Bahrain presents a prime opportunity for investors looking to enter the Gulf Cooperation Council (GCC) market. Ranked highly by the World Bank for ease of starting a business, Bahrain offers a progressive investment climate characterized by a skilled, diverse workforce and robust financial services. Significant reforms now allow foreign investors to own 100% of businesses in many sectors, enhancing its appeal. This guide explores the strategic benefits, streamlined processes, and economic diversification that make Bahrain a lucrative destination for business ventures.
Based on the findings by the World Bank Group for the year 2020, Bahrain is placed 3rd on the list of 20 countries in the Middle Eastern and North African countries with the most favorable conditions for setting up a business and is 43rd in the global list of 190 states. This is due to the country's developed financial services sector, skilled multicultural workforce, and strategic initiatives that encourage the establishment of new businesses in the country.
Investing in Bahrain: An overview
In 2018, Bahrain made significant changes to its foreign investment laws, allowing foreigners to own 100% of businesses in various sectors without a local partner. This change has opened up opportunities for foreign investors in areas like information and communications, manufacturing, real estate, healthcare, arts, entertainment, and professional services, enabling them to own full stakes.
However, it's important to note that foreign ownership is still restricted in certain industries such as oil and gas, military, and public transport. Potential investors should verify whether their intended business activities fall under these restrictions before proceeding.
Historically reliant on oil and gas, Bahrain is diversifying its economy to include sectors like banking, chemicals, plastics, tourism, and technology. The country offers numerous supports for new businesses, such as free trade zones, tax incentives, and economic reform programs.
Steps to setting up a business in Bahrain
Starting a business in Bahrain, including registration and obtaining the necessary licenses, is straightforward. Nonetheless, it's advisable to engage a local consulting firm. Understanding the local business culture, market, and other regional nuances is crucial for success, and local experts can provide valuable guidance through the establishment and growth phases of a business.
Choose the appropriate business structure
There are various types of business entities that one can register in Bahrain. The type you choose will define your operational limits, liability and tax obligations:
- Public Shareholding Company: This type requires a minimum of two founding shareholders and allows ordinary members of the public to purchase shares. Liability for each shareholder is limited to the extent of their investment.
- Closed Shareholding Company: This is the same as the public shareholding company; with the exception that its shares cannot be available to the public. This setup is ideal for simply structured businesses where individual shareholders do not wish to have their seed investment diluted.
- Limited Liability Company (LLC): This type of company can comprise 2 - 50 partners, whereby liability is limited to the amount of share capital equity contributed to the business. LLC's are mainly common in small and medium enterprises (SMEs).
- Joint Liability Company: This type of company is incorporated by two or more people who are liable for the entire obligations of the company. It is referred to as a general partnership.
- Limited Partnership: A partnership consisting of general partners who have unlimited liability and limited partners who have limited liability to the extent of their share. The general partners run the business, and the limited partners have interests in the business as investors.
- Company Limited by Shares: This form of company has fully liable joint partners, together with some limited liability partners. This requires at least four members.
- Single-Person Company: This is owned by one individual, and that individual bears the legal limit of liability at the level of share capital contributed. This is appropriate for sole proprietors who want to safeguard their personal assets.
- Foreign Branch and Representative Office: Appropriate for foreign companies intending to run business activities in Bahrain. A branch office is an extension of the parent company, while a representative office has no powers of commercial activities, only marketing and promotional activities.
Registering the business
The business registration in Bahrain is done through the Ministry of Industries, Commerce, and Tourism (MOICT). This commences with the choice of a business name along with other necessary documents, including identification documents and proof of address. However, this whole procedure can be carried out through the SIJILAT online platform.
Good to know:
Historically, share capital in a significant amount was necessary to start a business in Bahrain, but this particular requirement has been reviewed. The share capital can be BHD 50 (approx. USD 130). However, in case someone wishes to apply for a self-sponsored foreign investor visa, then a BHD 100,000 share capital is a minimum requirement.
Obtaining a business license
After completing company registration, businesses must apply for the appropriate licenses based on their specific activities. The necessary licenses include:
- Commercial Registration (CR): Required for all business entities.
- Sectoral Licensing: Businesses in fields such as hospitality, manufacturing, healthcare, and retail may need additional permits.
License approval might be delayed and could involve multiple authorities. For instance, restaurants and food-related businesses often need clearance from the Bahrain Food Safety Authority.
Licensing requirements include:
- Tourism lcense: Needed for operating within the hospitality and tourism sectors, such as hotels, travel agencies, and event planners.
- Production license: Issued by the Ministry of Industry for companies in the production and industrial sectors.
- Healthcare license: Granted by the National Health Regulatory Authority (NHRA) to healthcare providers.
The licensing process can be lengthy if multiple levels of authority approvals are required, often needing detailed business plans. Entrepreneurs are advised to work with a local business consultant or lawyer to streamline the process and improve the likelihood of obtaining the necessary approvals efficiently.
Good to know:
While Bahrain has significantly liberalized its investment environment, some sectors still restrict foreign investment. Industries such as oil and gas exploration, defense, and public utilities often require joint ventures with local partners or special government permissions. Therefore, it's crucial for potential investors to conduct thorough due diligence and ensure compliance with ownership regulations before registering a business in the country.
