Doing Business in Bahrain Guide 2008

BDO JawadHabib

www.bdojawadhabib.com

P O Box 787, Manama, Kingdom of Bahrain Telephone: +973 1753 0077 Facsimile: +973 1753 0088 E-mail: [email protected]

Doing Business in

Bahrain

BDO JawadHabib

Doing Business in Bahrain

© BDO Global Coordination BV, January 2008BDO and BDO International are trademarks of Stichting BDO

INTRODUCTION

The aim of this publication, which has been prepared for the exclusive use of BDO Member Firms and their clients and prospective clients, is to provide background information for setting up and running a business in Bahrain, in compliance with the legislation in force on 31 December 2007. It is of use to anyone who is thinking of establishing a business in Bahrain as a separate entity, as a branch of a foreign company or as a subsidiary of an existing foreign company, and to anyone who is considering coming to work or live permanently in Bahrain. The publication describes the business environment in Bahrain and outlines the financial and legal implications of running, or working for, a Bahraini business. The most important issues are included, but it is not feasible to discuss every subject in detail within this format. Accordingly, Doing Business in Bahrain is written in general terms and is not intended to be comprehensive. If you would like to know more, please contact the BDO Member Firms with which you normally deal, who can provide you with information on any further issues and on the impact of any legislation subsequent to 31 December 2007.

BDO International is a worldwide network of accounting and consulting firms, called BDO Member Firms, serving international clients. Each BDO Member Firm is an independent legal entity in its own country. The network is coordinated by BDO Global Coordination BV, incorporated in the Netherlands, with an office in Brussels, Belgium, where the Global Coordination Office is located.

Founded in Europe in 1963, it has grown to be the fifth largest in the world – the BDO network now has 626 offices in 111 countries, with more than 32,000 partners and staff providing professional auditing, accounting, tax and consulting services on every continent.

BDO’s special skills lie in applying its local knowledge, experience and understanding of the international context to provide an integrated global service. In BDO, common operating and quality control procedures are not a constraint on innovation and independence of thought, but the starting point. It is a vigorous organisation committed to total client service.

BDO’s reputation derives from consistently offering imaginative and objective advice within the client’s time constraints. BDO Member Firms take pride in their clients’ success and their relationships with them. It is a personal relationship that combines the benefits of professional knowledge, integrity and an entrepreneurial approach, with an understanding of a client’s business and an ability to communicate effectively. This ensures the highest-quality objective professional service, tailored to meet the individual needs of every client, whether they be governments, multinational companies, national or local businesses, or private individuals.

Doing Business in Bahrain has been written by BDO Jawad Habib, the Bahraini Member Firm of BDO.

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BDO Jawad Habib - A world of experience in local hands

CONTENTS1. THE BUSINESS ENVIRONMENT 1

GENERAL INFORMATION 1Geography 1History 1Government and Political Powers 2Population and Language 2Currency 2Religion 3Time, Weights and Measures 3Foreign Relations 3The Media 3Legal System 3Economy, Industry and Primary Resources 4Aluminium and Other Industries 5Transport and Communication 5BUSINESS ENTITIES 7Joint-Stock Company 7Limited Liability Company 7General Partnership 7Limited Partnership 8Partnership Limited by Shares 8Single-Shareholder Companies 8Branch of Foreign Company 8COMMERCIAL LAW 8AGENCY RIGHTS 9LABOUR RELATIONS AND WORKING CONDITIONS 9Availability of Labour 9Labour Market Reform 10Working Conditions 10Labour and Social Insurance Laws 11Housing and Real Estate 11Healthcare 11INTELLECTUAL PROPERTY RIGHTS 11Copyright 11

2. FINANCE AND INVESTMENT 13

BANKING AND LOCAL FINANCE 13The Banking System 13Investment Business 13Islamic Banking 14Equity Markets 15Insurance 15ACCOUNTING AND AUDIT REQUIREMENTS 16The Role of the Auditor 16INVESTMENT IN BAHRAIN 16Attractions 16Economic Development Board (EDB) 17Tourism and Hospitality 17

3. THE TAX SYSTEM 19

TAXES ON BUSINESS 19Corporate Income Tax 19TAXES ON INDIVIDUALS 19OTHER TAXES 19Customs Duties 19Other Taxes and Duties 19Local Taxes 19SOCIAL SECURITY CONTRIBUTIONS 20

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BDO Jawad Habib

5th Floor, UGB Tower, Diplomatic AreaPO Box 787, Manama, Kingdom of Bahrain

Tel: +973 17530077, Fax: +973 17530088E-mail: [email protected]: www.bdojawadhabib.com

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BDO Jawad Habib - A world of experience in local hands 1

1. THE BUSINESS ENVIRONMENT

General Information

Geography

Situated in the heart of the Arabian Gulf, 24 kilometres off the eastern coast of Saudi Arabia, lies the Kingdom of Bahrain (Arabic: Mamlakat al-Bahrayn). Bahrain is an archipelago of approximately 36 small islands covering a total land area of 711sq.km. The largest of these is Bahrain Island (578sq.km.) from which the Kingdom takes its name. It is connected by causeways to Muharraq, the second largest island, and to Sitra, where most of the industrial units are located. A causeway of about 30 km stretches across to the eastern coast of Saudi Arabia, increasing trade and traffic between the two countries. To the south-east lie sixteen smaller islands, which comprise the Hawar group. The largest of these is 19km long and 1.5km wide. There are numerous other small islands in the archipelago, mostly uninhabited, best known for the rich variety of migrating birds that live there for part of the year.

