Doing Business In... 2022 Comparisons

Last Updated July 14, 2022

Law and Practice

Authors



ASAR - Al Ruwayeh & Partners is among Bahrain’s leading law firms, with a strong network of contacts throughout the MENA region. Its work cuts across various sectors and includes mergers and acquisitions, banking and finance, real estate, securities, employment, corporate and commercial matters, franchising, commercial litigation and arbitration. The firm has capabilities to provide services in English and Arabic. Its clients include a number of significant clients based in Bahrain and elsewhere in the world (including in the United States, Europe and elsewhere in the GCC). ASAR is also regularly retained by leading international law firms and has won numerous awards for legal services rendered.

Bahrain operates a civil law legal system which mostly derives from codified laws and provisions. The legal system in Bahrain respects the judgments issued by higher courts; however, there is no system for binding judicial precedents.

The judicial system is divided into two branches: Sharia courts and civil courts.

Sharia Courts

Sharia courts are subdivided into Sunni and Ja’fari branches which review issues of personal status related to Muslims in accordance with the rules of laws of the particular branch of Islam to which the concerned individual belongs. Sharia Courts are in two classes:

  • courts of first instance, which would include minor Sharia courts and high Sharia courts depending on the subject of dispute; and
  • appeals courts which would review the appealed judgment issued by the court of first instance.

The Cassation Court will only accept the appeal of a judgment issued by an appeal court if it was based on violation or misapplication of the law or it was based on invalid procedures.

Civil Courts

Civil courts have jurisdiction over civil, commercial, criminal and matters related to personal status of non-Muslims. There is no administrative court; however, a division of the civil court would rule on administrative issues.

The civil courts operate under a two-tier judicial system in which the judgments issued by the courts of first instance will be appealable before appeal courts. The appeal courts are authorised to study both the legal and factual evidence of the case and issue a final judgment. The appeal courts’ judgment is appealable before the Cassation Court. The Cassation Court is the supreme court and it will only review the legal based defences to confirm compliance with the law. 

Bahrain Chamber for Dispute Resolution

The Bahrain Chamber for Dispute Resolution (BCDR) has a mandatory jurisdiction to review cases with value of BHD500,000 or more if:

  • the dispute was related to international business disputes (ie, if the headquarter of the disputed party or the place of enforcement was located outside of Bahrain);
  • at least one of the litigant parties are licensed by the Central Bank of Bahrain (ie, banks, insurance companies, financial entities etc); or
  • the dispute is a commercial one between companies.

The judgments issued by the BCDR are subject to appeal directly to the Cassation Court.

The Constitutional Court

Further, Bahrain established the Constitutional Court in 2002. The Constitutional Court examines the conformity of the laws with the constitution as requested by the substantive court, the National Assembly, or the Chamber of Deputies. The King may also ask the Court to review a law before it is passed.

Approval of Foreign Investments

In order to engage in commercial activities in Bahrain, a foreign or domestic company must operate through a legal entity registered in Bahrain. The registration of various legal entities in Bahrain is governed by the Commercial Companies Law No 21 of 2001 and the Implementing Regulations thereto (as amended). The Commercial Companies Law outlines the governance requirements applying to the various types of entities as well at statutory protections associated with such entities.

In addition to maintaining an entity in Bahrain, such entity must be registered with certain commercial objectives which dictate the breadth of their permissible activities.

Business Activities/Objects

In order to engage in commercial activities in Bahrain, a foreign or domestic company must be registered with the Bahrain Ministry of Industry and Commerce (MOIC). As noted above, the type of licence or company registration to be obtained is generally driven by the nature of the business activities that will be undertaken in Bahrain.

Foreign Ownership Restriction

Most of the commercial activities undertaken by companies and/or branches of foreign companies in Bahrain do not trigger a foreign ownership restriction, and companies undertaking such commercial activities can be 100% owned by foreign shareholders. While state security rationale may preclude a particular person from holding shares, and licensing requirements (for banks, telecoms, schools, engineers, etc) might limit certain individuals from operating these otherwise 100% FDI companies, requirements for a certain level of local shareholding are removed.

Bahrain’s Prime Minister issued a resolution in 2021 determining the commercial activities that may be undertaken by companies owned by foreign investors (the “FDI Resolution”). The said resolution represents a bedrock principle for attracting foreign investment into Bahrain and places Bahrain is an advantageous position within the Cooperation Council for the Arab States of the Gulf (GCC).

FDI and Free Trade Agreements

The FDI Resolution outlines the level of foreign ownership permitted for each commercial activity in Bahrain, of which the lists of activities subject to any foreign ownership restrictions are limited. Moreover, certain trade agreements and treaties have exempted limitations under other lists from application to persons from participating states. These include the following.

  • The GCC Unified Economic Treaty adopted by the GCC Supreme Council on 31 December 2001, whereby GCC natural and legal citizens shall be accorded, in any member state, the same treatment accorded to its own citizens, without differentiation or discrimination, in all economic and investment activities.
  • The Bahrain – US Free Trade Agreement was signed on 14 September 2004 and entered into force on 1 August 2006, whereby US nationals and US operational companies are enabled to conduct nearly all commercial activities in Bahrain, other than a few activities restricted to only Bahraini nationals ownership.
  • Bahrain entered into a bilateral Investment Promotion and Protection Agreement with the Republic of Singapore on 27 October 2003, which has been ratified by Law No 21 of 2004, which affords benefits to Singaporean individuals and their Singapore companies which are wholly Singaporean-owned.
  • Bahrain together with the other GCC countries entered into a free trade agreement with Iceland, Liechtenstein, Norway and Switzerland on 22 June 2009, which has been ratified by Law No 7 of 2012, affording special rights to nationals of those countries.

The free trade agreements provide for varying special rights in respect of permissible commercial activities, but notably derogate from the requirements for local ownership otherwise applying to those commercial activities.

