Relevant Activities Under Economic Substance Requirements

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Relevant Activities Under Economic Substance Requirements

economic substance requirements

In response to the work of the OECD as well as the European Union (EU) on fair taxation, the minister of Industry, Commerce and Tourism (MOIST) and the Central Bank of Bahrain (CB) issued a Ministerial Decision no. 106 on 27 December 2018 and a Directive on 22nd November 2018 respectively, both of which are concerning the Economic Substance requirements.

The above Ministerial decision and CBB Directive mandate companies with a Commercial Registration (CR) in the Kingdom of Bahrain that undertakes “Relevant Activities” to locally maintain adequate economic substance.

Relevant activities:

  • Distribution and service center activities
  • Headquarters activities
  • Holding company activities
  • Leasing activities (other than those activities undertaken by licensees of the Central Bank of Bahrain – CBB)
  • Shipping activities; and
  • Intellectual property activities in Bahrain

Economic Substance Test

Organizations occupied in specified activities must meet certain conditions to show their economic substance. This is exhibited by two-part test.

The initial part of the test decides whether the relevant entity is conducting its core income-generating activities (CIGA) in Bahrain, which should be undertaken with:

  • an adequate amount of annual operating expenditure;
  • an adequate level of qualified full-time employees; and
  • an adequate number of physical offices.

The entities which are relevant are not permitted to outsource any of their CIGA outside Bahrain; however they may outsource to providers in Bahrain, provided that the activities take place in Bahrain and adequate supervision of the activities is demonstrated. Bahrain Tax is leading auditing and accounting firm in bharain.

The second part of the test decides if the relevant entity’s direction and management are located in Bahrain, which is fulfilled by meeting the following conditions:

  • an adequate number of meetings of the relevant entity’s board of directors must take place in Bahrain;
  • at least a quorum of the board must be physically present in Bahrain during the meetings;
  • strategic decisions concerning the relevant entity must be made at the above-mentioned meetings and recorded in the meeting minutes;
  • all of the relevant entity’s records and minutes must be kept in Bahrain; and
  • the board of directors as a whole must possess the necessary knowledge and expertise to discharge its duties.


According to the article 9 of the ESR, an entity undertaking a relevant activity that:

a) Fail to file an annual return; or
b) Fail to meet the economic substance requirements for relevant activities , will be deemed non-compliant and will be subject to sanctions.

Non-compliant entities may be subject to at least one of the following actions:

  1. A warning notice
  2. Suspension of CR
  3. Striking off the trader from the CR
  4. Financial penalties
  5. Criminal prosecution

The factors which will dictate the type of sanctions imposed will depend on the type of breach, the number of times it has happened, and the MOICT’s judgement.

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