Financial Crime World

Bahrain Takes Step to Boost Financial Transparency with Economic Substance Regulation

Enhancing International Competency and Addressing Concerns of Profit Shifting

The Kingdom of Bahrain has strengthened its commitment to international financial standards by implementing the Economic Substance Regulation (ESR), a key requirement for businesses operating in the country. As part of its efforts to combat Base Erosion and Profit Shifting (BEPS) and ensure compliance with OECD guidelines, Bahrain has introduced measures aimed at promoting transparency and accountability in its financial sector.

What is Economic Substance Regulation?

The Economic Substance Regulation was introduced by the Central Bank of Bahrain (CBB) through Directive No. OG/499/2018, which outlines the requirements for certain financial institutions operating in Bahrain. The Ministry of Industry, Commerce and Tourism (MOICT) also issued a Ministerial Order (106) of 2018 to ensure compliance with these regulations.

Relevant Activities under Economic Substance Regulation

The following activities are subject to ESR:

  • For Non-CBB licensed entities:
    • Distribution and Service Center Business
    • Headquarters Business
    • Holding Company Business
    • Lease Finance Business
    • Shipping Business
    • Intellectual Property Business
  • For CBB licensed entities:
    • Banking Business
    • Financing Business
    • Insurance Business
    • Investment Fund Management Business

Applicability and Compliance

The Economic Substance Regulation applies to all Commercial Registered Licensees undertaking relevant activities, with the following deadlines:

  • January 1st, 2019: Traders applying for new commercial registrations, existing traders with new relevant activities or acquiring new Intellectual Property Assets
  • July 1st, 2019: Existing traders carrying on relevant activities

Penalties for Non-Compliance

Failure to comply with the Economic Substance Regulation can result in penalties of up to BD 100,000 and even imprisonment.

Purpose and Benefits

The implementation of ESR aims to:

  • Enhance Bahrain’s international competency
  • Address concerns of the European Union on profit shifting
  • Promote transparency and accountability in the financial sector

Conducting Economic Substance Regulation Test

To ensure compliance with ESR, businesses should assess their activities to determine if they meet the following criteria:

  • The “Relevant Activity” is a “Core Income-Generating Activities” in Bahrain itself.
  • The activities are adequately managed and directed in Bahrain.
  • There is an adequate number of qualified full-time employees employed in Bahrain.
  • There is an adequate amount of operating expenditure and physical assets in Bahrain.

Seeking Professional Assistance

Emirates Chartered Accountants Group Bahrain offers support to businesses seeking to assess their compliance with Economic Substance Regulation. Their team of experienced professionals can assist with:

  • Preliminary checks on applicability
  • Assessing satisfaction of ESR criteria
  • Identifying gaps and suggesting improvements
  • Filing Information Notification and Reporting with relevant authorities

For more information, please contact Mr. Bichin at br@emiratesca.com or +973 3619 8998.