Consequences of Investing Without Approval

Doing business in Bahrain without having a registered legal presence alongside the relevant licence(s) would result in being considered to be doing business without a licence, which is penalised under Bahrain law. Article 27 of the Commercial Register Law No 27 of 2015 provides that a penalty of imprisonment for a period not exceeding one year and a fine of no less than BHD1,000 and no more than BHD100,000, or one of these two penalties, shall be imposed on anyone who engages in a commercial activity without obtaining a licence from the competent authorities.

In addition, foreigners engaged in employment activities, who are not registered with the Labour Market Regulatory Authority and do not hold a work permit, may be subject to penalties and deportation (for violating work restrictions association with business visitor or tourist visas) and the risk that subsequent attempts to register an entity in Bahrain may be restricted. There are also prohibitions in relation to prior violations of “doing business” limitations. It should also be noted that liability for such actions could pass through the entity to directors, officers and shareholders of the foreign entity impermissibly “doing business” without a licence.

There are no special commitments that foreign investors must comply with for doing business in Bahrain other than the requirements mentioned in 2.1 Approval of Foreign Investments (ie, registering a legal presence in Bahrain, which must be registered with certain commercial objectives which dictate the breadth of their permissible activities). To clarify, the only obstacle that may exist is that the proposed activities to be undertaken by the foreign investor are subject to foreign ownership restriction; other than that, there is no difference in the treatment of a foreign and/or local investor by the Bahraini authorities.

Where an application for registration of a legal entity in Bahrain is rejected/ disregarded for a period of more than 30 days by the MOIC (whether by refusing to accept such application through the online portal or through a physical bypassing of such system, or by being expressly rejected – rather than being marked as defective – within such portal), the rejection is capable of ministerial grievance and, in the case of an unfavourable ruling on such grievance, by application to the Bahrain courts. Upon a decision (or silence) as to the grievance, an appeal would be eligible to the Bahrain High Court (Administrative Division) within 60 days. The High Court judgment could be provided within three to six months and subject to appeal before the Appeal Court within 45 days from the date of its issuance. The Appeal Court judgment could be provided within three to six months. Further, such Appeal Court judgment could be appealed to the Cassation Court within 45 days from the date of its issuance. The proceedings before the Cassation Court would take from 12 to 18 months until a final judgment is issued. The timelines mentioned above for the procedures before the Bahraini Courts are merely rough estimates, as the process is in the hands of the relevant authorities. Numerous factors may affect the progress of the matter (eg, caseload at the relevant department and the court, change of judges, notification process, etc).

Notably, interpretation of some free trade agreements is subject to special processes, which may be required to occur in tandem, or in advance, of the Bahrain administrative law procedures.

The Commercial Companies Law outlines the types of legal entities which may be established in Bahrain. These include forms with pass through liability, partial pass through liability or effective liability limitations.

The Commercial Companies Law also dictates rules on registration of interests in Bahraini entities, statutory obligations and entitlements of various stakeholders in Bahraini entities and provisions for enforcement of those obligations and entitlements. Entities incorporated in Bahrain must take one of the following forms:

  • general partnership;
  • limited partnership;
  • association in participation;
  • joint-stock company (public or closed); or
  • company with limited liability.

Foreign entities may operate in Bahrain by registering a foreign branch which is generally seen as legally indistinct from the parent undertaking. In addition, a natural person who is a GCC or United States national may obtain an “individual commercial registration” which is a form of sole proprietorship were the individual owner’s assets are not protected by a liability shield.

For the purpose of undertaking commercial activities in Bahrain, there is a strong preference among most investors to utilise a corporate form which benefits from a limitation on liability. Accordingly, joint-stock companies (BSC) and companies with limited liability (WLL) are strongly preferred by investors rather than partnerships and associations in participation. The Commercial Companies Law outlines the governance requirements applying to the various types of entities as well at statutory protections associated with such entities.

Joint-Stock Company

A Bahraini joint-stock company may take either a public or closely held (closed) form. It faces the most heightened formalities on governance but also provides for issuance of bonds and different classes of equity, trading on a registered stock exchange (in the case of a public joint-stock company), sale of shares without existing shareholder pre-emptive rights, and lower quorum and voting requirements for shareholder actions than those applying to other corporate forms. In light of the foregoing, closed joint-stock companies are a favoured vehicle for investment in Bahrain, particularly among non-affiliated shareholders.

Certain commercial activities, such as banking, insurance underwriting, and investment, are restricted to joint-stock companies among locally incorporated entities. Moreover, joint-stock companies face no limitation on the number of shareholders, noting that a minimum of two shareholders are required except in relation to companies established by the Amiri Decree.

A joint-stock company is required to maintain a board of directors (having three-year appointments) with a minimum of three members. For public joint-stock companies, the minimum number of directors increases to five members. A limited number of proxies are permitted for board of director meetings, noting that financial regulated entities are prohibited from board proxies and that an entity may similarly restrict board proxies in its constitutive documents. The board of directors is responsible for ensuring that no action is taken involving a personal interest by a director unless the director acknowledges their personal interest and abstains from deliberations and voting on the matter or is permitted to participate by a resolution of the shareholders of the company.

A joint-stock company provides a number of minority shareholder protections. For example, any holder of a minimum of 10% of the company’s capital would be entitled to appoint a director. In addition, the shareholder could unilaterally call for a meeting of the general assembly. Shareholders also have statutory pre-emptive rights to any equity issuance and to any convertible bond issuance.

Finally, shareholders have access rights to the company’s records including to obtain a copy of such records. Nevertheless, shareholders of a joint-stock company do not have statutory rights of first refusal in respect of share transfers to third parties, noting that such rights may be included in the constitutive documents of a closely held joint-stock company and/or board approval rights in respect of new shareholders may be included (in case of non-approval, the company would be obliged to purchase the transferor’s shares into treasury stock).

