Bahrain's tax system is designed to attract expatriates and multinational companies with its favorable taxation policies. The absence of personal income tax, capital gains tax, and inheritance tax makes Bahrain an appealing destination for professionals and businesses. While Bahrain is considered a tax haven, it has also introduced other forms of taxation, such as value-added tax (VAT), social security contributions, and excise taxes, which apply to both residents and businesses. This guide will explore Bahrain's tax system in detail, focusing on how various taxes and levies impact expatriates, residents, and businesses within the country.
Personal income tax in Bahrain
Tax-free income is one of the major reasons for relocating and working in Bahrain. Employment earnings for both Bahraini nationals and expatriates are not subject to any taxes, therefore making Bahrain a favorable place for professionals keen on increasing their personal incomes.
However, expatriates residing in Bahrain still must meet the tax obligations of their native countries. For instance, the United States applies income tax to its citizens irrespective of the country they reside in. To not be taxed twice, Bahrain has signed non-double taxation agreements recently with several states. These include:
- United Kingdom;
- Germany;
- India;
- France;
- Egypt;
- China;
- The Philippines.
These agreements are meant to ensure expats are not taxed on the same income in Bahrain and their country of origin. Expatriates should be aware of their international tax liabilities and contact local tax specialists or tax authorities in their native countries.
Social security contributions in Bahrain
Even though there is no income tax, any Bahraini national and resident expatriate aliens must contribute to national and private attributes or social security, which encompasses pension plans, unemployment insurance, and other social benefits.
Expatriates contribute to social security payments in Bahrain but to a lower degree than Bahraini nationals. These contributions are focused on workplace injury insurance and unemployment insurance coverage as follows:
- Employee contribution: 1% of gross salary;
- Employer contribution: 3% of gross salary.
Though the Bahrain government does not provide pensions to expatriates, their contributions serve the Unemployment Compensation Fund and cover any workplace injury. Such contributions are also made every month from salary, which is regarded as a set-off.
Municipal tax in Bahrain
In addition to the required social security contributions, expatriates who rent a house in Bahrain, either personally or through a corporation, are also subject to a local government tax. This tax funds the construction of community facilities and the provision of local services, including water and sewage systems.
Types of municipal tax
- Amount of tax: 10% on the average monthly rental that is charged.
- Tax subject: This tax is only applicable to expatriates.
- Tax remittance: There are instances when the rent charged in a lease includes the municipal tax. However, the expatriates should ask their landlords/real estate agents whether this tax is part of the lease and covers the entirety of the lease or whether it is paid in addition to the lease.
This municipal tax also contributes to paying for local services like waste collection and road micro maintenance as well as some other infrastructure in suburban areas.
Value-added tax in Bahrain
Since the beginning of 2019, Bahrain has been implementing Value Added Tax (VAT) initially at a rate of 5%. This change marked a significant transformation in the country's taxation system. As of January 2022, the standard VAT rate has increased to 10%. This adjustment aims to decrease the government's reliance on the oil sector and diversify its revenue sources. The National Revenue Bureau (NBR) levies VAT on most goods and services in Bahrain.
Transmission and distribution of VAT is as follows:
- Zero-rated items typically include basic foods, medicine, and educational training.
- The standard VAT rate is set at 10%.
- Exemptions apply to financial services, insurance, and specific real estate transactions.
Businesses with revenue/sales above BHD 37,500
It's essential to understand that businesses in Bahrain with a taxable turnover exceeding BHD 37,500 (approx. 99,700 USD) are required to pay VAT on their transactions. These businesses must submit specific forms for VAT returns through the NBR's online tax portal. Generally, operational expenses are subject to VAT, allowing companies to recover this amount. However, non-compliance with VAT regulations carries legal consequences. Therefore, it is crucial for policymakers in Bahrain to ensure adherence to these VAT rules and procedures to avoid legal issues.
Corporate taxation in Bahrain
The corporate tax policies in Bahrain are some of the most lenient in the entire Gulf region. Most businesses in Bahrain do not pay corporate income tax, which is a distinct benefit for investors operating in the country.
Oil and gas companies are an exception
While most businesses in Bahrain are exempt from corporate tax, oil and gas companies face a significant tax rate of 46% on profits. This high tax burden is designed to tap into the revenue potential of the oil and gas sector, allowing other sectors of the economy to remain tax-free.
Inclusion of businesses in the Free Zones
Bahrain offers Free Trade Zones (FTZs) that provide numerous benefits to businesses. These advantages include complete foreign ownership at 100%, no customs duties on imported goods, and unrestricted capital repatriation. Companies seeking tax-efficient operations are increasingly attracted to facilities like the Bahrain International Investment Park (BIIP) and the Bahrain Logistics Zone (BLZ).
Absence of capital gains, wealth and inheritance tax in Bahrain
Bahrain's attractiveness to expatriates and investors is significantly enhanced by its absence of capital gains, wealth, and inheritance taxes.
Excise tax on harmful products in Bahrain
To promote health and reduce the consumption of unhealthy products, Bahrain has implemented excise taxes, aligning with initiatives set by the Gulf Cooperation Council. These taxes are levied on products like tobacco and sugary drinks as follows:
- Tobacco products: 100%;
- Energy drinks: 100%;
- Soft drinks: 50%.
The introduction of these excise taxes has led to higher selling prices for these products, which aims to decrease their consumption and generate revenue for health initiatives.
Customs duties and taxes on imports in Bahrain
Bahrain imposes customs duties on a wide range of imported goods. The standard duty rate for most items is 5%, with exceptions for specific categories such as vehicles and electrical appliances. Below are some examples:
- Standard goods: 5% customs duty,
- Luxury and high-value items: Higher tariffs apply to luxury goods, including cars and expensive electrical equipment.
Good to know:
Educational and some medical items may be exempt from customs duties.
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