The capital, and largest city is Manama, with a population of approximately 163,000.

The climate in the Kingdom of Bahrain is pleasant from October until April, with temperatures ranging from 10°C to 30°C and rainfall being erratic, but averaging 7cm per year. Humidity is high in July, August and September with daytime temperatures averaging 39°C. The Kingdom has a number of natural springs mainly along the northern coast. These are gradually being depleted, but significant volumes of water are now generated from desalination plants.

History

The Kingdom of Bahrain is the site of Dilmun, the ‘land of immortality’ referred to in Babylonian, Sumerian and Assyrian inscriptions as an important port of call on the sea trade route between Mesopotamia and India. Though the land has been a home to earlier civilisations, recorded signs of habitation date from about 3000 BC and comprise three major Bronze Age settlements. The most important find to date is an entire city, buried beneath the Portuguese Fort, which indicates that the Kingdom was actively involved in trade with countries farther east as early as 3000 BC. Several round steatite stamp seals are further evidence of a merchant community native to the Kingdom. Similar seals have been found in Mesopotamia and India.

Islam reached the Kingdom of Bahrain during the 7th century and for the next eight centuries the country was governed by the Caliphs and a number of regional dynasties. After rule successively by the Portuguese, Persians and Omanis for majority of the seventeenth and eighteenth century, Bahrain came under the sway of the Al Khalifa family, who had moved south from Kuwait to engage in the pearling industry. They have been the rulers of the Kingdom of Bahrain without interruption since that time, although Britain was involved in the Kingdom’s administration until 1971, when the Kingdom attained independence.

2 BDO Jawad Habib - A world of experience in local hands

Government and Political Powers

The Kingdom of Bahrain is a constitutional monarchy, headed by the King, His Majesty Shaikh Hamad bin Isa Al Khalifa. He is the eldest son of the previous Amir, Shaikh Isa bin Salman Al Khalifa, and became Head of State on February 1999, upon the death of his father. He is the eleventh member of the Al Khalifa family to rule the Kingdom since the first Shaikh Ahmed Al-Fateh Al Khalifa ascended the throne in 1782. The Crown Prince, HH Shaikh Salman bin Hamad Al Khalifa, the eldest son of the King and the Commander-in-Chief of the Bahrain Defence Force, is next in line for succession.

The constitutional monarchy of the Kingdom of Bahrain provides for a two-chamber parliament which consists of an appointed and an elected chamber. The Cabinet, headed by a Prime Minister, is appointed by the King. The current Prime Minister, H E Shaikh Khalifa bin Salman al Khalifa, is also a member of the royal family. Following the general election of 2006, the largest party in the 40-seat lower house of parliament is the Shia Islamist Al-Wefaq National Islamist Society.

From the date of H H Shaikh Isa’s accession, Bahrain took increasing control of its internal affairs and British influence gradually waned. When British troops pulled out of Aden in 1967, Bahrain was briefly the centre of Britain’s Middle East military command, but the following year the British Government announced its intention to withdraw forces from East of Suez by 1971. All existing agreements with Britain were terminated on independence, although both countries pledged continuing friendship and goodwill. The National Day, 16 December, is officially celebrated as Independence Day. Shortly before independence, Iran laid claim to Bahrain based on its sovereignty during the 17th and 18th centuries, but a public-opinion survey conducted by United Nations representatives in 1970 showed conclusively that most Bahrainis did not wish to unite with Iran. Immediately after independence, Bahrain joined the Arab League and the United Nations, committing itself fully to the policy of development of the country for the benefit of all Bahrainis, and the promotion of greater unity and cooperation within the Arab world.

Population and Language

The Kingdom’s population, according to the latest estimates has reached 1,046,814 in 2007 of which foreigners account for about 49%.

Arabic is the native language of Bahrain. English is widely understood and commonly used by all nationalities, especially in the fields of business and commerce. Farsi, Hindi and Urdu are also widely spoken.

Currency

The unit of currency in Bahrain is the Bahraini Dinar (BHD), which, although freely convertible, is in practice pegged to the US dollar at the rate of USD 2.6490 = BHD 1. At the time of writing (late November 2007), therefore, the Bahraini Dinar was quoted against the euro at a rate of EUR 1.7950 = BHD 1.


Religion

Islam is the state religion. It is practised by the majority of the population; other religious groups such as Christians, Jews, Bahai and Hindu enjoy freedom of religion and maintain places of worship.

Time, Weights and Measures

Bahrain is in the UTC+3 time zone, meaning it is three hours ahead of Universal Coordinated time, or Greenwich Mean Time. The metric system of weights and measures is used in Bahrain.

Foreign Relations

While maintaining its identity and autonomy, Bahrain has always regarded itself as an integral part of the Gulf Community and was a founder member of the Gulf Cooperation Council in 1981. Even before independence, it was one of the most active advocates of economic and social cooperation and of a unified Arab voice in international forums. The Kingdom has always maintained a good relationship with the rest of the Arab world.

The Media

Bahrain has Arabic and English language newspapers. Foreign newspapers and magazines are readily available.