Public joint-stock companies implicate capital of BHD1 million, although listing on the Bahrain Bourse would require compliance with listing rules, which require certain annual turnover thresholds be exceeded and that the net worth of the entity exceeds its nominal share capital by 20%. By comparison, a closely held joint-stock company may have lower issued capital of BHD250,000, noting that the Commercial Companies Law includes a broad obligation that “the company’s capital . . . must be sufficient to achieve its objectives”. This provision of the Commercial Companies Law has been read to authorise the MOIC to dictate heightened minimum capital requirements both in respect of all companies undertaking a certain commercial objective and in respect of specific companies based on their commercial activities. Capital in a joint-stock company is not required to be fully paid at the time of issuance.

In light of the foregoing, closed joint-stock companies provide a preferable structure with a balance between minority shareholder protections and the use of corporate governance best practices among varied arm’s length shareholders operating in Bahrain. These benefits should be weighed against the high capital requirements for such entities.

Company With Limited Liability

Bahrain recognises companies with limited liability (similar to limited liability companies in other jurisdictions) which provide substantially more flexibility for operations and governance. A company with limited liability does not require a board of directors, though same is permissible, and may either be managed by the shareholders or by one or more designated managers.

Moreover, resolutions of the shareholders may be passed unanimously by circulation without a requirement to hold a formal partners meeting (eg, notice or invitation of government authorities) or to provide prior notification to the MOIC except for annual general meeting. A statutory right of first refusal in respect of share transfers applies with mandatory application to WLLs; priority rights also apply to any capital increase.

The duties and rights of directors in a joint-stock company apply equally to managers of a WLL, including rules on announcing and abstaining in the case of personal interests. Shareholders in a WLL have greater powers to remove managers, including a mandatory requirement that shareholders holding a majority of the capital in a WLL may remove any or all managers. Nevertheless, manager appointments are not required to arise by a vote if the constitutive documents of the WLL provide for appointment in another manner (eg, allocation of appointments among the shareholders). Additional variations from standard operations and governance are available, including dividends varying from pro rata with shareholding and fair market valuation for exercise of statutory rights of first refusal.

Other than decisions concerning amendment to the constitutive documents, increase or reduction of capital, and liquidation of the company (including in the context of a merger), corporate decisions may pass by the majority of partners in attendance at a duly convene shareholder meeting. In case of the foregoing actions, approval of 75% of capital of the company would be required (rather than the voting threshold applying only in respect of shareholder meeting attendees).

Based upon amendments to the Commercial Companies Law in 2014 and 2020, minimum capital requirements have been removed from WLLs. According to a recent amendment in 2020 to the Commercial Companies Law, a WLL can now be owned by one owner (previously there was a minimum of two shareholders). Nevertheless, the Commercial Companies Law includes a broad obligation that “the company’s capital . . . must be sufficient to achieve its objectives”. This provision of the Commercial Companies Law has been read to authorise the Bahrain Minister of Industry and Commerce to dictate heightened minimum capital requirements both in respect of all companies undertaking a certain commercial objective and in respect of specific companies based on their commercial activities. Capital in a WLL is required to be fully paid upon issuance and its shares must be of equal value.

In light of the foregoing, companies with limited liability provide a preferable structure for closely held subsidiaries and/or related party entities. In addition, where parties wish to avoid heavy capital investment or lock-in, a WLL structure may be preferred. These benefits should be weighed against restrictions on transfer of shares to a designated third party without risk of other shareholders exercising rights of first refusal.

Incorporation Process

As a high-level summary, in order to incorporate a BSC/WLL an application must be filed on the MOIC electronic portal (named Sijilat) together with all required documents. The said application would include the partners’ names and their percentage of ownership; the commercial activities to be undertaken; the proposed name of the company to be formed; the company’s capital, number and value of shares, etc. Once the application is vetted by the MOIC officials and approved, a non-operational commercial registration certificate would be issued. The application should thereafter be transferred to all other implicated ministries for their approvals; during such period (or at an earlier stage), the partners must secure a lease agreement for the business premises and file it on the MOIC portal for obtaining the municipality approval on the place of business. Additionally, a draft of the constitutive documents must be filed for MOIC approval, once approved an appointment must be booked with a Bahraini notary for execution and notarisation of the constitutive documents. In parallel a bank account must be opened with one of the licensed banks in Bahrain and a capital deposit certificate must be issued by the bank. Once the notarised constitutive documents and the capital deposit certificate are uploaded on Sijilat and incorporation fees are paid, the MOIC would issue the operational commercial registration certificate and commercial registration extract and the company would be active and permitted to start its activities, unless in limited circumstances one or more of its registered activities require a special licence following completion of incorporation process.

Timing

The entity should be capable of being formed in as little as three to six weeks from submission of all required documentation (depending on the ministerial “no objections” or licensing approvals).

Ongoing Reporting and Disclosure Obligations

Companies are subject to various ongoing reporting/disclosure obligations after incorporation. While the particular obligations will depend on the company itself and the activities it undertakes, examples of what may be required include the following:

  • the registration of changes of management or partners with the MOIC, as well as any amendments to a company’s constitutional documents;
  • financial statements must be submitted to the MOIC annually for review/approval within six months as of the end of the financial year;
  • any changes to the ultimate beneficial owner information must be immediately reported and registered with the MOIC;
  • for certain commercial activities an Economic Substance Report must be submitted annually to the National Bureau for Revenue; and
  • in the case of a BSC, a corporate governance report must be submitted annually to the MOIC.

Management Structures

A joint-stock company is required to maintain a board of directors (having three-year appointments) with a minimum of three members. In the case of public joint-stock companies, the minimum number of directors increases to five members.

A company with limited liability does not require a board of directors, though same is permissible, and may either be managed by the shareholders or by one or more designated managers.

Management of both types of legal entities could be foreign nationals and non-resident in Bahrain. 

Management Powers

The board powers in the case of a BSC or the managers’ powers in case of a WLL are set out in the memorandum and articles of association in the case of a BSC or in the deed of association in the case of a WLL. In the absence of any provisions regarding the powers of the board/managers, the board/managers have the full power to act on the company’s behalf except to those powers which if they are not specified in the constitutional documents could not be undertaken by the management, such as executing loans for more than a three-year term, selling the company’s property or business, mortgaging the same, providing guarantees for third parties, etc.

