Economic substance law ‘is game changer’

MANAMA: KPMG in Bahrain has called on all commercial registration (CR) holders in Bahrain to assess their economic substance.

The advisory firm said the economic substance legislation being introduced in Bahrain is a game changer from an international tax perspective.

According to the new mandate, legal entities carrying on business activities in or through Bahrain are now required to demonstrate that substantial economic activity is undertaken in Bahrain.

The Industry, Commerce and Tourism Ministry and the Central Bank of Bahrain (CBB) issued a Ministerial Decision No 106 on 27 December 2018 and a Directive on 22 November 2018 respectively setting out the economic substance requirements to be satisfied by in-scope entities carrying on relevant activities.

“The introduction of economic substance rules in Bahrain was in alignment with the recommendations imposed by the European Union (EU). Similar move was made by the UAE. Bahrain is indeed moving towards aligning itself with the international standards from a tax perspective,” said KPMG in Bahrain partner and head of tax and corporate services Philippe Norre.

The new requirement is applicable from January 1, 2019 on traders applying for new commercial registrations as well as CBB licensees.

However, a transitional period of six months was granted for legal entities registered/incorporated prior to January 1.

“Failure to comply with the new regulation can lead to substantial fines between BD1,000 and BD100,000, to suspension of CR and/or imprisonment for non-compliance. Therefore, businesses should start reviewing their activities today and evaluate the level of additional substance required to be satisfied, if any,” added Mr Norre.

According to the firm’s tax and corporate services manager Nik Faiziman Affandi, “Economic substance requires profits to be matched with the economic activities generating those profits. What used to be a favourite tax avoidance strategy by multinational corporations by incorporating a special purpose vehicle (SPV), in a low or zero-tax jurisdiction that is merely acting as a conduit company, economic substance legislation aims at counter-acting the tax effects of such strategy and ultimately providing more tax transparency and tax fairness globally through automatic exchange of information and mandating entities to have substantial economic activity to substantiate their profits respectively.”

Mr Affandi believes that SPVs that are basically dormant and shell companies with an abundance of profit that is untaxed, may soon be history.



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