skilled bilingual local and global workforce
  • 100% foreign ownership of business assets.
  • No restrictions on the repatriation or remittance of profits or capital.
  • No restrictions on the import/export of local and foreign currencies.
  • No tax on income, capital gains, sales, estate interest, dividends or royalties.
  • Permits 100% foreign ownership of businesses in many  types of business activities.
  • Easy access to the rest of the region – it takes less than one hour to get to Saudi Arabia, the UAE and Qatar.
  • One of the most educated and skilled workforce in the Gulf.
  • Most flexible visa policies in the region.

Companies in Bahrain can be 100% foreign-owned with restrictions applying only in certain sectors, such as trading activities, construction or catering services. International investors can choose between several types of business structure. A commercial company set up in Bahrain can choose from one of the following:

  • General Partnership Company
  • Limited Partnership Company
  • Joint Venture Company (known as Association in Participation)
  • Shareholding Company (known as Joint Stock Company or BSC)
  • Limited Partnership by Shares Company
  • Limited Liability Company (W.L.L)

Process for establishing different types of business structure

In May 2015, a new commercial registration system (the Sijilat) was launched in cooperation with the E-Government Authority and government agencies related to commercial licenses. Sijilat serves as the primary system to initiate and finalize commercial transactions entirely online.

To establish a Company, investors must obtain a Commercial Registration (CR) along with the necessary business licences and/or approvals. Businesses are considered legally established once registered with the Ministry of Industry and Commerce through obtaining a CR certificate (without a licence). Typically, the timeframe to obtain a licensed CR is three to four weeks.

Procedural and substantive requirements

It is essential to obtain an electronic advanced key (the “eKey”) by registering at the E-Government Authority in Bahrain via (www.ekey.bh) to submit any commercial transaction, or a notarized power of attorney who has an advanced eKey, without prejudice to the provisions of the Commercial Companies Law No. (21) of 2001.

Additionally, applications can be submitted through one of the professional bodies registered in the Ministry of Industry and Commerce that legally represent and apply for a commercial registration on behalf of investors, as well as any other service under the umbrella of the Sijilat portal.

Economy

Bahrain is a free market economy without any restrictions on capital movements, foreign exchange, foreign trade or foreign investment. Various factors help to support Bahrain’s strong position among GCC countries for foreign direct investment (FDI), not least the free transferability of currency and that few industries require local equity participation.

The Bahraini Dinar is a strong and stable currency. Since 2001, it has been pegged (at a rate of USD 2.66) against the US dollar. In 2006, Bahrain became the first (and still the only) Gulf state to sign a bilateral agreement with the United States (i.e. Free Trade Agreement). Bahrain also has deep, long-lasting ties with the UK:  it was a British protectorate for more than 100 years before gaining independence in 1971.

Bahrain has signed numerous Free Trade Agreements (FTAs) with various countries, which facilitate preferential access to these markets for Bahraini entities and businesses. These FTAs work to provide reduced or even eliminated tariffs, making exports more competitive.

In the decade up to 2022, consumer price inflation in Bahrain averaged 1.6 per cent, and at the end of 2023 it was less than 1 per cent. In the wake of the Ukraine conflict, surging oil prices helped to lift Bahrain’s GDP growth to 4.9 per cent in 2022, and it further expanded by 2.5 per cent in 2023.

Petroleum is Bahrain’s most exported product, comprising roughly 60% of all export receipts, 70% of government revenues, and 11% of total GDP.  Aluminium is the second most exported product, followed by financial services and construction materials. Other important and growing sectors include: tourism, logistics and manufacturing.

Bahrain’s state-owned energy asset holding company, Bapco Energies, rebranded itself in May 2023 as part of its focus on maximizing enterprise value through trading and investing in new technologies and renewables.

Meanwhile, a continued programme of privatisation will contribute to Bahrain’s long-term plans for economic development and diversification. This opening up of key state-owned assets for investment is set to boost investor interest further. 

Current opportunities & future prospects

A range of large infrastructure and development projects are taking place across the GCC, most notably in Saudi Arabia and the UAE, which are creating opportunities for both Bahraini firms and international companies.

To help move Bahrain from an economy built on oil to one driven by a diverse set of non-hydrocarbon business sectors, including manufacturing and tourism, Bahrain has announced more than 20 strategic infrastructure projects worth more than $30 billion. These include the construction and development of five offshore cities on artificial islands off Bahrain’s coastline, which will double Bahrain’s land area by 2030, these projects will be mostly funded via public-private partnerships.