Civil Liability

A partner, owner of the capital, director of the company or a member of the Board of Directors in a joint stock company or closed joint-stock company or limited liability company – as the case may be – shall be responsible in all their money for any damages to the company or partners or shareholders or third parties for any breach of the law or of the company’s constitutive documents and for the actions set out in Article 18 (Bis) of the Commercial Companies Law.

Criminal Liability

The Commercial Companies Law prescribes criminal/administrative penalties, under Articles 361 and 362.

Penalties under Article 361 (which includes violations under Article 18 (Bis) and other improprieties, include a fine of no less than BHD10,000 and no more than BHD100,000 and/or imprisonment. Penalties under Article 362 include a fine not exceeding BHD50,000.

Each of the foregoing is without prejudice to punishment under the Bahrain Penal Code. Criminal actions applicable to directors/shareholders include fraud, embezzlement and public and private bribery. Furthermore, Article 405 of the Bahrain Penal Code identifies specific additional penalties on directors in connection with bankruptcy, particularly for the following acts:

  • concealing, destroying or altering the company’s books;
  • embezzling or concealing part of the company's funds to the detriment of its creditors;
  • knowingly admitting liability for debts which are not debts of the company; or
  • contributing to the inability of the company to pay its debts, whether by making incorrect statements about the paid up capital, publishing incorrect balance sheets, distributing fictitious dividends or fraudulently receiving remuneration in excess of that stipulated in the company's constitutive documents.

Employment relationships in the private sector would be governed by Law No 36 of 2012 (the “Labour Law”). The Labour Law sets out the minimum rights in the employee’s favour and any condition or agreement that prejudices the rights of the employees will be deemed null and void. Any better benefits which are agreed in the employment agreements or the employer’s policies and internal regulations, or by virtue of custom, will remain applicable.

The Labour Law also recognise unions and collective bargaining between one or more union association(s) and the employer/s or employers’ associations for the purpose of improving the working conditions and terms of employment and settling collective labour disputes. The collective bargaining can be held at the level of the company, the business activity or relevant industry or at national level. However, collective bargaining is not a common practice in Bahrain.

The employment agreement is required to be (i) executed and concluded in writing in Arabic or (ii) attached to an Arabic translation if the agreement was drafted in a foreign language. Any referenced internal regulations or policies should be attached to the agreement and signed by the parties. Concluding the employment agreement verbally would not invalidate it; however, it may hinder the registration of the employment agreement by the Labour Market Regulatory Authority (LMRA) if it was entered into between an employer and an expatriate employee. The LMRA would require the employment agreement to be in written in order to finalise the registration and to obtain the employee's work permit and residence visa.

Further, if the employment agreement was concluded verbally, the employee would bear the burden of proving their claimed rights if they are more beneficial than the minimum rights as specified in the Labour Law.

According to Article (20) of the Labour Law, the employment agreement must include the following essential data:

  • the employer’s name, the address of the workplace and the commercial registration number;
  • the worker’s name, their date of birth, qualifications, job or occupation, residential address, nationality and the necessary personal identification documents;
  • the nature, type and duration of the contract; and
  • the agreed wage, method and time of payment, and all of the agreed benefits in cash or in kind.

The duration of the employment agreement will be for a definite or indefinite term. This will determine the calculation of the compensation for unlawful termination. 

The employee must not be effectively working for more than eight hours per day, unless otherwise agreed upon, provided that the effective working hours do not exceed ten hours per day and forty eight hours per week. The employee is entitled to receive at least one day rest each week.

The employee may work for additional hours if so required by the circumstances of the work. The employee will receive for each additional working hour a wage equivalent to their normal wage plus at least 25% for hours worked during the day and at least 50% for hours worked during the night. If the employee had to work on their weekly day of rest, the employee will have the choice between receiving an additional wage equivalent to 150% of their normal wage or another day for rest.

Bahrain is not an employment at will jurisdiction. Article 101 of the Labour Law provides that the employee will be entitled to receive compensation for termination if arising without a lawful cause. 

Termination by Employer

Termination for lawful reasons

Article 107 of the Labour Law provides that the employer may terminate the employment agreement without notice or compensation in any of the following circumstances:

  • if the employee has used a false identity or submitted false certificates or recommendations;
  • if the employee has committed any fault which caused serious material loss to the employer provided that such employer must report the matter to the competent authorities within two working days as of the date on which the occurrence of this serious material loss was brought to their knowledge;
  • if the employee, despite a written warning, fails to comply with written instructions which are required to be observed for the safety of employees and the establishment, provided that such instructions are written and posted up in a clear location at the workplace;
  • if the employee is absent without reasonable cause for more than twenty non-consecutive days or for more than ten consecutive days in one year, provided that such termination shall be preceded by a written warning by the employer to the employee after an absence of ten days in the former instance and an absence of five days in the latter instance;
  • if the employee fails to perform their essential obligations by virtue of the employment agreement;
  • if the employee discloses secrets related to their work without written authorisation from the employer;
  • if a final judgment was rendered against the employee for an offence or a misdemeanour prejudicing honour, trust or public ethics;
  • if the employee is found during the working hours to be under the apparent influence of alcohol or drugs, or if they have committed an immoral act at the workplace;
  • if the employee assaults their employer or their responsible official or commits a serious assault upon any of the employees or clients at the establishment during or as a result of the work;
  • if the employee fails to abide by the controls set by virtue of the law on the exercise of the right to strike; and
  • if the employee is incapable of performing the work for reasons related to that employee such as the cancellation of their work permit or the loss of the qualifications authorising them to exercise the work agreed upon.

