According to a recent update from the Bahrain National Bureau for Revenue, the income and capital tax treaty with Switzerland entered into force on 27 July 2021. The treaty, signed 23 November 2019, is the first of its kind between the two countries.

Taxes Covered

The treaty covers Swiss federal, cantonal, and communal taxes on income and on capital, and covers Bahrain income tax payable under Amiri Decree No. 22/1979.

Hydrocarbon PE

The treaty includes the provision that a permanent establishment will be deemed constituted if, for a period of more than 90 days, an enterprise of one Contracting State carries on any activity that is directly connected with the exploration for or production of crude oil or other natural hydrocarbons from the ground in the other State either for its own account or on account of others, or in refining crude oil owned by it or by others, wheresoever produced, in its facilities in the other State.

Withholding Tax Rates

• Dividends -
  • 0% if the beneficial owner of the dividends is a Contracting State, political subdivision, local government, or Central Bank thereof, a pension fund, investment authority, or any other government institution agreed to by the competent authorities of the Contracting States
  • 5% if the beneficial owner is a company directly holding at least 10% of the paying company's capital;
  • otherwise, 15%
• Interest - 0%
• Royalties - 0%

Note, with respect to Articles 7 (Business Profits) and 12 (Royalties) the final protocol signed with the treaty provides that payments received as consideration for the use of, or the right to use industrial, commercial, or scientific equipment constitute business profits covered by Article 7.

Capital Gains

The following capital gains derived by a resident of one Contracting State may be taxed by the other State:

• Gains from the alienation of immovable property situated in the other State;
• Gains from the alienation of movable property forming part of the business property of a permanent establishment in the other State; and
• Gains from the alienation of shares deriving more than 50% of their value directly or indirectly from immovable property situated in the other State, with an exemption for shares listed on a stock exchange in either Contracting State (or other exchange if agreed to) and an exemption if the company carries on its business in the property.

Gains from the alienation of other property by a resident of a Contracting State may only be taxed by that State.

Double Taxation Relief

Bahrain applies the credit method for the elimination of double taxation, while Switzerland generally applies the exemption method, although:

• the Swiss exemption on gains from the alienation of shares described above will not apply unless actual taxation of such gains in Bahrain is demonstrated; and
• in respect of income covered by Article 10 (Dividend), Switzerland may allow a deduction of the Bahrain tax paid (not exceeding Swiss tax), a lump sum reduction of the Swiss tax, or a partial exemption.

Further, a company that is a resident of Switzerland and derives dividends from a company that is a resident of Bahrain shall be entitled, for the purposes of taxation in Switzerland with respect to such dividends, to the same relief which would be granted to the company if the company paying the dividends were a resident of Switzerland.

Arbitration

Article 25 (Mutual Agreement Procedure) provides arbitration provisions, including that if the competent authorities are unable to reach an agreement to resolve a case within a period of three years, then the person that presented the case may request that any unresolved issues be submitted to arbitration.

Limitation on Benefits

Article 28 (Miscellaneous Provisions) provides that a benefit under the treaty shall not be granted in respect of an item of income or capital if it is reasonable to conclude, having regard to all relevant facts and circumstances, that obtaining that benefit was one of the principal purposes of any arrangement or transaction that resulted directly or indirectly in that benefit, unless it is established that granting that benefit in these circumstances would be in accordance with the object and purpose of the relevant provisions of the treaty.

Effective Date

The treaty applies from 1 January 2022. The 2004 Shipping and Air Transport Agreement between Bahrain and Switzerland will be suspended as long as the treaty is effective.