The broadcasting industry is restricted to one national, Government-owned TV station, Bahrain TV, which broadcasts on two channels, in Arabic and English, both terrestrially and via satellite. A number of radio stations broadcast in both Arabic and English.

Legal System

The Kingdom of Bahrain has an independent legal system administered by the High Judicial Council (Majlis al Qada al Ahia), which oversees Bahraini courts.

The Kingdom has developed its system of legislation along the lines of the civil model, drawing also from Egyptian doctrines and other European civil codes. In the event that the legislation is not applicable, a judge deduces the basis of his judgment from the principles of Shari’a Law and the provisions thereof, and in the absence of any such provision, custom is applied. In the absence of custom, the tenets of natural justice or the principles of equity and good conscience are applied. Commercial transactions are governed by contract between the parties and a well developed body of legislation.

Personal affairs of Muslim citizens, such as marriage, divorce and inheritance are dealt with under the principles of Shari’a.

Legislation is considered and adopted by the Cabinet of Ministers and enacted by Royal Decree. Judges are appointed by Royal Decree. Bahrain’s highest court is the Court of Cassation (Mahqamat At Tameez) to which cases are referred via the Appellate Court from the Court of First Instance.

Economy, Industry and Primary Resources

Economic IndicatorsBahrain is one of the fastest growing economies in the Arab world, according to the United Nations Economic and Social Commission for Western Asia (January 2006).

As an important financial centre in the Gulf region, Bahrain has attracted a great deal of international business activity and foreign investment. So well-regarded is the Bahraini business environment that the Heritage Foundation/Wall Street Journal ranked Bahrain’s economy the most free in all the Middle East, and among the sixteenth most-free in the world. Consequently, the people of Bahrain enjoy a high per capita income and an attractive standard of living.

The Government of Bahrain welcomes foreign investment and has created lucrative incentives to such business. As a result, Bahrain is home to numerous multinational firms with business in the Arabian Gulf.

Table 1: Key economic data

TradeTraditionally, the Kingdom of Bahrain has been the entrepot and the redistribution hub of the region, re-exporting chiefly to Saudi Arabia. The development of the new Khalifa bin Salman Port and Industrial Area is set to further expand this role. Thanks to the Government’s efforts to promote expansion of non-oil national exports, and due to the relatively limited oil reserves in Bahrain, the economy is well diversified in comparison to other Gulf countries. Bahrain enjoys one of the most free economies in the world, becoming a member of the World Trade Organisation in 1995.

Bahrain offers a number of advantages as a business or investment destination, including a Bilateral Investment Treaty (BIT) with the United States (in force as of May 2001, as the first BIT in the GCC) and a bilateral Free Trade Agreement (FTA) signed in September 2004.

The FTA is intended to help promote an attractive investment climate and expand trade in products and services between the two countries. The agreement aims to liberalise trading between the two countries by culminating tariff and non-tariff barriers and opening the market for free movement of goods and services.

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The FTA is also expected to attract foreign direct investment into Bahrain from the US and other developed and developing nations around the world. US companies will set up shops in Bahrain and take advantage of the benefits provided to them through the preferential treatment stipulated in the FTA. In addition, companies from other countries that may be interested to have easy access to the US market, are expected to take advantage in establishing a presence in Bahrain.

Oil and GasThe Kingdom of Bahrain was the first country in the Arabian Gulf to have an oil-based economy following the discovery of commercial quantities of oil in 1932. In 1936, the Bahrain Petroleum Company was established. Since then, the refinery has grown into a world-class unit with a current capacity of processing 255,000 barrels of crude oil per day. Gas reserves in Bahrain are presently around 3.9 million million (3.9 x 1012) cubic feet. There are two types of gas being produced, non-associated gas from the offshore Khuff zone and associated gas from the onshore oil fields. Production of these two types is estimated at around 297,000 million cubic feet per annum. The major uses of the gases are for injection onto oilfields, electric power generation and the oil refinery. The remainder is liquefied and exported in the form of naphtha, propane and butane.

Economically speaking, Bahrain is one of the most forward-looking Gulf countries, with long-term goals including continual economic diversification to reduce its dependence on oil revenues. In fact, Bahrain has reduced its dependency on oil revenue from 80% in 1970 to just 20% today. The Kingdom has achieved this remarkable result by consolidating economic activities, encouraging private-sector oil development and providing incentives to diversification.

Aluminium and Other Industries

Aluminium is the Kingdom’s oldest major industry after oil and gas. The smelter originally began production in May 1971, at a capacity of 120,000 tons per year. Aluminium Bahrain BSC (ALBA) became the largest modern aluminium smelter in the world when it commissioned its newest reduction line, Line 5, (increasing capacity to 819,000 tons per year) in May 2005. ALBA is a world-class facility and has one of the lowest production costs in the world.

Other heavy industries include the Arab Shipbuilding Repair Yard, which is capable of dry-docking very large crude carriers of up to 500,000 DWT, and the Gulf Petrochemical Industries Company, which produces annually in the region of 425,000 tons of ammonia, 370,000 tons of methanol and 537,000 tons of urea.

Transport and Communication

AirBahrain’s International Airport is served by more than 39 international airlines, and has been expanded through a major programme to handle increased traffic of up to 10 million passengers a year. Included in the recent USD 80 million extension is a 1000 sq.m. world-class duty-free shopping complex. The national carrier, Gulf Air, provides a comprehensive schedule of regional and international flights. DHL Worldwide Express operates a fleet of seven aircraft from its regional hub erected next to the airport in Muharraq, handling inbound and outbound shipments between the Middle East and the rest of the world.