Arbitrary dismissal

Article 104 of the Labour Law provides that the termination of the employment agreement by the employer will be unlawful and deemed as an arbitrary dismissal if the termination is due to any of the following causes:

  • the employee’s sex, colour, religion, ideology, marital status, family responsibilities, or the female employee’s pregnancy, delivery of a child, or breastfeeding;
  • if the employee is affiliated to any employee trade union or participates legitimately in any of its activities in accordance with the laws and by-laws;
  • if the employee represents employees in a trade union association, has already enjoyed said capacity or seeks to do so;
  • if the employee submits a complaint or an action against the employer, unless the same were of a vexatious nature;
  • if the employee exercises their right to take leave in accordance with the Labour Law; and
  • freezing the employee’s entitlements with the employer.

Termination for poor performance

According to Article 109 of the Labour Law, the employer may terminate the employment agreement as a result of the employee’s inadequate performance following notification of the aspects of their lack or poor performance and giving them an appropriate chance and time-limit of not less than sixty days for improving their performance and reaching the required level. In the case of failure by the employee, the employer may terminate the employment agreement without compensation following one month’s notice.

Redundancies

According to Article 110 of the Labour Law, the employer may terminate the employment agreement as a result of the total or partial closure of the establishment, the downsizing of its activities, the replacement of the production system by another in a way that affects the number of the workforce, provided the employment is only terminated following the notification of the Ministry of Labour of the reason of termination 30 days before the date of notification of the employee of the termination.

Termination by Employee

Employees may resign upon 30 days’ notice in all cases – the existence of a fixed duration employment contract does not exclude such resignation. If the employee fails to provide full notice, an employer may recover the level of wages associated with the incomplete portion of the notice period and may also claim damages. The employee would also not be paid for the incomplete period of the notice period.

In addition to ordinary resignation, Bahrain has recognised certain instances of constructive dismissal. The employees also has the right to terminate the employment agreement without notice if the employer assaults the employee during or as a result of the work or if the employer commits an act prejudicing ethics against the employee or any of their family members. The termination of the employment agreement in these cases will be deemed an arbitrary dismissal by the employer (Article 105 of the Labour Law).

Further, the employee may terminate the employment agreement following the employer’s notification in any of the two following events:

  • the violation by the employer of an essential obligation specified by virtue of the law, the employment agreement or the work regulations at the establishment; or
  • if the employer deceives the employee as to the working conditions or circumstances, when said deception is so serious that otherwise the employment agreement would not have been concluded.

The employee, before sending the notice of termination, must request the employer in writing to remedy the violation or deception within a time-limit not exceeding 30 days. If said time-limit elapses without any response by the employer, the employee will have the right to terminate the employment agreement. This will be deemed as an unlawful termination by the employer.

Compensation for Unlawful Termination

If the employer terminates the indefinite employment agreement for no reason or for an illegitimate reason following the expiry of three months as of the date of start of work, the employer will be obliged to compensate the employee with compensation equivalent to the wage of two working days per each month of service, with a minimum of one month’s wages and a maximum of twelve months’ wages.

If the employer terminates the definite employment agreement for no reason or for an illegitimate reason, the employer will be obliged to compensate the employee with a compensation equivalent to the wages of the remaining period of the employment agreement, unless the parties agree on lesser compensation provided the compensation agreed upon does not fall below the three months’ wages or the wages for the remaining period whichever is lesser.

In the case of redundancies, the employee will be entitled for compensation equivalent to half the compensation as mentioned above.

If the termination is deemed an arbitrary dismissal in accordance with the provisions of Articles 104 and 105 of Labour Law, the employee will be entitled to an additional compensation equivalent to half the compensation, unless the contract provides for a higher compensation.

As for the termination due to the employee, the employee will not be obliged to pay compensation to the employer except for the following cases:

  • if termination was made without abiding by the notice period obligation and it occurs at a time not suitable to the work circumstances and the employer would be incapable of finding a qualified replacement employee;
  • if termination was intended to cause the employer damages; and
  • if termination caused the employer a serious damage.

Employees are not mandatorily represented by the management. However, employees of any institution or an industry or activity are entitled to establish a trade union in accordance with Law No 33 of 2002 with respect to the issuance of Trade Unions Law (the “Trade Unions Law”). Trade unions have the right to attend member employees’ investigations and possess the right to strike.

Bahrain does not impose income tax on individuals; therefore, no tax is levied on the income earned by the employee.

The social insurance monthly contributions including workplace injury and unemployment coverage vary for expatriates and Bahrainis. Currently, for Bahrainis, the contribution rate is 21% of the monthly wage (ie, 14% from employers and 7% from employees). For expatriates, the contribution rate is 4% of the monthly wage (from the employers). 

The Social Insurance Law was amended recently and, as per the amendment, the percentage payable for Bahrainis will increase annually until the combined total monthly contribution will reach 28% of the monthly wage (by January 2028).

Currently, there are no direct taxes on income, capital gains or withholding tax on dividends/interest in Bahrain, except for companies engaged in the exploration, production and refining of oil, gas and petroleum, which are subject to 46% corporate income tax.

Indirect tax in the form of VAT is levied on consumer spending. It is collected on supplies of goods and services as well as on imports of goods and services into Bahrain. A standard rate of 10% VAT is applied on the supply of goods and services, as well as on imports of goods and services into Bahrain. Certain goods and services are subject to zero-rate (0%) VAT, including exported goods and services, and a few goods and services are exempt from VAT.

It should be noted that Bahrain imposes a real estate registration fee upon transfer of ownership on real estate property. The rate is 2% of the property value; however, it can be reduced to 1.7% if the duty is paid within 60 days following the transaction date.

Other government fees are generally charged on a fixed rate basis, including stamp/authentication fees and commercial registration fees. A municipal fee on rented property applies with minor differences in different municipal areas; these are usually around 10% of monthly rental rate and are collected along with utilities bills.

Bahrain does not impose income tax on resident individuals or corporates, except for companies engaged in the exploration, production and refining of oil, gas and petroleum. Therefore, tax incentives do not have relevance for Bahrain. All operating companies other than the companies mentioned above benefit from a 0% tax rate for corporate income tax.

