Commercial life in Bahrain can be broadly divided into the onshore and offshore sectors. In the offshore sector, which consists of exempt companies and offshore banking units, the rules regarding foreign participation are quite liberal. In the onshore sector, the rules governing each type of business entity impose certain limitations on foreign participation; all the partners of a general partnership must be Bahraini and foreign participation in other forms is limited to 49%. There are, however, certain exceptions to this rule.
The Commercial Companies Law allows for the establishment of 100% foreign owned companies under the following terms:
the purpose of the company is to establish an industrial enterprise in the country;
a majority of the company's capital is to be invested in an industrial development project; or
the company's objective is to use this establishment as a primary centre for the investment of funds related to the distribution of its goods and/or services.
If the wholly foreign owned company takes the form of a joint stock company, it must be a closed joint stock company.
Certain exceptions to the partnership rules allow some service sector partnerships, such as accounting, architectural and engineering firms to engage in partnership relations between Bahrainis and foreigners. In the event that there is only one foreign partner, the Bahraini partners must be entitled to at least 51% of the capital and operational earnings, and, if there are several foreign partners, to at least 30% thereof.
Forms of Business
Exempt companies are joint stock companies that have been exempted from some or all of the requirements of the Law of Commercial Companies by the Minster of Commerce and Agriculture. An exempt company must register and situate its main office in Bahrain, but is set up to conduct its activities outside of Bahrain. This type of company may operate for a maximum 25 year period. The exempt company's activities must be conducted outside Bahrain. No more than 20% of the capital of an exempt company may be owned by Bahraini nationals without the permission of the Minister. An exempt company takes the form of a joint stock company. The company's name must be followed by the phrase "Bahraini Exempt Joint Stock Company" and an indication of the entity's capital. The company's activities may not include insurance, banking or brokerage. It is exempt from the requirements of local Bahraini participation in ownership applicable to most Bahraini companies. Without the consent of the Ministry of Commerce and Agriculture, an exempt company is not allowed to conduct any business or to undertake any commercial activity within Bahrain.
Exempt companies must have at least two members, and the maximum number of members is unlimited. Exempt companies are managed by a board of directors of not less than two and not more than 10 directors. A percentage of profits of the exempt company must be allocated each year for depreciation and 10% of the net profits thereafter must be allocated to form a compulsory reserve until the amount of such reserve equals 25% of the capital.
The Directorate of Commerce and Companies' Affairs of the Ministry of Commerce and Agriculture has complete discretion to accept or to reject an application for the registration of an exempt company. It may exercise this discretion in accordance with its views as to the contribution that the proposed company will make to the economy of Bahrain and to Bahrain's reputation as an offshore centre for business activity. Upon its incorporation, the exempt company is required to deposit a portion of its capital with the Bahrain Monetary Agency in order to guarantee any liabilities which might be outstanding upon the company's dissolution and may be paid only to the liquidator of the company.
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