Road and RailThere are no railways in Bahrain. The road network is connected to the eastern coast of Saudi Arabia via a causeway completed in 1986. A proposed bridge, referred to as the ‘Friendship Bridge’ will link Bahrain and Qatar via a 45-kilometre causeway – the world’s longest fixed link. A feasibility study for this project is already completed. This road network will be a natural extension of the King Fahad Causeway, which connects Bahrain and Saudi Arabia, thus linking the entire region.

Post and Telecommunications ServicesThe postal system is state-owned and as efficient as any in the world. Bahrain’s telecommunications system stands amongst the most advanced in the world and has made an essential contribution to the Kingdom’s economic development. In the finance and banking sectors, the services provided are vital. Their foundations can be traced back to the last century when the Gulf was already an important link in world communications, between India and Europe. The role grew, and with it Bahrain moved to the forefront of the telecommunications world.

The country is well equipped with telephones, fax installations and direct international dialling at relatively low rates for the region. Mobile phones and special data transmission lines are readily available. The Government has liberalised the telecommunication sector to allow competition to stimulate the economy with the aim of attracting more foreign investment to the country.

In an effort towards fully liberalising the sector, the Bahrain Telecommunications Regulatory Authority (TRA) has awarded Zain (previously known as MTC-Vodafone Bahrain) a 15-year mobile licence to operate in the country, ending the monopoly of the Bahrain Telecommunications Company (Batelco).

With the launch of the new service, Bahrain has become the second country in the Middle East, after the United Arab Emirates, to offer third-generation mobile services. Bahrain is also one of the first few countries in the world to have nationwide 3G wireless services, which offer the most advanced video mobile communication. The recent data available from the TRA indicates that the number of cellular mobile customers in Bahrain in September 2007 was 899,931.

The regulator is working to liberalise other services in the telecommunications sector, including the internet and other value-added services.

ShippingThe Kingdom of Bahrain is ideally located at the centre of the trade routes for very large crude carriers, which spend more time loading in the Gulf than in any other waters. The Organisation of Arab Petroleum Exporting Countries (OPEC, as it then was) originally proposed Bahrain as the site of the world’s first purpose-built yard to serve very large crude carriers in 1968. En route repair facilities, geographical convenience, high quality workmanship and a fast turnaround time have won Bahrain a significant share of the world business, despite the present overcapacity. Mina Salman is currently Bahrain’s only port, but work is well under way on a new port and industrial area, called the Khalifa bin Salman Port and Industrial Area.


Business Entities

The Kingdom of Bahrain’s Commercial Law is largely derived from the Napoleonic Code, as in most other Middle Eastern countries. There are several types of business organisation, some of which may be relatively new to those used to Anglo-Saxon legal systems.

The type of investment vehicle that is eventually chosen by foreign investors will depend on the industry or service they wish to offer, the geographical market and whether the import of goods or manufacturing is involved.

Obtaining contracts from government and quasi-governmental organisations is usually on a tender system. Joint-Stock Company (sharika musahima)

Joint-stock companies can take the form of closed stock companies or public stock companies. The closed stock company may be 100% foreign-owned, while the foreign ownership of a public stock company is restricted to a maximum of 49%. Every company in Bahrain should have its head office in the country. The minimum share capital of a closed stock company is BHD 250,000 (EUR 448,750; USD 662,250). The directors need not be Bahraini nationals.

Limited Liability Company (thaat masouliya mahdooda)

A limited-liability company consists of two or more shareholders who are responsible for the debts of the company to the extent of their individual interests in the capital. However, the number of shareholders in a limited-liability company cannot exceed 50, and the transfer of shares is restricted. The minimum share capital is BHD 20,000 (EUR 35,900; USD 52,975). The directors need not be Bahraini nationals.

The Commercial Companies Law states that a minimum of 51% of the shares of a limited-liability company should be held by nationals of Bahrain and that the head office should be in Bahrain. One hundred percent foreign ownership is possible in cases where industrial service companies are being set up in Bahrain to act as regional distribution centres.

A limited-liability company may not engage in activities such as insurance, banking or investment

General Partnership (musharaqa aama)

A general partnership is an association of two or more persons trading together under a specific collective trade name for commercial purposes, in which the partners assume joint liability, to the extent of their entire property, for the partnership’s debts. There are no provisions in the law concerning the minimum or maximum capital required of a partnership or the maximum number of partners allowed. However, the partnership should have a minimum of two partners.


Limited Partnership (musharaqa mahdooda)

A limited partnership consists of general partners who are fully liable to the extent of their entire property for the debts of the partnership, as well as limited partners who are liable to the extent of their interest in the capital. A limited partnership is subject to the same formation procedures as a general partnership, but the trade name must not include the name of any limited partner. to the same formation procedures as a general partnership, but the trade name must not include the name of any limited partner.

Partnership Limited by Shares (at tawseaa bil as hum)

A partnership limited by shares combines certain features common to a limited partnership and other features similar to those of a company. A partnership limited by shares consists of one or more general partners who are responsible for the debts of the partnership to the full extent of their share in the capital, together with other partners whose liability is limited to their investment in shares.