This is not relevant for Bahrain as the effective rate for the levy of direct taxes on corporate and personal income is 0%.

Thin capitalisation and required actions associated with the same differ for different types of companies and may be subject to increased obligations vis-à-vis regulatory licensing. 

Companies incorporated in Bahrain (including Central Bank of Bahrain licensees) are subject to special annual financial reporting requirements including (other than for public joint stock companies) confirmation of the adequacy of the financial position of the company.

The MOIC takes a general view that losses of 50% of capital require special consideration of the financial position. In the absence of loss of capital to the extent that same is below the minimum permissible capital associated with the form of entity and the commercial activities undertaken, an entity may persist. Furthermore, Bahrain’s Insolvency Law involves a debtor-in-possession structure whereby continued management during an insolvent restructuring is permissible. As such, thin capitalisation is not generally restricted in the absence of other wrongful actions by companies or their management, although filings may be required.

For publicly listed companies, Bahrain Bourse regulations involve suspension of trading upon a loss of 75% of capital, among other circumstances which are outlined in the bourse’s resolution “Procedures Related to Listed Companies with Accumulated Losses of 20% or more of their Share Capital” issued on 2 September 2020.

Transfer pricing rules are not relevant for Bahrain.

In order to meet the European Union criterion 2.2 and the OECD’s base erosion and profit shifting (BEPS) Action 5 minimum standard, the Kingdom of Bahrain has implemented economic substance requirements on entities that carry out geographically mobile business activities. As per the applicable laws, all registered entities who qualify the acceptance test under economic substance requirements are required to file an annual return with the Ministry of Industry and Commerce. This is limited to only to the registered entities in Bahrain.

Competition and antitrust in Bahrain are regulated under Law 31 of 2018 (the “Competition Law”). The Competition Law provides for various practices which will be deemed to be anti-competitive and unlawful as well as issues regarding particular transactions requiring reporting to and/or approval by the Competition Authority (CPA).

Although, the permanent regulator will be the CPA, which will be a directorate of the Ministry of Industry and Commerce, the interim regulator is the Consumer Protection Department (CPD), also a directorate of the MOIC. The Final CPA is not yet formed; accordingly, the CPD presently undertakes the CPA’s responsibilities on an interim basis. Each further reference to the CPA shall include its interim incarnation.

All “economic concentrations” resulting in shifting market control require the prior approval by the CPA – where “economic concentration” is defined as any act that results in the whole or partial transfer (merger or acquisition) of assets, stocks, shares, uses, rights or obligations from a business to another, that would enable a business or a group of businesses to control, directly or indirectly, another businesses or group of businesses.

A shift in market control would arise where a transaction involves or results in a person/entity being in a dominant position. A dominant position is defined as existing when a position of economic strength enjoyed by an undertaking enables it to prevent effective competition, and to act in a manner significantly independent from its clients and competitors, and hence from its consumers (Article 8 of the Competition Law). This is further clarified as follows:

Unless the contrary is proven, a business is in a dominant position if its share in the relevant product market in Bahrain exceeds 40%. A group of businesses, consisting of two or more businesses, are in a dominant position if their market share in a relevant product market is more than 60%. However, a business may have a dominant position in the market, even if its share does not meet the aforementioned ratios.

Accordingly, if a merger would result in a market concentration, a prior approval by the CPA would be required.

The authors would generally advise for a short letter to be submitted to the CPA where an acquisition/merge could theoretically result in concentration or dominance. Such letter would seek confirmation that (based upon facts stated in the letter) no formal application for approval would be required. The competition authority has been forthcoming with responses to such letters.

See 6.1 Merger Control Notification.

See 6.4 Abuse of Dominant Position.

The Competition Law does not prohibit an establishment being in a dominant position. However, it prohibits an establishment from abusing its dominant position, specifically in the following cases, which are outlined in Article 9 of the Competition Law as abuse of the dominant position: 

  • imposing prices for sale or purchase or any other terms of trade, whether directly or indirectly;
  • limiting production, markets or technical development, in a way affecting the consumers;
  • discrimination in agreements or contracts, of any kind, that are concluded with suppliers or with customers whenever their contractual positions are similar, whether this distinction is in prices, product quality, or in other terms of engagement;
  • suspending the conclusion of a product agreement on the condition of accepting obligations or products that are by their nature or under its commercial use not related to the product subject to the agreement, contract or original transaction; and
  • refraining, without any legitimate justification, to conclude with any business transactions for the sale or purchase of a product, the sale of products with an artificially low cost, or terminating the dealing with the competing business resulting in excluding them from the market or causing them losses which make the continuation of their activities difficult.

Moreover, the MOIC may, after taking the opinion of the CPA and the approval of the Council of Ministers, issue a decision whereby he exempts a specific behaviour from the prohibition stipulated above for exceptional considerations related to the public interest (Article 10 of the Competition Law).

Definition of a Patent

Law No 1 of 2004 with respect to Patents and Forms of Benefits and its amendments (the “Patent Law”) provides that a patent would be awarded for every new invention that comprises a creative step and is capable of being applied industrially in agriculture, fishing, services, handicraft or any type of industry in its broadest sense, as well as for the use or manner of using a known product including products that are used for certain medical case. Further, the patent must not have been announced to the public in Bahrain or abroad before the date of application.

The Patent Law does not consider the following as a patent:

  • inventions for which a ban on its commercial exploitation in Bahrain is necessary to preserve the public order or morals, or where allowing the patent would be detrimental to the protection of human life or animal or plant health or would cause considerable damage to the environment;
  • animals; and
  • the necessary methods of diagnosis, treatment and surgery for treatment of humans and animals except for the products that are used in any of these methods.

Length of a Patent

According to Article (14) of the Patent Law, a patent's protection period will be twenty years commencing from the date of filing a patent application in Bahrain.