Other large-scale government infrastructure projects include:

  • $7 billion Bahrain Petroleum Company (BAPCO) modernisation & expansion project
  • $3.5 billion King Hamad Causeway transportation infrastructure project – a new 15-mile causeway between Bahrain and Saudi Arabia.
  • $2 billion Bahrain Metro project

Among other local Bahraini projects, the construction of a new seawater reverse osmosis desalination plant is planned by Bahrain’s Electricity and Water Authority (EWA) and in August 2023, the government announced a deal to develop a 72-MW solar park, the country’s largest.

Similarly, Bahrain’s electric vehicle (EV) charging infrastructure is being accelerated.

In the move towards a greener, more sustainable economy, Bahrain launched a National Energy Strategy in November 2023, which aims to cut the country’s greenhouse gas emissions by 30 per cent by 2035, before reaching net zero by 2060.

As part of the focus on its economic growth, Bahrain aims to lead the Gulf region in its digital economy.  As a first-mover in emerging business and finance domains, including open banking, cloud computing and advanced manufacturing, the Kingdom has made significant strides in investing in Fintech and other emerging technologies.

Bahrain is now home to the largest financial technology centre in the Middle East, Bahrain’s FinTech Bay – one of the Kingdom’s most important initiatives focusing on investment in innovation, including advanced laboratories and business accelerators.

The Kingdom has fostered a vibrant startup ecosystem through initiatives such as the Bahrain Fintech Bay and via Bahrain’s Economic Development Board (EDB) offering support for startups and entrepreneurs in the region. There also plans to exploit developments in artificial intelligence (AI) and to use Bahrain’s desert plains as a location for data centres.

Legal system

Overview

The legal system of Bahrain is a hybrid system deriving from a number of jurisprudential traditions including Islamic Sharia, Egyptian civil, criminal and commercial law (the Egyptian system itself is derived from the French Napoleonic code, local tradition and custom).

Over recent years, Bahrain has undertaken significant efforts to reform its legal system in order to promote economic development. Bahrain’s legal system consists of a network of courts that handle a wide range of civil, criminal, and commercial cases.

In 2017, Bahrain introduced significant changes, including the establishment of dedicated commercial courts which focus exclusively on resolving business disputes and providing a specialized approach to handling complex commercial matters.

The well-established national arbitration centre, the Bahrain Chamber for Dispute Resolution (BCDR), facilitates efficient dispute resolution, which further enhances Bahrain’s reputation as an attractive jurisdiction for business in the region. BCDR’s current arbitration and mediation rules came into effect in 2022 and 2019, respectively.

Court System and Jurisdiction

Bahrain has a well developed legal framework when compared to some of its neighbours. Bahrain’s court system comprises of Civil Courts and Sharia Courts.  The Court of Cassation is the highest court.  As a civil law jurisdiction, the decisions of higher courts are not binding on the decisions of the lower courts thus decisions of the Court of Cassation are authoritative but not binding. The Sharia Courts are generally responsible for Family Law and inheritance matters.

Bahrain is a signatory to the New York Convention on the Enforcement of Foreign Arbitration Awards.  Therefore, all relevant arbitral awards from a signatory seat would be recognised and enforced by the Bahraini courts subject to satisfying certain requirements.  Bahrain is also a signatory to the Riyadh Convention for the Execution of Judgments, Delegations and Judicial Notification which authorises the execution of judgments issued by courts of the GCC member countries.

Bahrain’s court system and the jurisdiction of the Bahrain courts are governed by Bahrain Decree-Law No. 42/2002 On the Issuance of the Judiciary Law. The main law defining the categories of Bahrain courts and classifying the jurisdiction of each level or degree of the courts is Bahrain Decree-Law No. 42/2002.

Bahrain’s judicial system consists of Civil Courts and Sharia Courts. Other courts, such as the BCDR Court and the Constitutional Court. have their own specific laws.

The core legislation governing the procedures of the Civil Courts is Bahrain Decree-Law No. 12/1971 on the Issuance of the Civil and Commercial Procedures Law (as amended). Bahrain’s Civil Courts have the power to adjudicate all disputes relating to civil, commercial, and administrative matters.

They are comprised of:

The Court of Cassation.

The High Court of Appeal.

The High Court.

The Lower Court.

The Court of Urgent Matters.

The Court of Execution.

Foreign investment restrictions

Bahrain takes a pragmatic approach towards FDI and foreign ownership of local companies. The EDB facilitates commercial registry applications and liaises with government ministries to assist the operations of global companies.

As a major business hub in the Gulf region, Bahrain has one of the most flexible investment environments to attract foreign investors. Through its liberal approach to FDI, Bahrain actively seeks to attract foreign investors and businesses; no product localization is enforced, and foreign investors are not obliged to use domestic content in goods or technology.

