The Kingdom of Bahrain is poised to introduce its first corporate income tax, a significant development for businesses operating within the nation. A draft law, recently submitted to Parliament under Royal Decree No. 79 of 2025, outlines a proposed corporate tax Bahrain system designed to diversify government revenue and align with international standards. This new legislation, currently under scrutiny by the Financial and Economic Affairs Committee, marks a pivotal shift in Bahrain’s economic landscape.
Understanding the Proposed Corporate Tax Law
The introduction of a Bahrain tax law represents a major change for a country that has historically relied on oil revenue and lacked a broad-based taxation system. The draft law, issued from Riffa Palace on December 31st, 2025, details the framework for this new tax, aiming for a balance between revenue generation and maintaining Bahrain’s attractiveness as an investment destination. The Council of Representatives and the Legislative and Legal Affairs Committee are also involved in reviewing the bill before it can be enacted.
Key Provisions of the Draft Law
The proposed law establishes a tiered system. A 0% tax rate will apply to taxable income up to BD200,000. However, a 10% corporate tax rate will be levied on any portion of taxable income exceeding this threshold. This structure suggests an intention to minimize the impact on smaller businesses while ensuring larger, more profitable entities contribute to the national treasury.
The core charging rules will apply to both resident companies and the permanent establishments of non-residents, triggering tax obligations when revenue surpasses BD1 million or taxable income exceeds BD200,000 within a tax period. This dual trigger ensures a broad application of the tax.
Withholding Tax Implications
Beyond the core corporate tax, the draft law introduces a withholding tax system on Bahrain-sourced income. This includes:
- 0% on dividends
- 5% on interest (reduced to 0% for payments made by government entities)
- 5% on royalties
- 5% on services
This withholding tax aims to capture revenue generated within Bahrain, even when paid to non-resident entities. Understanding these withholding tax rates is crucial for businesses engaging in cross-border transactions.
Defining Tax Residence and Exemptions
The draft law clearly defines tax residence, encompassing legal entities formed under Bahraini law, those formed abroad with ‘effective management’ located in Bahrain, and individuals present in the Kingdom for more than 183 days in a calendar year. This definition is vital for determining which entities are subject to the new tax regime.
However, the legislation also outlines several exemptions. These include:
- Government entities
- Non-profit organizations
- Government investment funds (with certain exclusions)
- Licensed pension funds
- International organizations
These exemptions are intended to protect essential public services and encourage investment in specific sectors. It’s important to note that even exempt bodies may be subject to tax if they engage in commercial activities outside their core purpose.
Implementation and Future Regulations
Currently, the draft law lacks a specific start date, indicating the government is allowing time for preparation and further refinement. The Minister of Finance will be responsible for issuing executive regulations and decisions following Cabinet approval.
Furthermore, a phased registration approach for withholding tax purposes is planned, with details to be determined by ministerial decision after Cabinet approval. This phased implementation is likely intended to ease the transition for businesses and ensure a smooth rollout of the new system. The implementation of these regulations will be a key aspect of the overall tax reforms Bahrain is undergoing.
Impact on Businesses and Investment
The introduction of corporate tax will undoubtedly impact businesses operating in Bahrain. While the 0% rate for income up to BD200,000 offers some relief to smaller enterprises, larger companies will need to factor the 10% tax into their financial planning.
However, Bahrain remains committed to maintaining its competitive edge as an investment destination. The relatively low tax rate compared to other jurisdictions, coupled with its strategic location and business-friendly environment, suggests the Kingdom aims to strike a balance between revenue generation and attracting foreign investment. Businesses should proactively assess the implications of the new law and seek professional advice to ensure compliance.
In conclusion, the proposed corporate tax Bahrain law represents a significant step towards diversifying the nation’s economy. While the details are still being finalized, the draft legislation provides a clear framework for the introduction of a corporate income tax, including provisions for withholding tax, tax residence, and exemptions. Businesses should stay informed about the ongoing developments and prepare for the implementation of this new tax regime to ensure continued success in the Bahraini market.