Single Shareholder Company (sharikat al shaks al wahid)

Single-shareholder companies are limited-liability companies whose capital is fully owned by a single natural or corporate person. The liability of the owner is limited to the extent of the capital invested in the company. The capital of a single-shareholder company should not be less than BHD 50,000 (EUR 89,750; USD 132,450). In other respects, a single-shareholder company is governed by the same regulations as a limited-liability company.

Branch of Foreign Company

Branches of foreign companies and representative offices are allowed in Bahrain. However, a Bahraini in the same area of business must act as a sponsor unless the branch or office is being set up in Bahrain to act as a regional goods or services distribution centre.

The Minister of Industry & Commerce must be satisfied, prior to registration, that the parent company is a viable financial entity and that it will assume full responsibility for the liabilities, commitments and obligations of business entities. Foreign banks that wish to set up branches in Bahrain must also obtain the approval of the Central Bank of Bahrain (“CBB”).

However, approval can be granted by the Minister of Industry & Commerce, for the setting-up of companies that are fully owned by non-Bahrainis. The reporting currency may be other than the Bahrain dinar. The business activities of such a company must be stipulated by the Minister of Industry & Commerce. The Minister may also exempt such a company from the minimum required capital and authorise board meetings and general assembly meetings to be held outside Bahrain.

Commercial Law

Commercial transactions and activities in general are regulated by the Commercial Code, which includes a detailed provision in respect of general bankruptcy procedures.


Agency Rights

Investors must be aware of the commercial effects of the Commercial Agency Law, which came into effect in late 1992.

Under this law, only Bahraini nationals or companies wholly owned by Bahrainis are permitted to import goods and equipment for trade and resale in the country. The position of the agent, as set out in his agreement with the principal, is secure provided that the agency is registered in the Commercial Agencies Register maintained at the Ministry of Industry & Commerce. Only the registered agent may import goods for resale in Bahrain.

Under the law, an agency may now be terminated upon the expiry of its fixed term. However, an agent, in the case where an agency is terminated due to the expiry of its term, has the right to claim compensation from the principal if the agent has made an obvious success of promoting the principal’s products. Where an agency agreement is for an indefinite period, and one party wishes to terminate it despite the other’s objection, the matter must be referred to an arbitration committee, whose form and rules of deliberation shall be determined by an order to be issued by the Minister of Industry & Commerce, unless a written agreement has been made between the two parties detailing separate provisions for the termination of the agency agreement.

Despite the protection provided to both principals and agents, it is still advisable that the principal be satisfied with the prospective agent in all respects before committing himself to an agreement.

Labour Relations and Working Conditions

Availability of Labour

Educational facilities in the Kingdom are amongst the best in the region. The relatively high standard of spoken English and a well trained local workforce is the result of the wide range of innovative and comprehensive educational programmes that are continuously implemented at the primary level and intensively followed through. Bahrain houses a creative selection of the best universities in the region, providing a wide range of undergraduate courses.

The Kingdom of Bahrain maintains advanced educational standards relative to other GCC countries. The socio-educational structure has been developed in order to allow women to be fully part of the working force.

In general, labour market conditions in the Kingdom are good and are expected to remain so. Government labour-market policies and programmes emphasise skill training and occupation upgrading of Bahrainis, while regulating the employment of foreign workers to prevent unfair competition with citizens.

The policy of the Kingdom of Bahrain towards the employment of foreign workers is embodied in the Labour Law for the Private Sector. Expatriates may be employed provided that they do not unfairly compete with available Bahrainis. In practice, this means the employer must request permission from the Minister of Labour to employ expatriates and the request must specify the occupation of the expatriates.


The policy of Bahrainisation of employment does not mean that the goal is to replace all foreign workers. Rather, Bahrainisation aims to assure the full and effective utilisation of the scarce human resources of the Kingdom. Expatriate labour is viewed as a complementary resource, not as competition to the local labour force.

The importation of skilled professional and technically qualified expatriates has both facilitated rapid economic growth and diversification and provided significant on-the-job training to Bahrainis. The use of foreign labour has also alleviated inflationary pressure and eliminated bottlenecks in the construction and service sectors of the economy. Labour relations in the Kingdom are extremely peaceful and strikes are unheard of.

Labour Market Reform

Under legislation currently passing through Parliament, there will be support for businesses investing in training and development of core and specialist skills for Bahrainis, as well as Government-led initiatives to encourage the development of sector-specific skills within Bahrain. New systems are also planned for the registration and monitoring of expatriate employees, to ensure the correct skills are being brought into the Kingdom.

Working Conditions

Hours and WeekendsWorking hours and weekends vary in Bahrain but most businesses are open from 08:00 until 18:00. Friday and Saturday are the official days of rest. The Labour Law specifies a maximum normal working week of 48 hours (six days at eight hours per day) after which overtime or time off in lieu takes effect. A minimum of three weeks’ paid annual leave is provided for. These terms are flexible and on average a growing number of employees work only 40 hours a week with four to five-week holidays.

Salaries, Wages and BenefitsEmployment in terms of salaries, wages and benefits in Bahrain, depends on the background of the employee. If the employee is an expatriate, the components of the total package will vary widely and may include free accommodation or allowances, annual air fares for the employee and his family, educational allowances for the employee’s children, extraordinary medical expenses protection (basic medical and hospital services are provided free of charge to all citizens), shipments of personal effects and allowances for cost of living differentials, utilities expenses and local transportation. There are no officially mandated national pay scales and no minimum salary; rather, salaries and benefits are determined by market forces.