Patent Registration

The patent application is submitted to Bahrain Patent Office by the applicant if they are a national, or resident in Bahrain if they are a national of a member state of the Paris Convention for the Protection of Industrial Property or other countries if their nationals enjoy national treatment according to any conventions enforced in Bahrain; or if such person has a current industrial or commercial entity in such country.

Enforcement and Remedies

Bahrain is a member of the Patent Regulation of the GCC; and therefore, the applicant would enjoy patent protection within the GCC countries. Further, the applicant can enjoy a wider protection across other countries if they choose to file a patent application through a direct, Paris Convention application; or to file a national stage application using the Patent Cooperation Treaty (PCT), including a priority claim back to the priority application.

In principle, the patent owner has the exclusive right to prevent or stop others from commercially exploiting the patented invention. According to Article 40 of the Patent Law, the patent owner may seek the issue of a judicial writ from the competent court to take a precautionary action upon infringement or to avoid any imminent infringement of the patent right.

The court would order the claimant (ie, the patent holder) to provide a security or guarantee to protect the defendant and prevent misuse of the right. The patent owner must file a substantive case on merits within twenty days from the date on which the decision to adopt the precautionary measure is issued, otherwise the precautionary order will be cancelled upon the defendant's request.

Further, the patent owner who suffered from damages due to infringement of the patent rights may claim for a sufficient compensation which would cover the damages and the profits generated by the offender from such infringement.

Moreover, Article (41) of the Patent Law provides for a criminal punishment of imprisonment for a period of no less than three months and no more than one year and/or a fine of no less than BHD500 and not exceeding BHD2,000, against anyone who knowingly commits with their knowledge any of the following unlawful acts:

  • manufacture, using the manufacturing method, selling, exhibiting for sale, trade, import or possession with the intention of trading in goods that include infringement upon patents; and
  • displaying on products, advertisements, marks, packing materials, wrappings or any such items, details that give the impression that they have obtained a patent or form of benefit.

Trade marks are regulated by Law No 6 of 2014 on Approval of the Trade Marks Law (Regulation) of the GCC (the “TM Law”). Article 2 of the TM Law defines trade marks as “Everything that takes a distinctive form such as names, words, signatures, characters, codes, numbers, titles, seals, drawings, images, inscriptions, packaging, figurative elements, shapes or colour, group of colours or combinations thereof, or any other sign or group of signs if used or intended to be used to distinguish goods or services of a construction regarding the goods or services of another constructions or to indicate to do one of services, or for controlling or inspecting the goods or services. The sign of sound or smell could be considered as a trade mark.”

A trade mark application is submitted to the Trade Mark Office at the Industrial Property Directorate by the applicant if they are a national of or resident in the Kingdom of Bahrain. Trade marks cannot be registered if they are free of any distinctive feature, contrary to public order or morals, geographical names, copies or imitations of a famous trade mark or likely to mislead the public.

The protection period of a trade mark is ten years from the date of application in Bahrain.

Trade Mark Enforcement and Remedies

If the trade mark owner has a justifiable reason to believe that others are importing copied goods bearing similar mark in a way that may confuse the public, the trade mark owner may submit a written application to the Custom’s Directorate to stop customs releasing these copied goods. The trade mark owner has to file a case on the merits before the competent court within ten working days from the date of notification of the decision to stop the customs release for these goods, otherwise the decisions would be deemed as of no effect.

In the case of an infringement or to prevent an imminent infringement, the trade mark owner may obtain an order from the court to take precautionary measures to stop such infringement. The court might assign the claimant (ie, trade mark owner) to provide a suitable bail or a guarantee that is sufficient to protect the defendant and to prevent abuse of the right. The trade mark owner must file a substantive case on merits within 20 days from the date of issuing the decision to adopt the precautionary measure, otherwise the precautionary order will be cancelled upon the defendant's request.

Further, the trade mark owner who suffered from damages due to infringement of the trade mark rights may claim for a sufficient compensation which would cover the damages and the profits generated by the offender from such infringement.

Moreover, Article 42 of the TM Law provides for a criminal punishment of imprisonment and/or a fine on any person convicted of misrepresenting or imitating a registered mark to mislead or confuse the public, knowingly sell or possess with the intention of trading any goods bearing false or imitated marks; or unlawfully uses such marks or offers services under this mark.

Industrial designs are protected by Law No 6 of 2006 on Industrial Drawings and Models (the “ID Law”). An industrial drawing or model is defined as any arrangement of lines and colours and any coloured or non-coloured three dimensional shape.

The industrial drawing and design application is submitted to the Patent Office by the applicant if they are a national of or resident in Bahrain. The industrial drawing or model will be registered if it is novel, usable in industry or handcrafts and must not be disclosed to the public whether in Bahrain or abroad in any way preceding the date of filing the registration application. 

The industrial drawing and design is protected for ten years from the date of filing, and this period can be renewed for a further five years.

Industrial Design Enforcement and Remedies

In the case of infringement or to prevent an imminent infringement, the industrial design owner may obtain an order from the competent court to take precautionary measures to stop such infringement. The court might assign the claimant (ie, industrial design owner) to provide a suitable bail or a guarantee that is sufficient to protect the defendant and to prevent abuse of the right. The industrial design owner must file a substantive case on the merits within 15 days from the date of issuing the decision to adopt the precautionary measure, otherwise the precautionary order will have no effect.

Moreover, Article 30 of the ID Law provides for a criminal punishment of imprisonment for a period of no less than three months and no more than one year and/or a fine of no less than BHD500 and not exceeding BHD2,000, against anyone who knowingly commits any of the following unlawful acts:

  • exploiting, for a commercial purpose, an industrial drawing or model, which has been registered, or which is not fundamentally different from it; and
  • selling, displaying for sale, importing from abroad or acquiring for commercial purposes, products that infringe on another’s registered industrial drawing or model or which is not fundamentally different from it.

Copyrights in Bahrain is regulated pursuant to Legislative Decree No 22 of 2006 with respect to the Protection of Authors’ rights and Attendant Rights Law and its amendments (the “Copyrights Law”).

