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Bahrain aims to attract foreign direct investment

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Steven Brown, Sherif Saad Eldin and Ahmed Al-Saeed of ASAR – AI Ruwayeh & Partners discuss the factors attracting foreign investment to Bahrain and consider foreign ownership restrictions

Bahrain is considered a major business hub in the Gulf Cooperation Council (GCC) region, with one of the most flexible investment environments to attract foreign investors. Factors that support Bahrain’s place at the top among GCC countries for foreign direct investment (FDI) include the free transferability of currency, which is pegged to the US dollar, and that few industries require local equity participation.

Significantly, Bahrain imposes no personal or corporate income tax (except for oil companies), no capital gains tax and no variable stamp taxes. Additionally, Bahrain’s value added tax regime, applying a rate of 10%, is substantially below VAT rates elsewhere in the region and in most of Europe.

Most of the commercial activities undertaken by companies and/or branches of foreign companies in Bahrain do not trigger a foreign ownership restriction, and companies undertaking such commercial activities can be 100% owned by foreign shareholders. While state security rationale may preclude a particular person from holding shares, and licensing requirements (for banks, telecoms, schools, engineers, etc.) might limit certain individuals operating these otherwise 100% FDI companies, requirements for a certain level of local shareholding are removed.

This article is focused on foreign ownership restrictions on companies (or perhaps more accurately, the very limited number and impact of restriction). Bahrain’s Prime Minister issued a resolution in 2021 determining the commercial activities that may be undertaken by companies owned by foreign investors (FDI Resolution). The FDI Resolution represents a bedrock principle for attracting foreign investment into Bahrain and places Bahrain at an advantageous position within the GCC.

FDI and free trade agreements

The FDI Resolution outlines the level of foreign ownership permitted for each commercial activity in Bahrain, of which the lists of activities subject to any foreign ownership restrictions are limited. Moreover, certain trade agreements and treaties have exempted limitations under other lists from application to persons from participating states. These include:

  • GCC Unified Economic Treaty adopted by the GCC Supreme Council on December 31 2001, whereby GCC natural and legal citizens shall be accorded, in any member state, the same treatment accorded to its own citizens, without differentiation or discrimination, in all economic and investment activities;

  • The Bahrain–US Free Trade Agreement was signed September 14 2004 and entered into force on August 1 2006, whereby US nationals and US operational companies are enabled to conduct nearly all commercial activities in Bahrain other than a few activities restricted to only Bahraini nationals ownership;

  • Bahrain entered into a bilateral investment promotion and protection agreement with the Republic of Singapore on October 27 2003, which has been ratified by Law No. 21 of 2004, which affords benefits to Singaporean individuals and their Singapore companies which are wholly Singaporean owned; and

  • Bahrain together with the other GCC countries entered into a free trade agreement with Iceland, Liechtenstein, Norway and Switzerland (the ILNS countries) on June 22 2009, which has been ratified by Law No. 7 of 2012, affording special rights to nationals of those countries, (the FTAs).

The FTAs provide for varying special rights in respect of permissible commercial activities, but notably derogate from the requirements for local ownership otherwise applying to those commercial activities.

FTAs place certain restrictions on which foreign citizen or company may benefit; one area of expertise for the ASAR – Al Ruwayeh & Partners (ASAR) Bahrain legal practice is our specialisation in FDI structuring to maximise the benefit to our clients operating in Bahrain.

FTAs represent a significant opportunity for FDIs from treaty parties to operate in Bahrain in otherwise restricted commercial fields. Since the FTAs each predate the FDI Resolution, many multinational companies have structured using the special rights available through the FTAs as an entry into the GCC market at a time when similar arrangements were not available elsewhere in the GCC.

The FDI Resolution represents another step forward for Bahrain to distinguish itself from steps taken in other countries, maintaining its lead in the FDI area within the Gulf region.

Opening the market under the FDI Resolution

Noting that Bahrain had already embraced 100% foreign ownership in many commercial fields—albeit through piecemeal regulations—the FDI Resolution centralised the list of those commercial activities subject to ownership limitations. By positioning itself with a single source resolution, foreign companies can approach operating in Bahrain with a clear picture of their rights and obligations.

Additionally, the level of required local ownership for many otherwise restricted commercial activities was reduced from 51% Bahraini ownership to requiring only minimal local shareholders (as little as a single share). Such change enables greater control by FDIs over the affairs, as well as the financial returns, connected to their Bahrain operations.

Of particular note, lawful structures had already existed to permit allocation of most (but not all) economic entitlements to a foreign entity. That said, management and ownership authorisations granted a de facto veto right to local partners in ownership restricted companies. ASAR developed a number of structures to serve this purpose and are formalising adjustments for those structures to serve our clients with the FDI Resolution not in place.

In this regard, the FDI Resolution includes five categories of commercial activities (divided under five schedules).

Schedule one

This section outlined a limited number of commercial activities (18 activities), which can only be undertaken by entities with 100% Bahraini ownership. These residual activities are designed to protect traditional Bahrain activities (such as fishing) and those inherently linked to nationalisation of persons and goods (such as customs clearance, recruitment offices). In particular, these activities are generally excluded from bilateral treaties and FTAs permitting FDI.

