Company formation in brief
Commercial activities of all organizational and legal forms of enterprises in the Kingdom of Bahrain are regulated by the Law on Commercial Companies No. 28 of 1975 with its subsequent amendments, as well as Government Decree No. 25 of 1977. This regulation legalized a specific type of enterprise, which is known today in Bahrain as an “exempt” company or offshore company.
Definitions and concepts in Islamic law are difficult to translate directly. Since Bahrain does not follow the continental or Anglo-Saxon (common) system of law, for example, the term "company" is often used in Bahrain to refer to both a company and a partnership, and the term "partner" refers to both a partner in a partnership and a shareholder in companies.
To understand the essence of a company (partnership) in Bahrain, the following definition is used: “a contract under which some persons have made contributions (in cash assets or in the form of services), having agreed to jointly participate in an enterprise with the aim of making a profit (and also agreed to share in the profit and in losses due to the activities of the enterprise) ".
The legislation allows the establishment of the following types of businesses in Bahrain:
• Limited liability company
• Joint Stock Company
• Branch of a Foreign Company
Any other types of businesses that are not associated with the above are not recognized as legal in Bahrain.
The Law on Commercial Companies allows the establishment in Bahrain of an enterprise with 100% foreign investment if the following conditions are met:
• the purpose of the investment is to establish an industrial enterprise in the country;
• most of the capital is invested in an industrial development project;
• the purpose of the enterprise is to organize a center for the distribution of goods and services.
The law allows for the establishment in Bahrain of a partnership of the following organizational and legal forms:
• Unlimited Partnership
• Limited Partnership
• Partnership Limited By Shares
Limited Liability Company is a closed company, the shares of which are prohibited for public subscription.
The company is established by at least two and at most 50 shareholders, whose liability is limited to the shares of participation in the company. At least one shareholder must be a resident of Bahrain.
The life of such a company is limited to 25 years, after which, however, it can be extended by an anonymous decision of the shareholders meeting.
A company can only have one manager in its management. Managers are not required to be shareholders of the company.
Limited liability Company cannot engage in banking, insurance and brokerage activities.
At least 51% of the authorized capital of the partnership and Limited liability company must be owned by residents of Bahrain.
In a Joint Stock Company all members are liable for debts up to the value of their shareholdings in a company. This type of enterprise can be established in Bahrain as:
• Public joint stock company
• Closed joint stock company
• Exempt joint stock company (offshore company)
A public joint stock company can only be established with the permission of the Minister of Commerce, and, additionally, by a decree of the Emir of Bahrain. The minimum number of shareholders is seven and they sign from 7 to 20% of the company's shares.
A public joint stock company receives a permit to operate for a fixed period or period necessary for the company to achieve a certain goal.
The public stock company is governed by a board of directors consisting of 3 to 12 directors, each of whom is appointed for 3 years. Most directors must be residents of Bahrain.
The shares can be transferred to third parties without restriction. However, residents of Bahrain may transfer and / or sell their shares only to residents of Bahrain.
A closed joint stock company is established in the same way as a public joint stock company. An exception is that instead of the Emir's Decree, the founders sign a memorandum in which they assure that:
• the constituent documents do not contradict the Bahraini law;
• all shares are subscribed by the founders, and fully paid in an authorized bank;
• the founders have appointed the necessary management personnel for the company.
The minimum number of shareholders in a company is 5.
A closed joint stock company can be 100% owned by foreign shareholders.
Exempt Joint Stock Company is a company that is exempt from the Bahrain Commercial Company Law. Such a company is also exempted from the legal requirements for the participation of local residents of Bahrain, who can own no more than 20% of the “exempt” company. Exempt joint stock company can be 100% owned by foreign shareholders.
An offshore company must have a registered office in Bahrain, but must operate outside of Bahrain. The life of the company is limited to 25 years.
An offshore company DOES NOT HAVE THE RIGHT to engage in insurance, banking and brokerage activities.
Exempt joint stock company must have at least two shareholders. The maximum number of shareholders is not limited.
The company is managed by a board of directors, at least 2 and no more than 10 people.
The law allows foreign companies to open branches in Bahrain if they receive permission from the Minister of Trade and Agriculture, and also if the foreign company has a so-called "sponsor" in Bahrain.
The minister will not give permission unless the parent company can prove its ability to be financially responsible for the branch's debts.
All types of businesses must have a permanent office in Bahrain.
There is no personal income tax in Bahrain.
Municipal tax is paid by individuals and legal entities renting real estate in Bahrain. Its size depends on the type of real estate, namely: unfurnished residential real estate, furnished residential real estate, commercial real estate, etc.
Social tax is paid by all employing companies if the number of employees is more than 10, and is divided between employer and employee in a certain proportion.
There is no withholding tax in Bahrain. Also in Bahrain there is no VAT, property tax on real estate and production tax.
There is no foreign exchange control and no restriction for foreign shareholders to repatriate their profits out of Bahrain.
In any case, if a potential investor intends to do business in Bahrain, a country that mainly lives according to Sharia law, the only correct decision will be to act only after consulting a local lawyer.
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