Foreign companies are also not required to have local partners in order to do business: 100% foreign ownership of business is therefore allowed, although sector-specific restrictions may apply. Sectors that are open to 100% foreign investment include: technology, tourism, healthcare, education, manufacturing, and business services. Where restrictions apply in sectors such as construction, foreign ownership may be limited to 49%.

Bahrain also prides itself on offering an attractive and open regulatory environment to international businesses with governance standards that deliver exceptional stability. Although regulation is clear, simple and transparent, several laws have recently been introduced laws alongside other changes to Bahrain’s business regulatory environment, including commercial registration requirements, quality standards, and import restrictions.

Bahrain’s business-friendly economy and stable financial system are matched by an equally attractive corporate tax regime. Bahrain currently has no personal or (except for oil companies) corporate income tax (CIT), capital gains tax, withholding taxes, variable stamp taxes, or other taxes on the repatriation of profits. There are no taxes levied on capital inflows or outflows. At the rate of only 10%, Bahrain’s value added tax (VAT) regime is substantially below VAT rates applied elsewhere in the region.

As one of the only remaining GCC countries without a comprehensive CIT, Bahrain is, however, set to relandscape its tax regime by introducing CIT to the Kingdom. The Bahrain Minister of Finance and National Economy announced the move in May 2023, and it is likely to apply to all commercial activities.

The CIT rate is anticipated to be in the range of 5% to 10% for businesses that fall below the Base Erosion Profit Shifting (BEPS) Pillar II threshold. For businesses above the threshold, a tax rate commensurate with the Global Minimum Tax (GMT) rate of 15% is likely.

Anti-Money Laundering

Bahrain’s implementation of the Anti-Money Laundering Law in 2001 and its membership in the Financial Action Task Force (“FATF”) puts it in a strong position to counter the financing of terrorism and prevention of money laundering.  A person who commits any of the following acts shall have committed an offence related to money laundering:

  • Failure to disclose to the Enforcement Unit any information or suspicion acquired in the course of that person’s trade, business, profession, employment or otherwise regarding the offence of money laundering;
  • Failure or refusal to follow or obstruction or hindering of any order issued by the Enforcement Unit or issued at its request by the Investigation Magistrate pursuant to investigation of the offence of money laundering; and
  • Disclosure of any information or suspicion acquired in the course of that person’s trade, business, profession, employment or otherwise regarding the issue of an investigation order or attachment order in a money laundering offence, where such disclosure is likely to prejudice the investigation.

Documents Issued By Foreign Entities

All documents prepared or assembled outside Bahrain and which are used for incorporating an entity in Bahrain or seeking a licence to carry out business must be:

  • Notarised by a notary public in their country of origin;
  • Stamped by the Ministry of Foreign Affairs and the Embassy of Bahrain (or designated Bahraini Consulate in the region) at the country of origin; and
  • Further be stamped at the Embassy of the concerned country in Bahrain and the Bahrain Ministry of Foreign Affairs.

Bahrain is a signatory to the Hague Apostille Convention.  Therefore, if the documents were issued from another signatory country, there is no need to go through the legalisation process under paragraphs (ii) and (iii) above after obtaining the Apostille stamp.

Top tips

Given its strategic location, doing business in Bahrain is generally a quick, efficient process. To ensure that everything goes smoothly in the Kingdom, some tips are suggested:

  • Understanding the Business Culture: Unlike some other jurisdictions, Bahrain enjoys a relatively laid-back and friendly environment for doing business: a unique business culture which values personal relationships and trust. As a result, building rapport and maintaining good relationships with local partners (including the ministries and other governmental entities) and clients is essential.
  • Networking is an essential pillar to doing effective business in Bahrain. Due to its size and island feel, attending networking events, forums, and conferences helps to build and cement relationships with potential clients, partners and government officials.
  • Competition and employment. Bahrain’s market is competitive, especially in sectors like finance, hospitality, and real estate. Be sure to conduct thorough market research to understand your competitors and differentiate your offering. Although Bahrain has a skilled workforce, there can be labour shortages in some specialised fields. Recruitment and retention of talent can therefore be competitive and challenging, particularly in niche areas.
Our Services

Our banking and finance team has developed an extensive track record over the past decade in providing specialised legal services and advice of the highest quality to Bahrain’s banking and financial sector.

As a premier insolvency team in Bahrain, we specialise in representing every type of stakeholder in connection with insolvency matters.

Our firm provides specialist contentious and non-contentious advice covering the local and international construction market.

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Our employment team helps clients to steer through the sophisticated landscape of local laws that govern the employer/employee relationship.

The strength of our dispute resolution team is internationally renowned and we have significant experience in the local Bahrain courts at every level.

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