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.
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.
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.
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.
The following capital gains derived by a resident of one Contracting State may be taxed by the other State:
Gains from the alienation of other property by a resident of a Contracting State may only be taxed by that State.
Bahrain applies the credit method for the elimination of double taxation, while Switzerland generally applies the exemption method, although:
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.
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.
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.
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.