Non-wage items of compensation or fringe benefits, which are not specifically mandated in Labour Law, are also subject to negotiation. Locally recruited employees, even of senior status, may not be eligible for accommodation and other allowances. There is no income tax in Bahrain. Public holidays usually total 13 days, including 16 December, the National Day or Independence Day. Public holidays vary according to the lunar calendar.


Labour and Social Insurance Laws

The Labour and Social Insurance Laws, introduced in the mid-1970s, are important reference material for businesses operating in Bahrain. Social insurance contributions are levied on all businesses with more than ten employees, and all employees are entitled to the protection offered by the Labour Law, which deals with hiring and termination, hours of work and entitlements to annual leave. It is now made optional for businesses with less than 10 employees to register with the General Organisation for Social Insurance (GOSI). The courts generally rule in favour of the employee if there is any leeway or ambiguity in interpreting the law, although the majority of disputes arising are settled out of court through the conciliation efforts of the Minister of Labour.

Housing and Real Estate

Commercial and residential lease rates have both grown in recent years, largely resulting from the increased demand in both the residential and commercial sector. In the next few years, a number of commercial projects will be completed in the Seef District and Bahrain Financial Harbour will substantially increase the Kingdom’s supply of quality office space.

Government housing projects are expected to be initiated across the Kingdom and the supply of quality expatriate accommodation is also expected to substantially increase in Seef, Juffair, Saar and Budaiya. The Amwaj Islands project has recently been the first to attract large-scale private investment from expatriates offering freehold sale of both land and apartments.

Healthcare

Bahrain has a modern health system, which includes inpatient and outpatient care, dental, paediatric, maternity and orthopaedic care. Within the state system, most primary and secondary treatment is available free to nationals and at a subsidised cost for expatriates.

Intellectual Property Rights

Bahrain’s first trademark law was passed in 1955, and the latest amendments are incorpo-rated in the Trademark Law of 1991, including the extension of the validity of trademark registrations from five to 10 years. Foreign patents and designs can also be protected through registration under the Trade Mark Law.

Copyright

Copyrights are governed by Legislative Decree No. 10 of 1993. The law protects the author of creative works, which are of literary, scientific, artistic or cultural nature. The Minister of Information is empowered to monitor the implementation of this law.


2. FINANCE AND INVESTMENT

Banking and Local Finance

The Banking System

With an excellent communications network, ideal geographic location, infrastruc-tural stability and tax-free operational facilities, the Kingdom of Bahrain is an ideal base for the banking industry, which was established in 1975. An Amiri (Royal) Decree of 1973 established the Central Bank of Bahrain (Al Masrafil Bahrain al Markazi – CBB) (the erstwhile Bahrain Monetary Agency) as the Central Bank and the supervisor of banking regulations for both commercial and offshore banks. The industry played an important role in recycling the rapid growth in surplus funds earned by the oil-producing countries from the mid-1970s. Figures for the year 2007 show that there are 29 retail banks, 86 wholesale banks, 39 investment banks and 36 representative offices of foreign banks and other investment companies licensed by the CBB to operate out of Bahrain. Their presence has encouraged other companies to establish regional bases in Bahrain. Recently, plans have been put in place to tighten the already strict laws on money laundering.

The Kingdom of Bahrain has developed into an important regional financial centre, and the Government has actively encouraged the development of banking units and investment banks in Bahrain.

The CBB currently offers the following banking licenses:

• Retail Bank licence (‘RB’)• Wholesale Bank licence (‘WB’) In summary, RBs are permitted to carry out all types of banking activities, in Bahraini dinars as well as other currencies, and with residents as well as non-residents of Bahrain. Wholesale banks may also undertake transactions without restriction, when dealing with the Government of Bahrain and its agencies, CBB bank licensees and non-residents. However, they may only undertake transactions denominated in Bahraini dinars and/or with a resident of the Kingdom of Bahrain, if these are whole-sale in nature.

Banks may operate these licences either on a conventional basis, or according to Islamic banking principles.

Investment Business

The CBB currently offers the following investment-business licence categories:

• Category 1 investment-firm licences• Category 2 investment-firm licences• Category 3 investment-firm licences

In summary, Category 1 investment-firm licensees are able to undertake all types of regulated investment services, including dealing in financial instruments as principal. In undertaking these activities, they are able to hold client assets.


Category 2 investment-firm licensees are authorised to undertake all regulated investment activities, with the exception of dealing in financial instruments as principal. They are allowed to hold client assets, but are not allowed to act as principal in client transactions or act as a market maker.

Finally, Category 3 investment-firm licensees are limited to undertaking the activities of “arranging deals in financial instruments” and/or “advising on financial instruments”. They are not allowed to hold client assets.

Investment-firm licensees may operate on a fully shari’a-compliant basis, should they wish to, in which case, certain specific requirements would apply (such as the need to appoint a shari’a supervisory committee).

Islamic Banking

Bahrain is the leading centre for Islamic finance in the Middle East region. The first Islamic bank in Bahrain was established in 1979, when the Bahrain Islamic Bank was licensed. Since then, the sector has grown considerably, satisfying a growing desire by customers to transact their financial activities in accordance with the Islamic shari’a. A cornerstone of Islamic banking is the principle of profit sharing.