The Copyrights Law provides protection to authors of literary, artistic and scientific works which can be registered at the Copyrights Protection Office at the Ministry of Information; however, it is not common to register the copyrights works in Bahrain because the Copyrights Law provides for an automatic copyright protection without the need for any formal registration regardless of the value of such works, their type, the purpose of creating them, and the method or form of their expression. Copyrights protection will last throughout the lifetime of its author plus 70 years after their death.

The owner of copyright work has the exclusive rights over reproduction of their work, translation, distribution, broadcasting and transmission of their work to the public or transfer of its ownership.

In the case of infringement or to prevent an imminent infringement, the copyright owner may obtain an order from the competent court to take precautionary measure to stop such infringement. The court might assign the claimant (ie, the copyright owner) to provide a suitable bail or a guarantee that is sufficient to protect the defendant and to prevent abuse of the right. The copyright owner must file a substantive case on the merits within 20 days from the date on which the decision to adopt the precautionary measure was adopted, otherwise the precautionary order will be cancelled upon the defendant's request.

Further, a copyright owner who has suffered damages due to infringement of their trade mark rights may claim for a sufficient compensation which would cover the damages and the profits generated by the offender from such infringement.

Moreover, Article 65 of the Copyrights Law provides for imprisonment for a period of no less than three months and no more than one year and/or a fine of no less than BHD500 and no more than BHD4,000 for anyone who infringes upon any copyright whether for material gain or to achieve a commercial purpose or special material gain.

Databases will enjoy protection in accordance with the Copyrights Law. As for computer software, the protection of the Copyrights Law can be applicable. Article 2 of the Copyrights Law included computer software within its protection. Also, the protection of the Patents Law can apply to computer software if it is classified as a novel invention which is capable of being applied industrially.

Trade secrets are protected by the Law No 7 of 2003 on the Trade Secrets (the “Trade Secrets Law”), which prohibits disclosure of confidential information if it was of commercial value and its legal holder took effective measure to preserve it.

In the case of infringement or to prevent an imminent infringement, the trade secret owner may obtain an order from the competent court to take precautionary measure to stop such infringement. The court might assign the claimant (ie, the trade secret owner) to provide a suitable bail or a guarantee that is sufficient to protect the defendant and to prevent abuse of the right. The trade secret owner must file a substantive case on the merits within 15 days from the date of issuing the decision to adopt the precautionary measure, otherwise the precautionary order will be of no effect.

Moreover, Article (7) of the Trade Secrets Law provides for a criminal punishment imprisonment for a period of no less than three months and not more than one year and/or by a fine of not less than BHD500 and not more than BHD2,000 for any person who unlawfully discloses, acquires or uses trade secrets and was aware of their confidentiality or that they were acquired by unlawful methods.

Bahrain Law No 30 of 2018 on the issuance of the Personal Data Protection Law (PDPL) provides the statutory framework for personal data protection in Bahrain.

The PDPL is modelled after the EU’s General Data Protection Regulation (GDPR) and regulates the processing (broadly defined to include collection, storing and revealing) of data (ie, personal data and sensitive personal data) using means located in Bahrain. The PDPL defines two main roles with regard to data, that of:

  • data manager – the person who decides (solely or in conjunction with others) the purposes and means of processing; and
  • data processor – the person who processes the data for and on behalf of the data manager.

The PDPL applies to (i) individuals or natural persons residing in Bahrain; (ii) organisations with a place of business in Bahrain; and (iii) people and organisations that are not present in Bahrain but that process data using means (independently or through third parties) available in Bahrain, unless such processing is solely for the purpose of passing data through Bahrain.

The provisions of the PDPL would become applicable for foreign entities (ie, entities which do not have a presence in Bahrain) if such entities were processing personal data or sensitive personal data using means located in Bahrain. The PDPL does not provide a definition of the term “means”. Taking a clue from the definition of Personal Data (as defined in the PDPL) the authors believe that the term “means located in Bahrain” is to be interpreted subjectively, taking into consideration all means, including physical and intangible means at the disposal of the data manager.

The Ministry of Justice and Islamic Affairs (MOJ) has been notified as an interim administrative body that is assuming responsibility for the duties and powers prescribed for the personal data protection authority (PDPA) until the establishment of the PDPA in accordance with the provisions of the PDPL. The Minister of Justice and Islamic Affairs assumed the role of the PDPA’s chairman, and the Ministry’s undersecretary will assume the role of the PDPA’s executive chairman.

The interim PDPA is vested with the powers to issue resolutions to implement various provisions of the PDPL and discharge the functions of the PDPA in the interim. Recently, on 17 March 2022, the interim PDPA issued multiple draft resolutions for implementing various provisions of the PDPL. Also, the PDPA is vested with the powers under the PDPL to investigate violations on its own, at the request of the responsible minister, or pursuant to a complaint by a data owner. 

The PDPA is also entrusted with the function of maintaining a register of data protection supervisors and issuing directions to certain data managers to appoint data protection supervisors.

The authors are not aware of any substantial reforms that may have arisen in any of the above legal fields.

ASAR - Al Ruwayeh & Partners

Building No 283, Road No 1704
Diplomatic Area 317
P.O. Box 20517
Manama, Kingdom of Bahrain

+973 17 533 182

+973 17 533 185

asarbh@asarlegal.com www.asarlegal.com
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Law and Practice in Bahrain

Authors



ASAR - Al Ruwayeh & Partners is among Bahrain’s leading law firms, with a strong network of contacts throughout the MENA region. Its work cuts across various sectors and includes mergers and acquisitions, banking and finance, real estate, securities, employment, corporate and commercial matters, franchising, commercial litigation and arbitration. The firm has capabilities to provide services in English and Arabic. Its clients include a number of significant clients based in Bahrain and elsewhere in the world (including in the United States, Europe and elsewhere in the GCC). ASAR is also regularly retained by leading international law firms and has won numerous awards for legal services rendered.