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Taxation of Foreign Enterprises in the Kingdom of Bahrain

Brolin, Johanna LU (2015) LAGM01 20151
Department of Law
Abstract
The tax levied in the Kingdom of Bahrain is limited to taxation on companies involved in certain activities related to crude oil and natural hydrocarbon within the country. The majority of this type of companies are owned by the Bahraini government, but is however in no way restricted to Bahraini owners as the Bahraini corporate registration law allows for foreign ownership. The tax rate is 46% of the income from such activities, but apart from that there is no Corporate Income Tax (CIT) nor Personal Income Tax (PIT) levied – on either local or foreign enterprises.

In order for a foreign enterprise to be taxed across borders it is essential to decide whether a permanent establishment (PE) can be considered constituted. Unless there is... (More)
The tax levied in the Kingdom of Bahrain is limited to taxation on companies involved in certain activities related to crude oil and natural hydrocarbon within the country. The majority of this type of companies are owned by the Bahraini government, but is however in no way restricted to Bahraini owners as the Bahraini corporate registration law allows for foreign ownership. The tax rate is 46% of the income from such activities, but apart from that there is no Corporate Income Tax (CIT) nor Personal Income Tax (PIT) levied – on either local or foreign enterprises.

In order for a foreign enterprise to be taxed across borders it is essential to decide whether a permanent establishment (PE) can be considered constituted. Unless there is a permanent establishment in Bahrain it may be difficult to tax the foreign enterprise, and if taxation is in fact made in both resident state and source state (Bahrain), a situation of double taxation may arise. Bahraini tax law lacks a domestic definition of a PE, but the term is defined in agreements on the avoidance of double taxation (DTAs) made between Bahrain and 38 other countries. The definitions of these establishments vary from country to country and are far from easily defined. In order to clarify the meaning of the DTAs certain methods of interpretation can be used. Generally, the Vienna Convention on the Law of Treaties (VCLT) will serve as a guide to understand the meaning of an article. In addition, DTAs based on the Model tax conventions made by the OECD and the UN may be interpreted in the light of these and their commentaries. In order to understand in what specific situation a foreign enterprise will be considered constituting a PE in Bahrain, it will be important to consult the DTA applicable and has to be made individually depending on the country involved, i.e. the same definition will not be applicable on country X as on country Y in most scenarios. The term permanent establishment has been subject to heated discussions worldwide, and there is still no clear definition of the term. The OECD has recently presented suggested changes in the PE definition that will have impact on future interpretations. Consequently a foreign enterprise in Bahrain will be taxed depending on the definition of a PE made in the applicable DTA. However, to this point no source-based taxation has been made in Bahrain on foreign companies, due to the fact that the domestic tax rate is limited to oil and hydrocarbon related industries.

The rules on source-taxation in Bahrain are in line with international principles on source taxation. It can, simplified, be said that it is every state’s right to levy tax, due to principles of state sovereignty. As a result, it should also be up to the country at hand to decide whether the tax levied should be 0% or as in this case, nil apart from when involved specific activities. (Less)
Abstract (Swedish)
I kungadömet Bahrain är beskattningsmöjligheterna ytterst begränsade. Den enda beskattningsgrund som finns är 46 % skatt på företag involverade i olja och kolväten. Majoriteten av de företag som bedriver denna typ av verksamhet i Bahrain är just nu begränsad till bahrainska företag, ofta med anknytning till den bahrainska staten, även om denna typ av aktivitet på intet vis är begränsad till att endast bedrivas av bahrainare. Ett utländskt företag som bestämmer sig för att bedriva verksamhet i Bahrain kommer alltså bara vara skattskyldig för inkomst hänförlig till sådana aktiviteter. I de fall Bahrain beskattar ett utländskt företag, finns möjligheten att företaget även blir beskattat i hemstaten, varför en risk för dubbelbeskattning... (More)
I kungadömet Bahrain är beskattningsmöjligheterna ytterst begränsade. Den enda beskattningsgrund som finns är 46 % skatt på företag involverade i olja och kolväten. Majoriteten av de företag som bedriver denna typ av verksamhet i Bahrain är just nu begränsad till bahrainska företag, ofta med anknytning till den bahrainska staten, även om denna typ av aktivitet på intet vis är begränsad till att endast bedrivas av bahrainare. Ett utländskt företag som bestämmer sig för att bedriva verksamhet i Bahrain kommer alltså bara vara skattskyldig för inkomst hänförlig till sådana aktiviteter. I de fall Bahrain beskattar ett utländskt företag, finns möjligheten att företaget även blir beskattat i hemstaten, varför en risk för dubbelbeskattning föreligger.

Dubbelbeskattning kan ibland avhjälpas med hjälp av dubbelbeskattningsavtal, vilka har som syfte att förhindra situationer där samma inkomst beskattas i två länder. Bahrain har ingått sådana avtal med 42 länder, varav 38 idag är i kraft.

