Wednesday 06, June 2018 by Jessica Combes

Strength in soft infrastructure

 

Brian Howard, Partner at Trowers & Hamlins, highlights Bahrain’s progress on the legislative front and explains how it bodes well for foreign investment

Countries such as Saudi and the United Arab Emirates have both come up with new regulations to drive economic activity and support foreign investment. How has this developed in Bahrain?
Bahrain has long been the easiest jurisdiction in the GCC in which to do business. Many international foreign investors have historically chosen, with good reason, to establish their GCC hubs in the Kingdom of Bahrain. Bahrain has long offered a corporate tax-free environment with free repatriation of funds and very limited restrictions on areas in which a 100 per cent foreign ownership is allowed. It has one of the most developed regional electronic commercial registration systems and very low minimum capital requirements.

While Saudi Arabia and the United Arab Emirates have taken various measures to free up certain restrictions in these areas and established—in the case of the United Arab Emirates, a number of free zones where their restrictions on activities are freer—Bahrain offers within its onshore regime a fully competitive and advantageous regulatory environment, provides full onshore GCC access and a suitable hub for expansions across the GCC.

Even with this advantageous starting point, Bahrain has, in the last three years, focused on securing its place as a destination of choice for international foreign investors, particularly within the GCC. Bahrain has improved a raft of legal and infrastructure measures aimed at improving systems and processes for incorporating companies, clarifying and updating regulatory frameworks, and allowing companies to do business more effectively within its borders.

One of the first significant changes came in 2015, when the capital requirements for establishing new businesses were lowered, immediately resulting in the number of commercial registrations in the kingdom to increase threefold. It is now permissible to establish a single shareholder company with a capital of $135 or a two shareholder with limited liability company with a capital of $265. This coupled with the extensive range of sectors which permit 100 per cent foreign ownership has made Bahrain an attractive destination for establishing corporate entities. In addition, Bahrain introduced a new commercial registration portal, called Sijilat, shortly after the capital changes to speed up the process of company incorporation such that it is now possible to achieve a commercial registration number in a matter of hours from an application being made.

There have also been clarifications of Bahrain’s labour laws, providing more certainty on employee costs and the process for obtaining visas has significantly improved with prices coming down and the process for obtaining work permits eased. Bahrain has also introduced the first regional trusts law in 2006. This was given a complete overhaul in 2016 to make the Trusts Law comparable with the trust legislation of key trust centres such as the Channel Islands.

The new Trusts Law maximises flexibility and has similarities with Jersey’s trust law but with the advantages of a fully codified system. Utilisation of the new Trust Law is increasing rapidly and it is being used for international investment structuring, asset protection, estate planning, alleviating forced inheritance rules for future generations, ownerships of assets where there would otherwise be foreign ownership restrictions, charities and purpose trusts, employee incentive schemes, real estate investment trusts and to replace less robust nominee ownership structures widely utilised across the GCC. The Trusts Law provides clear guidance on confidentiality and allows settlors to reserve powers and interests/controls for themselves.

Further, transfers of assets into trusts in Bahrain are exempt from any fees and the law expressly states that inheritance rights under foreign laws will not be recognised in Bahrain in relation to assets under a trust. In addition, beneficial interests under trusts are freely transferrable. Bahrain has also introduced the first onshore protected cell company and limited partnership laws suitable for financial investment structuring and funds in the GCC.

Even more recently, Bahrain approved regulatory changes in relation to financial services and financial technology as well as opening up further avenues for debt and equity funding arrangements. These measures include a regulatory sandbox to allow start-up fintech companies to operate in an incubator-friendly environment with limited regulatory requirements for an initial start-up period. Furthermore, Bahrain has also introduced legislation enabling crowdfunding platforms to be developed for equity and debt arrangements.

Bahrain has recently set its sights on financial technology given this is a natural fit with Bahrain. Bahrain has one of the most developed IT and telecommunications infrastructures in the region and has established a hub of financial technology firms who are aiming to service asset managers, banks and financial institutions across the globe. These developments and the previously existing legal infrastructure in Bahrain allow Bahrain to assert itself as the continued hub of choice for foreign direct investment in the region.

In your opinion, what can be done to boost the country’s appeal?
One of the issues that Bahrain has faced following the global credit crunch and recession was the ability of Bahrain’s bankruptcy and composition law to meet modern requirements in relation to financial restructuring by companies and institutions facing solvency issues. To this end, Bahrain has been developing new modern legislation in relation to bankruptcy which has recently cleared Bahrain’s parliament and which we are hopeful will be brought into law in the coming months.

It is anticipated that the new bankruptcy law will include a robust workout arrangement and moratorium process, similar to the Chapter 11 processes in the United States, which will allow entrepreneurs to fail but regroup, reorganise and then be successful. This will be a useful addition to the legislative changes which have been developed to enhance Bahrain’s position as being a jurisdiction of choice for SME owners and entrepreneurial companies.

What opportunities do you see for Bahrain in terms of foreign investments?
The legal and economic infrastructure in Bahrain is without doubt highly competitive for foreign investment. The empirical evidence for this is there with the large increase in commercial registrations in Bahrain. Notable recent examples include Amazon Web Services’ plans for launching its first data centre in the region in Bahrain and the production of Oreo cookies in Bahrain by Mondelez which has taken advantage of the incentives of Bahrain International Investment Park.

The choice of these major international businesses shows the trust which is being placed in the Bahrain regulatory framework and provides an excellent endorsement of Bahrain’s competitive advantages in relation to foreign investment. We fully expect other major investors and international entrepreneurs will continue to establish themselves in Bahrain as a jurisdiction of choice for the Middle East.