Bahrain Business Tax News Introduction of Corporate Income Tax in Bahrain

A draft Income Tax Law was advanced by the Bahrain Cabinet to the Legislative Branch for review and approval. Subject to legislative approval, implementation is expected from 1 January 2027, marking a significant structural shift from Bahrain's long-standing position as a largely tax-free jurisdiction for businesses outside the oil and gas sector. 

Below, we set out the key features of the proposed regime and our recommended preparation steps  

Corporate Income Tax

Scope and applicability

Corporate Income Tax (CIT) will be imposed on taxable income derived from business activities conducted inside or outside the Kingdom by a resident legal person, on taxable income derived from business activities conducted inside the Kingdom by a resident natural person, and on taxable income derived from business activities carried out through a Permanent Establishment of a non-resident in Bahrain. 

The CIT provisions will apply to any resident person or Permanent Establishment of a non-resident that satisfies either of the following thresholds in a given tax period:

• Revenue exceeds BHD 1,000,000; or
• Taxable income exceeds BHD 200,000.  

Tax will be imposed on taxable income at a rate of:

• 0% on the portion not exceeding BHD 200,000; and
• 10% on the portion exceeding BHD 200,000. 

Key exemptions

The following categories of income are treated as exempt from tax under the draft Income Tax Law: 

• Dividends and other profit distributions received by a resident legal entity.
• Dividends, other distributed profits and capital gains arising in relation to a qualifying participation interest. 
• Income of a qualifying foreign Permanent Establishment. 
• Income derived from business activities classified as financial services, professional services, or logistics services in accordance with the Regulations.•
• Income realized and applied for public benefit purposes. 
• Grants of all forms provided by a Government Entity.

Other notable features of the Corporate Income Tax regime

• Interest deductibility: A taxable person may not deduct net interest expenses from taxable income at a rate exceeding 30% of its positive accounting EBITDA for the relevant tax period, excluding exempt income.  This restriction does not apply where the taxable person's net interest expenses for the relevant tax period do not exceed BHD 1,400,000. 
• Tax loss relief: Tax losses may be carried forward to subsequent Tax Periods, subject to a 50% cap on the amount that may be offset against taxable income in any single period.
• Transfer Pricing: Transactions with related parties must be conducted on arm's-length terms. Where terms differ from those that would have been agreed between independent parties, the National Bureau for Revenue may adjust taxable income accordingly.
• Tax grouping: Two or more taxpayers may form a tax group where one member directly or indirectly owns at least 75% of the other, enabling (i) tax losses to be transferred between group members and (ii) intra-group asset transfer relief, whereby no gain or loss arises on transfers of assets or liabilities between group members because transfers are treated at tax book value. Such asset transfer relief is subject to a five-year clawback. 
• Non-deductible expenses: Expenses incurred to generate exempt income (other than interest expenses), capital expenditures, entertainment expenses, fines and penalties, illegal payments, donations, and grants (save as specified in the Regulations), and dividends or profit distributions paid by the taxpayer are all treated as non-deductible.

Matters deferred to the Income Tax regulations

The draft Income Tax Law establishes the broad framework of the Corporate Income Tax regime but expressly defers a significant number of critical computational and procedural details to the Income Tax Regulations, which have not yet been published. Key matters left to the Regulations include:

• Tax depreciation: The Regulations shall specify the rules, conditions, and controls for calculating tax depreciation, including the principles and mechanisms for determining depreciation and amortization, and the categories of depreciable assets.
• Bad debts: Bad debts need to meet the conditions specified in the Regulations to be deductible. 
• Entertainment expenses: Entertainment expenses will be non-deductible as specified in the Regulations.
• Exempt activities - Financial Services, Professional Services and Logistics Services: These activities will be specified in the Regulations.
• Participation exemption conditions: The Regulations shall determine the rules, conditions, and procedures for applying the participation exemption, including in relation to the prospective intent holding period rule.
• Transfer pricing methodologies: The Regulations will specify the conditions and controls for applying the transfer pricing provisions, including the rules, methods, and mechanisms related to pricing.
• Tax grouping: The restrictions related to multiple transferees or changes in ownership or business will be set out in the Regulations.
• Registration: Registration is to be carried out in accordance with the rules, conditions, and controls specified in the Regulations.
• Tax return filing deadlines: The Tax return form and when a tax return must be submitted will be specified in the Regulations.
• Advance tax instalment: Taxpayers must pay tax in advance instalments in accordance with the rules, controls, procedures, and deadlines specified in the Regulations. 

Withholding Tax

Withholding Tax will be imposed on payments of the following types of income generated in Bahrain by non-residents which are not attributable to a Permanent Establishment of the non-resident in Bahrain, at the following rates:

The Withholding Tax will constitute the final tax liability on such income.  

Any resident or Permanent Establishment of a non-resident that makes payments of income arising in Bahrain (other than a natural person not carrying on a business activity) will be required to calculate, collect, and remit the Withholding Tax to the National Bureau for Revenue on a quarterly basis.

Interaction with the Domestic Minimum Top-Up Tax

The proposed Corporate Income Tax will operate alongside the existing Domestic Minimum Top-Up Tax ("DMTT"), which has been in effect since 1 January 2025. The DMTT applies to multinational enterprise groups with global consolidated revenues of at least EUR 750 million and ensures a minimum effective tax rate of 15% on Bahraini operations. For businesses within scope of both regimes, the expectation is that Corporate Income Tax will be computed first, with the DMTT then operating as a top-up where the effective tax rate on Bahraini operations falls below the 15% global minimum threshold.   

Recommended Preparation Steps

To ensure a smooth transition for the introduction of Income Tax in Bahrain, we recommend the following steps:

Corporate Income Tax

1. Analyze the impact of the draft Income Tax Law.
   • Determine whether you will fall within the scope of the new Corporate Income Tax.
   • Evaluate your investments and holding structure for the participation exemption.
   • Evaluate whether your Foreign Permanent Establishments will qualify for the exemption.
   • Review financing arrangements considering the 30% EBITDA interest deductibility cap.
   • Review the transfer pricing arrangements and documentation for related party transactions.
2. Reassess the implications upon the release of the final Income Tax Law.
3. Review the Income Tax Regulations as they become available.

Financial forecasts and budgets should be updated after each phase to reflect the projected Corporate Income Tax cost. 

Withholding Tax

1. Review all existing contracts with non-residents extending beyond 1 January 2027 to identify payments that will be subject to Withholding Tax and assess the financial impact of the Withholding Tax.
2. Ensure that new contracts with non-resident counterparties adequately address the Withholding Tax implications, including any gross-up obligations.
3. Assess the availability of relief under Bahrain's Double Tax Treaties. Where treaty benefits may be available, we recommend proactively requesting tax residency certificates from non-resident recipients in advance of the implementation date.

Compliance and administration

1. Develop policies and procedures for Income Tax. 
2. Reviewing your accounting systems and financial reporting processes to ensure readiness for Income Tax obligations.
3. Design the records and define the supporting documents to be maintained to verify taxable income and Withhold Tax payable.

How Deloitte can assist:

We will continue to monitor the progress of the Income Tax Law through the legislative process and will update you as further details become available.Should you have any questions in relation introduction of Income Tax in Bahrain or require assistance to assess its impact on your business, please do not hesitate to contact us.