Market SizeThere are currently 28 Islamic financial institutions licensed in Bahrain, including five full commercial banks, 16 investment banks and three offshore banking units.

Islamic banks provide a variety of products, ranging from traditional Islamic structures such as murabaha, ijara, mudaraba, musharaka, al-salam and istisna’a, restricted and unrestricted investment accounts, syndications and other structures used in conventional finance, which have been accordingly modified to comply with shari’a principles.

Regulatory FrameworkA comprehensive prudential set of regulations for Islamic banks was introduced in early 2000 by the CBB. This is referred to as the Prudential Information and Regulatory Framework, or PIRI. The framework covers areas such as capital adequacy, asset quality, management of investment accounts, corporate governance and liquidity management.

Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI)The AAOIFI was established on 1 Safar, 1410H (corresponding to 26 February 1990) and established the following year in Bahrain as an international, autonomous, non-profit-making body. It is the leading international standard-setter for Islamic financial institutions, in the field of accounting, auditing, governance and transparency. It works closely with bodies such as the International Accounting Standards Board; its standards are based on international accounting standards. All Islamic financial institutions licensed in Bahrain have to comply with AAOIFI standards.


Liquidity Management Centre (LMC)The LMC, established in Bahrain in 2002, seeks to develop an active secondary market for short-term shari’a-compliant treasury products. These comprise of different asset pools with varying risk and return profiles and different tenors. Islamic banks and corporates with surplus liquidity form the primary investor base for the sukuks (short-term Islamic security).

Equity Markets

In 1989, Bahrain’s Stock Exchange commenced operations to formalise the market in the shares of local public companies. The authorities are keen to encourage the growth of the stock exchange and a number of new public companies have been floated since its establishment. The Bahrain Stock Exchange has signed cooperative agreements with the Muscat Securities Market (Oman), the Amman Financial Market (Jordan), the Egyptian Stock Market and the Kuwait Stock Exchange. The market capitalisation of the Bahrain Stock Exchange stood at BHD 10.2 billion (EUR 18.30 billion; USD 27.01 billion) at the end of 2007, increasing from BHD 8.0 billion (EUR 14.36 billion; USD 21.19 billion) in 2006, achieving a growth of 27.50%.

Insurance

Ten insurance companies currently operate in Bahrain and 68 offshore insurance companies are registered here. In 1987, the Government issued the Insurance Companies Law to regulate the activities of these companies and most of its provisions have now been implemented.

The CBB currently offers the following insurance licences:

• Insurance-firm licence• Insurance-broker licence• Insurance-consultant licence• Insurance-manager licence• Insurance-exchange operator licence

In summary, insurance firms are permitted to enter into contracts of insurance. They are licensed to undertake specific classes of insurance: general and long-term insurance activities may not be combined. Insurance firm licences also specify the particular type of business allowed (direct, reinsurance or captive business); and on what basis the licensee operates (conventional or Islamic principles).

Insurance brokers are allowed to broker insurance contracts and provide advice on such contracts to their customers. Insurance consultants are solely allowed to provide advice on insurance contracts, without broking or otherwise arranging such contracts. Insurance managers are allowed to provide insurance-management services: for instance, managing a captive insurer on behalf of a corporate group. Finally, insurance-exchange operators are allowed to operate an insurance exchange.


Accounting and Audit Requirements

There is no officially recognised corpus of auditing and accounting standards in Bahrain, although certain specific accounting policies are laid down by the CBB, for example, in its annual circular to banks and money-changers. The Insurance Law also stipulates certain accounting practices. The Ministry of Industry & Commerce requires all accounting firms licensed to practice in Bahrain to adopt International Standards on Auditing and International Accounting Standards (International Financial Reporting Standards) in performing their work. However, there will continue to be issues that are not addressed, or require amplification, and in these circumstances, reference will probably continue to be made to the US and the UK authoritative statements, guidelines and exposure drafts. The Role of the Auditor

Auditors, as in the case of other businesses, are licensed to operate by the Ministry of Industry & Commerce through the commercial registration system. Legislative Decree No. 26 of 1966 regulates the auditing and accounting profession.

All quoted companies, banks, insurance companies and limited-liability companies are required to have their financial statements audited and must provide a copy to the Ministry of Industry & Commerce. The CBB has the right to approve the appointment of auditors by the bank’s shareholders.

The auditor’s report must be read out at the annual general meeting, and must affirm that:

• The financial statements, and the financial information within the directors’ report are in accordance with the books and records of the company and that proper books of account have been kept. • Stocktaking (where applicable) has been conducted in accordance with recognised procedures. • The company has complied with the provisions of the Commercial Companies Law and with its articles of association in all material respects. • Dividends proposed by the board of directors of financial institutions must be approved in advance by the CBB and then by a majority of shareholders in the annual general meeting.

Investment in Bahrain

Attractions

The Kingdom has many attributes that encourage investment by foreign investors. Its political stability, excellent communications facilities, easy access to the Saudi Arabian market, relatively skilled work force with a good standard of spoken English, low cost of fuel and power, absence of personal and corporate taxation, and lack of exchange and profit-repatriation controls are factors that make it the ideal place for many businesses to locate their manufacturing or service functions for the region, or simply the regional head office.