Schedule two

Schedule two includes a list of 20 activities which may only be undertaken by companies with a minimum of 51% Bahraini ownership, albeit such activities may be included in treaties and FTAs permitting 100% ownership by GCC and US persons and, in some cases, Singaporean and ILNS citizens and their companies based on current FTAs. The primary industries involve include passenger transportation, construction activities and logistics agents.

Schedule three

Schedule three includes a list of 178 activities which may be undertaken by companies with any level of FDI on the condition that at least one equity share is owned by a local partner. The primary industries covered by these activities include sale and trade of goods, food service, trade craft (e.g. tailoring/carpentry), passenger and freight transport. Such activities are eligible for inclusion in FTAs. For entities involving non-FTA foreign investment, restrictions on company type would apply, namely requiring companies with limited liability or closed joint stock companies.

An exceptional cases under Schedule Three is ‘retail sale via internet’, which may be undertaken by 100% FDI companies subject to the local company’s capital investment of not less than 50,000 dinar (approx. $135,000).

Schedule four

Schedule four includes a list of 62 commercial activities normally subject to foreign ownership restrictions that may be undertaken by a major multinational foreign entity. The Resolution defines such a permissible foreign entity as existing in at least three global markets; being part of a group company with the parent company’s capital being not less than 20 million dinar (approx. $55 million) and subject to invested capital into Bahrain of not less than 2 million dinar (approx. $5.5 million) in the first year.

Schedule five

Schedule five includes a list of the 377 commercial activities that may be fully undertaken by entities with 100% foreign ownership. Note that one of the objects, ‘Extraction of crude petroleum and natural gas’ eligible for 100% FDI status requires a government concession and would be subject to Bahrain’s limited corporate income tax regime. In some cases, conducting business by way of a registered foreign branch is permissible for these commercial activities.

The approach of Bahrain to FDI differs significantly from other GCC jurisdictions, noting the large number of commercial activities which are not subject to ownership restrictions, since this permissibility applies to onshore businesses through the country, not only those located in ‘free zones’. In fact, Bahrain has no ‘free zone’, though special economic areas with associated customs and importation exemptions are grants. Therefore, no separate legal regime and legal distinction applies between Bahrain and foreign owned businesses.

Under the FDI Resolution, foreign investors have vast opportunities to participate in nearly the full breadth of Bahrain’s economy with little or no leverage afforded to local partners. Finally, even in those few residual areas of meaningful foreign ownership restriction, structuring options are available.

Special FDI structures

Trusts

It must be noted that trusts are available in Bahrain, including specific consideration to foreign ownership restrictions. In 2016, Bahrain enacted a financial trust law which specifically contemplates the holding of otherwise foreign ownership restricted assets (such as company shares and real property) on trust regardless of the nationality of the beneficiaries.

Accordingly, each of the restricted corporate objects under schedules one to four could be operated through a trust arrangement. Restrictions on who may act as trustee and requirements for trust registration can impact the viability of this structure, but it remains an option for FDI into unique industries. The only catch, the foreign ownership restricted asset must devolve to an eligible owner at the end of the life of the trust.

There are various mechanisms to accomplish this requirement while maintaining all value of a business to the beneficiaries (e.g. orphan trusts); ASAR has a robust trust practice, including unique experience and knowledge on the options available for a Bahrain trust.

Public companies

For entities incorporated in GCC countries, a requirement of 100% ultimate GCC national ownership is required for those entities to benefit from the GCC Economic Treaty. Nevertheless, Bahrain’s interpretation of that treaty would consider any GCC incorporated and publicly listed stock company (on a GCC stock market) as a GCC person entitled to GCC treatment in Bahrain. This is true even if ownership is more than 51% foreign.

Ministerial exceptions

The Minister of Industry and Commerce may, in conjunction with approval of the Council of Ministers, issue an order approving the incorporation of a company of foreign capital to conduct one activity or more from among the foreign ownership restricted activities (on a case by case basis). This is specifically contemplated in Bahrain’s Commercial Companies Law and requires the following:

  • An application must be submitted to the Minister by the foreign company;

  • Such company must have a strategic economic significance or a profitable return for Bahrain’s economy;

  • The application must be reviewed and approved by the Council of Ministers; and

  • The Minister shall issue such order in agreement with the Minister concerned with the administrative authority to which the conduct of the requested activities is subject to licensing by it or to its supervision.

Bahrain’s approach

Bahrain has taken a pragmatic view to foreign direct investment with a liberal approach to foreign ownership of local companies (and property, which is a topic for another time). The Kingdom has also empowered its Economic Development Board to facilitate commercial registry applications and to liaise with ministries to enable global companies to expedite their operation in Bahrain.

This business friendly approach has facilitated growth and allowed for the introduction of best practice regulations around economic substance, corporate governance, ultimate ownership and tax compliance. Bahrain is a strong alternative to larger population centres for multinationals to overseas their MENA and EMEA operations.