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Economic Substance Regulation in Bahrain: A Guide for Businesses

The Kingdom of Bahrain has strengthened its commitment to international financial regulations by implementing the Economic Substance Regulation (ESR) framework. This regulation aims to ensure that investments made in the Kingdom are not driven solely by a privileged tax regime.

Background on the ESR Framework

The Central Bank of Bahrain (CBB) issued Directive No. OG/499/2018 Concerning Economic Substance Requirements for certain Financial Institutions in Bahrain on November 22, 2018. The Ministry of Industry, Commerce and Tourism (MOICT) also issued Ministerial Order No. (106) of 2018 concerning Economic Substance requirements in the Kingdom of Bahrain on December 27, 2018.

Relevant Activities under the ESR Framework

The following activities are considered “Relevant Activities” under the ESR framework:

For Non-CBB Licensed Entities Undertaking Non-Regulated Activities

  • Distribution and Service Center Business
  • Headquarters Business
  • Holding Company Business
  • Lease Finance Business
  • Shipping Business
  • Intellectual Property Business

For CBB Licensed Entities Undertaking Regulated Activities

  • Banking Business
  • Financing Business
  • Insurance Business
  • Investment Fund Management Business

Compliance with the ESR Framework

The Economic Substance Regulation in Bahrain is applicable from January 1, 2019, to certain Financial Institutions in Bahrain licensed by the Central Bank of Bahrain (CBB). All Licensed Entities are required to submit an annual report to the CBB confirming their compliance with the Economic Substance Regulation in Bahrain.

Timeline for Compliance

For traders applying for new commercial registrations, it shall be applicable from January 1, 2019. Existing traders with respect to new relevant activities or acquiring new Intellectual Property Assets shall also comply from January 1, 2019. For all existing traders carrying on relevant activities, it shall be applicable from July 1, 2019.

Records and Reporting

To comply with the Economic Substance Regulation in Bahrain, businesses must maintain their books of records for a period of six years from the end of the financial year in which the Information Notification is filed with the Authority.

Penalties for Non-Compliance

Non-compliance with the ESR framework will attract penalties that could reach BD 100,000 or even imprisonment.

Purpose of the Economic Substance Regulation

The purpose of the Economic Substance Regulation in Bahrain is to improve the international competitiveness of the Country and address concerns of the EU on shifting profits.

Support from Emirates Chartered Accountants Group Bahrain

Emirates Chartered Accountants Group Bahrain offers support to businesses in assessing their compliance with the Economic Substance Regulation in Bahrain, including:

  1. Preliminary check for applicability
  2. Satisfaction of ESR criteria
  3. Identifying gaps and providing suggestions for improvement
  4. Filing Information Notification & Reporting with relevant authorities

Contact Us

Contact Emirates Chartered Accountants Group Bahrain for more information on Economic Substance Regulation in Bahrain:

Mr. Bichin, Asst. Manager, Bahrain Operations br@emiratesca.com +973 3619 8998