In brief, simplified administrative and legal systems and procedures, along with rapid industrialisation, assure excellent opportunities for potential foreign investors considering Bahrain as a Middle Eastern hub for business activity.


Investment incentives also include:

• 100% foreign ownership allowed for certain categories of business. • No VAT nor any form of sales tax on goods or service. • Duty-free access to the Gulf Cooperation Council States (subject to conditions). • Sustained low inflation. • Strategic geographical position in a market of 100 million people. • ‘Fast-track’ seven-day commercial registration procedure for new companies. • A liberal and high standard of living. • A well-developed multilingual labour force at one-third the cost of those in industralised countries. • No customs duties on imports of raw materials, semi-finished commodities brought for further processing, imports required for development projects, machinery for manufacturing, or on goods imported for re-export.

Economic Development Board (majlis tanmea al iktasadiya)

The Economic Development Board (EDB), an autonomous semi-private agency, was established by Amiri Decree in April 2000.

The EDB is the lead agency that plans and executes strategies to boost Bahrain’s economy and to promote the flow of foreign direct investment into Bahrain. This is within the overall goals of further diversifying Bahrain’s economy and ensuring sustainable GDP growth by capitalising on and further developing Bahrain’s competitive advantages. The EDB aims to develop Bahrain as a global hub for business and investment, creating a superior investment environment for international companies serving the global market.

The EDB is the leading business facilitator in Bahrain. It serves investors seeking general information on Bahrain’s investment environment, or assistance processing applications to set up an enterprise.

Tourism and Hospitality

Bahrain’s natural tourism assets are largely under-exploited relative to other Middle Eastern destinations at present but a number of projects are in the pipeline intended to boost the sector’s supply and stimulate demand.

The Government has sought to enter partnership arrangements in various tourism-related projects most notably in the Zallaq area on the west coast and at the southern tip of the island with Durrat Al Bahrain. Although these partnership arrangements have been slow to bear fruit, the private sector is increasingly investing in new hotels and resorts in key locations and the Government has stepped in to provide major tourism resources such as the Bahrain International Racing Circuit. Despite a crackdown on alcohol sales and bands intended to encourage family-oriented tourism, Bahrain remains a relatively liberal country and this will undoubtedly assist the process of tourism development in the future.

As of the end of 2006, Bahrain’s total hotel supply consisted of 97 properties, with a total room and suite supply of 6,244 and 1,118 respectively and a total number of 10,252 beds. The four and five-star hotel-room supply collectively account for 53% of the total room supply in the Bahrain market.


3. THE TAX SYSTEMThere is hardly any direct taxation in Bahrain on either businesses or individuals. There is no personal income tax, gift or inheritance tax, or wealth tax. The only direct taxation of corporate income is on profits arising from the extraction of petrochemical products. There is also no value-added tax or sales tax. The only taxation revenue derived by the Government is the tax on petrochemical extraction mentioned above and customs and import duties.

Taxes on Business

Corporate Income Tax

Petrochemical ExtractionThe only instance of corporate income taxation in Bahrain is on profits derived from the extraction of petrochemical products.

Withholding TaxesThere are no withholding taxes on the repatriation of profits or dividends, royalties, licence fees or group charges. However, if the investor operates in other countries in the region, the withholding-tax rules in those countries will need to be taken into account in the regional business structure.

Taxes on Individuals

There is no personal taxation system for income, capital gains, gifts or inheritances in Bahrain and, furthermore, no requirements to file any form of tax return.

Other Taxes

Customs Duties

Custom duties are levied on imported goods at the rate of 5%, with the exception of tobacco products (100%) and liquor (125%).

Other Taxes and Duties

Hotels pay a tourism levy of 5% of turnover to the Government. Other Government fees related to the issues of work permits for foreigners, identity cards, driving licences, vehicle registration and inspection, amount to approximately BHD 250 (EUR 450; USD 650) per year, per person.

Local Taxes

Local taxes, which appear on electricity bills, are charged at 10% of the monthly rent paid for the property under occupation.


Social Security Contributions

Social insurance contributions payable by the employer are levied on all salaries of foreign workers at 3% and on those of Bahraini workers at 12%. The latter also contribute 6% from their salaries representing the employee’s share of contributions. In addition, a 1% salary contribution has been introduced by the Government to fund the national unemployment insurance scheme. Social security contributions are capped at a monthly salary of BHD 4,000 (EUR 7,175; USD 10,600). The main cost arising under the provisions of the Labour Law is an end-of-service indemnity, payable to foreign workers only, which is calculated as being 15 days’ salary for each of the first three years of service and 30 days’ salary for each subsequent year.


AppendixDouble Taxation Agreements

Bahrain has double taxation agreements with the following countries and jurisdictions.

China Malaysia Egypt Morocco France Singapore Jordan Syria Lebanon Thailand

Treaties have also been concluded with Algeria, Belgium, the Netherlands, Pakistan, Sudan, Turkey and Yemen, but these have yet to come into force.

Bahrain has transport tax treaties with the following countries

China United States France Yemen Singapore

A transport tax treaty has also been concluded with the Netherlands, but has yet to come into effect.

Bahrain has an inheritance tax treaty with France.

Bahrain has no social security agreements.


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Documents

Doing Business in Bahrain Guide 2008