Taxes in Bahrain: a guide to the tax system for businesses and individuals

Bahrain offers one of the most tax-friendly environments in the Gulf. With no personal income tax, no capital gains tax and no withholding tax on dividends, interest or royalties, it’s a highly attractive destination for businesses and individuals looking to optimise their tax obligations.

While historically tax-free, Bahrain introduced excise tax in 2017 and value-added tax (VAT) in 2019. The country’s tax framework continues to evolve, with new reporting requirements and international tax agreements shaping compliance obligations. In 2025, a domestic minimum top-up tax (DMTT) will come into effect, applying to Bahrain entities that are part of large multinational enterprise groups.

For businesses operating in the country, understanding these obligations is essential. This guide outlines the key regulations, explaining what is taxed, who is exempt, and what you should be aware of when operating in the country.

Personal and corporate tax in Bahrain

Bahrain doesn’t tax personal income. Salaries, capital gains and inheritance are all untaxed, and there is no levy on income earned outside the country. Employees contribute to social insurance, with Bahraini nationals paying 7% and employers contributing 12%. For expatriates, employer contributions are lower at 3%. These payments are capped at a salary base of BHD4,000 (c. USD10,500) per month.

For businesses, corporate tax is largely absent, making Bahrain an attractive place to set up operations. The main exception is oil and gas companies, which pay a 46% tax on profits. There are no withholding taxes on dividends, interest or royalties, and businesses are generally not subject to controlled foreign corporation (CFC) rules or transfer pricing regulations.

From 2025, a Domestic Minimum Top-Up Tax (DMTT) of 15% will apply to Bahrain-resident entities that are part of large multinational enterprise (MNE) groups. This measure aligns Bahrain with international tax standards under the OECD’s Pillar Two framework, ensuring that large MNEs pay a minimum level of tax on their profits. While the DMTT doesn’t affect most domestic businesses, it’s an important consideration for multinational groups operating in the country.

To align with international tax standards, Bahrain joined the OECD/G20 Inclusive Framework on Base erosion and profit shifting (BEPS) in 2018. As of January 2021, Bahrain introduced Country-by-Country Reporting (CbCR) rules, which follow the guidelines outlined in the OECD Action 13 in respect of Transfer Pricing Guidelines. These rules only apply to businesses or branches in Bahrain that are part of in scope MNE groups.

Value Added Tax (VAT) in Bahrain

VAT in Bahrain is administered by the National Bureau of Revenue (NBR), which oversees compliance and enforcement. The tax was introduced in 2019 at a rate of 5%, before increasing to 10% in 2022. The standard rate applies to most goods and services, though some qualify for exemptions or a 0% rate. Businesses must register for VAT if their annual turnover exceeds BHD37,500, while those earning BHD18,750 or more can register voluntarily. Non-resident companies must register from their first taxable transaction.

Excise tax in Bahrain

Bahrain introduced excise tax in 2017 as part of a regional agreement among GCC countries. The tax applies to products deemed harmful to health, such as tobacco and energy drinks, which carry a 100% levy. Carbonated drinks are taxed at 50%. The government may expand excise tax to cover additional goods in the future.

International tax treaties in Bahrain

Bahrain has signed 45 Double Taxation Agreements (DTAs) with major economies, including the UK, France, China, the Netherlands, Singapore, Switzerland and Turkey. These agreements help businesses and investors by preventing income from being taxed twice, both in Bahrain and in the treaty partner jurisdiction.

In June 2022, Bahrain ratified the OECD’s Multilateral Instrument (MLI), an international treaty that enables jurisdictions to swiftly implement the treaty-based recommendations from the BEPS package, which are aimed at reducing tax avoidance. Ratifying the MLI allows Bahrain to update its existing DTTs without renegotiating each one individually.

Tax incentives and free zones in Bahrain

Bahrain’s approach to taxation is built around its commitment to open markets. There are no restrictions on capital flow, which allows businesses to operate without the financial constraints found in other jurisdictions.

For companies looking to set up in free zones, Bahrain offers significant tax exemptions. These zones are designed to attract foreign investment, making them a preferred choice for businesses engaged in trade, logistics and manufacturing.

While tax advantages are a key benefit, businesses must still comply with local regulations to maintain their exempt status. This includes meeting reporting requirements and ensuring that operations align with the intended use of the free zone.

The appeal of Bahrain’s tax framework lies in its predictability. With no corporate tax outside specific sectors and no personal income tax, the country remains one of the most investor-friendly in the region. That said, to ensure compliance and unhindered operations, it’s essential to understand the rules, keep proper records and seek expert advice.

How can Sovereign PPG help?

As one of the leading corporate service providers in the Gulf region, Sovereign PPG has extensive experience in the Bahrain market and strong relationships with government authorities. We can simplify business set-up, ensuring full compliance with Bahrain’s tax regulations and corporate requirements.

If you need assistance with establishing a company in Bahrain, understanding tax obligations, or ensuring compliance in free zones and other business sectors, contact us.