An overview of the liberal FDI landscape in Bahrain

Bahrain / Corporate Structuring

One of the key drivers for investors to invest in Bahrain is the benefit of potentially holding 100% of shares in a Bahrain entity.Contents

Thank you for reading

Law Update: Issue 358 - Technology, Media & Telecoms Edition

An overview of the liberal FDI landscape in Bahrain

Rad El Treki
Partner, Head of Corporate
Structuring – Bahrain

Yara Frotan
Associate,
Corporate Structuring

Abdulla Isa
Paralegal,
Corporate Structuring

One of the key drivers for investors to invest in Bahrain is the benefit of potentially holding 100% of shares in a Bahrain entity. The Commercial Companies Law 21 of 2001 permits foreign investors in Bahrain to acquire 100% business ownership, subject to sector-related restrictions. Over the past years, the Ministry of Industry and Commerce (the “MOIC”) have progressively eased the foreign ownership restrictions for a wide range of commercial activities. Initially, these restrictions were structured on the basis of certain commercial activities permitting either (i) 100% foreign ownership; or (ii) 49% foreign ownership with a minimum of 51% GCC (and/or Bahraini) ownership. More recently in 2021, Decision 40 of 2021 was published by the Minister of Industry and Commerce (the “Resolution”) consolidating all previous decisions by setting out (via schedules) all commercial activities and the respective applicable levels of foreign ownership restrictions. In doing so, the Resolution also brought about certain procedural changes in the levels of foreign ownership restrictions applicable to a wide range of commercial activities, with the result that the majority of commercial activities that formerly necessitated a minimum of 51% GCC ownership may now only require a minimal percentage of GCC ownership (as small as a single share).The ResolutionThe Resolution contains 5 categories of commercial activities (distributed across 5 schedules), as follows:Schedule 1:
This schedule lists out 18 commercial activities that require 100% Bahraini ownership. Where a Bahrain entity is undertaking any of the activities listed under this schedule, then it may not be owned by a foreign shareholders. The activities listed under this schedule have historically been restricted to Bahraini ownership. These include: fishing activities, clearance offices, newspaper activities, postal activities, food trucks, employment offices, rental of motor vehicles and recruiting manpower agencies. Schedule 2:
This schedule lists out 20 commercial activities that require a minimum of 51% GCC ownership. While a foreign individual or entity may own shares in a Bahrain entity undertaking the activities listed under this schedule, there is still a need for the majority of the shares in the Bahrain entity to be held by a GCC individual or entity. Some of the activities listed under this schedule include: construction activities, electrical installations, demolition works, accounting activities, building completion activities, sea freight agencies, air cargo agencies, shipping agencies, pearl testing laboratories, private security activities, and heat, air-conditioning and refrigeration installation and maintenance activities. Schedule 3:
This schedule lists out 178 commercial activities that permit foreign ownership, provided that there is a minimum percentage of GCC ownership (in practice, this can be satisfied by the GCC or Bahrani party holding a single share). Certain activities under this schedule previously fell under schedule 2, meaning that they would previously require at least 51% GCC ownership. The majority of sale, trade, import and export activities fall under this schedule, in addition to the following activities: repair activities, pet care activities, personal event planners, motorcycle rental activities, printing activities, reproduction of recorded media, mining and quarrying activities, support activities for crop and animal production, electric power generation, transmission and distribution activities and water collection and treatment activities. Existing Bahrain entities undertaking the activities listed under this schedule i.e. entities that were incorporated prior to the publication of the Resolution now have the option to restructure their Bahrain entity by amending the shareholding percentages to reflect (for example) a 99.9% / 0.1% shareholding structure, rather than a 51% / 49% shareholding structure.Schedule 4:
This schedule lists 62 commercial activities that permit 100% foreign ownership, subject to certain pre-requisites being satisfied. More specifically, full foreign ownership is permitted for the commercial activities listed under this schedule only if (i) the foreign shareholder is a major multinational foreign entity existing in at least three global markets; (ii) has a capital of not less than BHD 20 million; and (iii) the Bahrain entity’s capital is not less than BHD 2 million in the first year. The activities listed under this schedule include motorcycle trade and maintenance and repair, agricultural activities, some sale, trade, import and export activities such as those related to agricultural machinery, transportation equipment, tobacco, household items, books, perfumery and leather goods.Schedule 5:
This schedule lists out 377 commercial activities open to 100% foreign ownership. This is the schedule with the most commercial activities listed, and these commercial activities would not require a local partner to hold shares in the Bahrain entity. Examples of the commercial activities listed under this schedule include food production and manufacturing activities, pharmaceutical and medical activities, activities licensed by the Central Bank of Bahrain, schools, construction of floating structures, in flight sales activities, warehousing and storage activities, logistics and cargo handling activities, courier services, short term accommodation activities, telecommunication activities, holding companies, marketing activities, administrative support activities, sports instruction, and activities of amusement and theme parks .Other points to noteIt is important to note that where there are GCC ownership requirements (e.g. 51% or one share as the case may be) to be satisfied by way of inclusion of a GCC corporate entity as a shareholder , then (i) the corporate shareholder must itself be 100% owned by GCC nationals directly, ultimately and at every of the ownership chain; and (ii) the corporate shareholder must itself be established in a GCC jurisdiction. Additionally, Article 345 of the CCL stipulates that Minister of Industry and Commerce may issue an order to approve a foreign company to conduct a restricted activity (i.e. one that requires a percentage of GCC ownership) without a GCC partner, on a case by case basis. An application must be submitted to Minister by the foreign company for review. Where there is a requirement for a minimal percentage of GCC ownership for the activities listed in schedule 3 of the Resolution, then the structure of the Bahrain entity may be 99.9% / 0.1%, noting that to achieve a 0.1% shareholding, the Bahrain entity would need to have a suitable number of shares – for example, 1,000 shares (or a number of shares evenly divisible by 1,000 i.e. BHD 1,000 share capital divided into 1,000 shares each with a nominal value of BHD 1), whereby the 0.1% shareholder would hold 1 share.ConclusionThe Resolution has consolidated the different levels of foreign ownership restrictions, providing a streamlined guide to foreign investors whereby their relevant commercial activities are placed within a respective schedule, indicating whether or not a local partner is required. The Kingdom’s readiness to attract foreign direct investment is once again confirmed in the progressively relaxed foreign ownership restrictions for various activities, most notable trading activities. The Resolution further emphasises Bahrain’s longstanding dedication to fostering an open and diverse economy and to further expanding its business-friendly regulatory landscape.

For further information, please contact Rad El Treki.

^{Published in May 2023}