Ett företag kan beskattas i Bahrain i den mån det kan fastställas att de har ett ”Permanent Establishment” (PE) där. Inkomst hänförlig till sådant ställe kan enligt dubbelbeskattningsavtalen (artikel 7) beskattas i källstaten. Definitionen av ett PE återfinns i modellavtal från såväl FN som OECD, men det är ändå svårt att ge en konkret förklaring på vad ett sådant ställe innebär exakt. Nya förslag om hur PE ska utvecklas är även på gång genom BEPS. För att underlätta i tolkningen av ett dubbelbeskattningsavtal finns vissa regler i VCLT som kan följas, där b.la. ordalydelse och sammanhanget spelar stor roll. Varje skatteavtal som Bahrain ingått är olika uppbyggt, varför det är viktigt att i varje särskilt fall undersöka hur PE definieras i just det skatteavtal som är tillämpligt emellan just de länderna.

Regleringen om källbeskattning såsom den ser ut i Bahrain är i linje med de principer som anammats internationellt, där varje land ska ha rätt att beskatta inom sitt territorium enligt principer om länders suveränitet.

Det är extremt stor sannolikhet att ett utländskt företag i Bahrain inte beskattas överhuvudtaget i landet, varför en situation där ett dubbelbeskattningsavtal fyller funktion sällan kommer uppstå. Men i de situationer de faktiskt beskattas kommer en definition av PE vara relevant. Dubbelbeskattningsavtalen fyller givetvis även en funktion för bahrainska företag som i sin tur vill flytta delar av sin verksamhet utomlands, i den mån det finns sådana avtal. För att avgöra om ett utländskt företag i Bahrain kan anses ha ”PE” där, måste det specifika dubbelbeskattningsavtal som är tillämpligt länderna emellan användas, vari tolkningen ska göras b.la. beroende på om det specifika avtalet är baserat på OECD eller FN modellen, där även tolkningsreglerna i VCLT aktualiseras. (Less)
Please use this url to cite or link to this publication:
author
Brolin, Johanna LU
supervisor
organization
course
LAGM01 20151
year
type
H3 - Professional qualifications (4 Years - )
subject
keywords
Skatterätt, permanent establishment, beskattning, Bahrain
language
English
id
5434106
date added to LUP
2015-06-17 13:00:04
date last changed
2015-06-18 14:04:25
@misc{5434106,
  abstract     = {The tax levied in the Kingdom of Bahrain is limited to taxation on companies involved in certain activities related to crude oil and natural hydrocarbon within the country. The majority of this type of companies are owned by the Bahraini government, but is however in no way restricted to Bahraini owners as the Bahraini corporate registration law allows for foreign ownership. The tax rate is 46% of the income from such activities, but apart from that there is no Corporate Income Tax (CIT) nor Personal Income Tax (PIT) levied – on either local or foreign enterprises. 

In order for a foreign enterprise to be taxed across borders it is essential to decide whether a permanent establishment (PE) can be considered constituted. Unless there is a permanent establishment in Bahrain it may be difficult to tax the foreign enterprise, and if taxation is in fact made in both resident state and source state (Bahrain), a situation of double taxation may arise. Bahraini tax law lacks a domestic definition of a PE, but the term is defined in agreements on the avoidance of double taxation (DTAs) made between Bahrain and 38 other countries. The definitions of these establishments vary from country to country and are far from easily defined. In order to clarify the meaning of the DTAs certain methods of interpretation can be used. Generally, the Vienna Convention on the Law of Treaties (VCLT) will serve as a guide to understand the meaning of an article. In addition, DTAs based on the Model tax conventions made by the OECD and the UN may be interpreted in the light of these and their commentaries. In order to understand in what specific situation a foreign enterprise will be considered constituting a PE in Bahrain, it will be important to consult the DTA applicable and has to be made individually depending on the country involved, i.e. the same definition will not be applicable on country X as on country Y in most scenarios. The term permanent establishment has been subject to heated discussions worldwide, and there is still no clear definition of the term. The OECD has recently presented suggested changes in the PE definition that will have impact on future interpretations. Consequently a foreign enterprise in Bahrain will be taxed depending on the definition of a PE made in the applicable DTA. However, to this point no source-based taxation has been made in Bahrain on foreign companies, due to the fact that the domestic tax rate is limited to oil and hydrocarbon related industries. 

The rules on source-taxation in Bahrain are in line with international principles on source taxation. It can, simplified, be said that it is every state’s right to levy tax, due to principles of state sovereignty. As a result, it should also be up to the country at hand to decide whether the tax levied should be 0% or as in this case, nil apart from when involved specific activities.},
  author       = {Brolin, Johanna},
  keyword      = {Skatterätt,permanent establishment,beskattning,Bahrain},
  language     = {eng},
  note         = {Student Paper},
  title        = {Taxation of Foreign Enterprises in the Kingdom of Bahrain},
  year         = {2015},
}