The Low-Tax Proposition
Bahrain has historically positioned itself as one of the world’s most tax-friendly jurisdictions. No personal income tax. No capital gains tax. No withholding tax on dividends. For decades, this zero-direct-tax environment was the foundation of Bahrain’s appeal to international businesses, financial institutions, and expatriate professionals.
That proposition is evolving. The introduction of Value Added Tax and the pending implementation of corporate income tax signal a structural shift in Bahrain’s fiscal model — a shift driven by the fiscal sustainability aspiration of the Economic Vision 2030’s government pillar. The kingdom’s declining oil revenue base and structural fiscal deficits have made some form of broadened taxation inevitable.
The critical question for businesses and investors is whether Bahrain’s tax framework remains competitive relative to regional alternatives, even as the zero-tax era ends.
Personal Income Tax
Bahrain does not levy personal income tax. There is no tax on employment income, self-employment income, investment income, or any other form of personal earnings. This policy applies equally to Bahraini nationals and expatriate residents.
The absence of personal income tax is a cornerstone of Bahrain’s talent attraction strategy. In a region where the UAE and Qatar also impose no personal income tax, this feature is necessary to remain competitive rather than sufficient to differentiate. However, combined with Bahrain’s lower cost of living relative to Dubai and Abu Dhabi, the zero income tax creates a net disposable income advantage for mid-career professionals.
Capital Gains Tax
Bahrain does not impose capital gains tax on individuals or corporations. Gains from the sale of shares, real estate, business assets, and other capital items are not subject to taxation. This applies to both Bahraini and foreign investors.
The absence of capital gains tax is particularly relevant for the financial services sector, private equity operations, and property investment — all sectors identified as priorities under the economy pillar.
Corporate Tax
Bahrain has announced the implementation of a Domestic Minimum Top-Up Tax (DMTT) at 15 percent, aligned with the OECD’s Pillar Two framework. This tax applies to multinational enterprise groups with annual consolidated revenue of EUR 750 million or more. The implementation places Bahrain in line with the global minimum tax initiative.
For smaller businesses and domestic enterprises below the Pillar Two threshold, Bahrain historically imposes no corporate income tax on most sectors. The exception is the oil and gas sector, where companies operating under concession agreements are subject to a 46 percent tax rate on profits from hydrocarbon extraction.
The introduction of corporate taxation represents the most significant structural change to Bahrain’s tax framework since the kingdom’s independence. The design — targeting only the largest multinational groups to comply with international standards — attempts to preserve Bahrain’s competitiveness for small and medium enterprises while meeting global tax governance expectations.
Value Added Tax
Bahrain introduced VAT in January 2019 at a rate of 5 percent as part of the GCC-wide VAT framework agreed by member states. The rate was subsequently increased to 10 percent effective January 2022.
Registration threshold. Businesses with annual taxable supplies exceeding BHD 37,500 (approximately $100,000) must register for VAT. Voluntary registration is available for businesses above BHD 18,750.
Standard rate. 10 percent on most goods and services.
Zero-rated supplies. Certain categories of goods and services are zero-rated, including exports of goods, international transport, newly constructed residential properties (first supply), and certain financial services.
Exempt supplies. Certain supplies are exempt from VAT, including some financial services, residential property rentals, bare land, and local passenger transport.
Filing and payment. VAT returns are filed with the National Bureau for Revenue (NBR) on a periodic basis. Filing frequency depends on the size of the business — monthly for larger entities, quarterly for smaller ones.
The VAT introduction was politically sensitive. Bahrain’s population had no experience with broad-based consumption taxation. The government mitigated the impact through exemptions for basic food items and essential services, and through the social protection system’s targeted support for lower-income households.
Social Insurance Contributions
While Bahrain does not impose income tax, social insurance contributions represent a mandatory employment cost:
Bahraini employees. The employer contributes 12 percent of the employee’s salary to the Social Insurance Organisation (SIO). The employee contributes 8 percent. Total social insurance contribution: 20 percent of salary.
Non-Bahraini employees. The employer contributes 3 percent of the employee’s salary. The employee contributes 1 percent. Total social insurance contribution: 4 percent of salary.
The differential contribution rate — 20 percent for Bahraini employees versus 4 percent for non-Bahraini employees — historically created a cost incentive for employers to hire expatriate rather than Bahraini workers. The Bahrainisation programme and Tamkeen’s wage subsidy mechanisms are designed to counteract this distortion by subsidising Bahraini employment costs.
Additionally, a Labour Market Fee is levied on work permits for non-Bahraini employees, creating a partial offsetting cost to the social insurance differential.
Regional Comparison
| Tax Type | Bahrain | UAE | Saudi Arabia | Qatar | Oman |
|---|---|---|---|---|---|
| Personal Income Tax | None | None | None | None | None |
| Capital Gains Tax | None | None | None (nationals), 20% (non-residents on Saudi assets) | None | None |
| Corporate Tax | 15% (DMTT for large MNEs) | 9% (above AED 375k threshold) | 20% (general rate) | 10% | 15% |
| VAT | 10% | 5% | 15% | None | 5% |
| Oil & Gas Tax | 46% | Variable | 50-85% | 35% | 55% |
Bahrain’s competitive position has shifted with the introduction of VAT at 10 percent — the highest rate in the GCC. However, the absence of personal income tax, capital gains tax, and broad-based corporate tax for domestic enterprises preserves a significant advantage for businesses and individuals operating below the Pillar Two threshold.
Fiscal Context
The evolution of Bahrain’s tax framework is inseparable from the vision’s fiscal sustainability aspiration. The kingdom’s structural fiscal deficit, public debt exceeding 100 percent of GDP, and credit rating in the B+/B2 range create pressure for revenue diversification. Tax policy is not merely an economic tool in Bahrain — it is a fiscal survival mechanism.
The tension between maintaining tax competitiveness (to attract investment) and broadening the tax base (to close fiscal deficits) defines the kingdom’s policy challenge. Every tax introduced reduces Bahrain’s headline advantage over zero-tax competitors. Every tax deferred extends the fiscal deficit.