Establish a corporate banking account
The next step after registering a business and obtaining the necessary licenses is to open a corporate bank account. In Bahrain, banks like the National Bank of Bahrain (NBB), ABC-Bank, and HSBC offer corporate banking services. These services require documentation such as commercial registration details, copies of licenses, identification, and information about shareholders when necessary.
Free Trade Zones in Bahrain
Bahrain hosts three free trade zones, each designed to support specific business activities like manufacturing, distribution, and logistics, offering attractive incentives:
Bahrain Logistics Zone (BLZ)
Focused on logistics and distribution, the BLZ is strategically located near the Khalifa Bin Salman Port, which is ideal for companies involved in goods movement throughout the Gulf area.
Bahrain International Investment Park (BIIP)
Positioned near the airport, the BIIP caters primarily to manufacturing and industrial activities. Benefits for businesses operating here include zero corporate tax, 100% foreign ownership, and duty-free access to GCC markets for products that meet the rules of origin. BIIP offers additional perks like low land lease rates and duty-free imports, aiming to attract manufacturers targeting the GCC's USD 1.5 trillion GDP market.
Bahrain International Airport Free Zone
Located within Bahrain International Airport, this zone is tailored for businesses in aeronautical logistics, light industrial activities, and those producing high-value products, offering a prime logistical advantage.
Benefits of establishing a business in the Free Zones
100% foreign ownership: Businesses in the free zones can be fully foreign-owned.
Tax benefits: There are no corporate or individual income taxes for entities within the free zones. Additionally, these businesses benefit from tax-free imports and exports of goods and services within the zones.
Land and electricity incentives: Companies may receive cost-saving incentives on land and electricity, enhancing their operational efficiency and growth potential.
Virtual offshore activities: Although physically located within the GCC, companies in free zones are treated as offshore entities, which can offer strategic advantages.
Good to know:
There are restrictions on free zone companies when dealing with the local Bahraini market or other GCC markets directly. These restrictions may encourage businesses aiming for broader GCC market access to establish operations outside the free zones to avoid tariffs and comply with trade origin regulations.
Taxation in Bahrain
Bahrain does not impose corporate income tax on companies in the oil and gas sector, nor does it levy individual income tax on employee salaries. Additionally, there are no capital gains taxes, withholding taxes, or wealth taxes for businesses operating within its borders. This favorable tax regime significantly enhances Bahrain's attractiveness as a business destination.
However, in 2019, Bahrain introduced a Value Added Tax (VAT), which was implemented in 2022 at a rate of 5%. VAT applies to almost all goods and services except for essential food items, medical care, and education. Businesses exceeding a certain turnover threshold are required to register for VAT, and they must file returns and make payments at specified intervals.
Goods imported into Bahrain are generally subject to a 5% customs duty, although products entering Bahrain's free trade zones are exempt. Furthermore, goods that receive rules of origin certificates can benefit from duty-free trade within the broader GCC market.
Employment and labor regulations in Bahrain
Staff recruitment, labor practices, and employment
The Labor Market Regulatory Authority (LMRA) oversees employment regulations in Bahrain, including the Bahrainisation policy. This policy requires foreign-operated businesses to employ a certain percentage of Bahraini nationals, which varies by industry. Companies must adhere to this regulation during their recruitment processes.
While it is common for businesses in Bahrain to hire expatriates, these employees must be provided with work permits and residence passes. The LMRA also offers a flexible permit that allows foreign workers to work for multiple employers, although this is mostly available to low-skilled laborers and less so in skilled or managerial positions.
Employing workers and registration with LMRA
All self-employed individuals and businesses in Bahrain must register their employees with the LMRA and provide them with healthcare services or insurance. Bahrain's liberal work visa policy facilitates the recruitment of skilled expatriates from abroad.
Health considerations are also vital, as disease and injury can impact an employee's ability to work. Employers are required to ensure that all employees are covered by health insurance through the National Health Insurance Program. Additionally, employees must be enrolled in the Social Insurance Organization (SIO) for social contributions. Understanding and complying with Bahrain's labor laws helps businesses avoid penalties and ensures smooth operations.
Cultural background and business practices in Bahrain
For instance, knowing and fitting into the local business practices is critical to prospering in Bahrain. In the Gulf states, business transactions are almost dependent on building relationships and trust over lengthy periods of transactions. Foreign investors are, however, expected to be sensitive to the Islamic culture and other cultural factors when pursuing business in Bahrain.
Building on this foundation of trust and cultural understanding, it is important for foreign investors to approach business dealings in Bahrain with patience and respect for local customs.
Meetings often begin with social pleasantries, as Bahrainis value personal connections and hospitality as much as professional exchanges.
Business attire should be formal, with men typically wearing suits and women opting for formal clothing.
Punctuality is appreciated, but it is equally vital to remain flexible, as schedules may shift to accommodate unexpected events or hospitality traditions.
Additionally, addressing senior members of a team with appropriate titles and showing deference to hierarchical structures can foster goodwill and demonstrate cultural awareness, enhancing the likelihood of successful partnerships.
Useful links:
World Bank Group - Doing Business Rankings 2020
Gulf Business - Ease of Doing Business in Bahrain 2020
Bahrain Economic Development Board (EDB)
Ministry of Industry, Commerce, and Tourism (MOICT) Bahrain
Invest in Bahrain - Government Initiatives for Businesses
SIJILAT - Online Business Registration Platform, MOICT Bahrain
Social Insurance Organization (SIO) Bahrain
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