An Overview of Related-Party Transactions in Bahrain

16 Mar 2022

The Economic Cooperation and Development (OECD) organization is a forum where governments work together to address globalization’s economic, social, and environmental challenges. To collaborate on regulations bearing on approval and disclosure of Related-Party Transactions (RPT), it was created the Guide on related-party Transactions in the MENA region. The OECD and the MENA region recognized the importance of generating suitable frameworks of RPT regulations to avoid the risks of illegitimate RPT. The Related-Party Transactions are prevalent in the MENA region, especially transactions between the company and its controlling shareholder. These shareholders might be in a place to take out private advantages of control. Dealing with equity and non-equity RPTs emerged as a significant matter on the global corporate governance program due to some high-profile cases which have hurt market confidence. In the MENA region, the peril of an illegitimate RPT is intensified by the incidence of entities controlled by private or governmental shareholders who are often active in both administration and key board functions, also by the existence of holding and conglomerate structures in the region.

The most common RPTs in the area are with board members or between entities in the paired group. The second most usual source of RPTs in the region, as reported by regulators, is transactions between companies in the same group. The majority of RPTs in the MENA region are assumed with board members and rendering board approvals ineffective for several motives, including the lack of requirements to include independent board members in the acceptance of RPTs and challenges related to board independence in the region more generally. In theory, regulators could need concerned board members to abstain from contributing in discussions on an agreed transaction and/or need this discussion to be conducted by an independent board member. In reality, this might be challenging given that supervising shareholders often sit on the boards and those director duties are not well distinguished in the region.

A related-party transaction is an agreement between two parties who are linked by a preexisting business. According to the Federal Commercial Companies Law (CCL), the term “related-party” includes the chairman, employees, the directors, and any establishments in which such persons hold at least 30% of the share capital. An example of a related-party is the business affiliates, subsidiaries, or shareholder group. In Bahrain, through Decree-Law Number 48 of 2018, it was introduced the Value Added Tax. Article 2 of this Law, specify that tax must be imposed on every taxable supply by a taxable person in Bahrain and on goods and services established by a taxable person. The standard rate is 5 % on the value of the supply or import. Article 22 of this Law stated the Value of Supply for related persons that must be designed based on market value if the supply’s value is less than the market value and the customer is not eligible to deduct input tax in full. Additionally, the terms and conditions for applying this Article are in article 24 in Executive Regulation number 12 of 2018. Article 24 established the value of supplying Good and Services following the subsequent conditions:

  • The consideration does not contain the amounts placed in favor of the taxable person by the customer by way of guarantee if these two conditions have happened:
  • These amounts are naturally recoverable.
  • They are no down payments.
  • The market value must be determined affording to the reasonable price in the market between two independent parties, under similar circumstances, on the same date as the supply transaction and according to the following conditions:
  • The supplier and the customer are not exposed to any commercial pressure.
  • Both (the supplier and the customer) act in their own best interest, separately.
  • In a reasonable period, the transaction is settled.
  • When the market value cannot be determined according to the previous paragraph, the Bureau must regulate the market value based on the mechanism it depends on.

Any business registered for Value Added Tax should uphold a record showing the procedures used to estimate the market value. If the records are not furnished in thirty (30) days, NBR will conclude the market value to be better than what is calculated by the supplier. Furthermore, the National Bureau for Revenue (NBR) that is the agency responsible for implementing and managing VAT has introduced that when the market value could not be determined according to the three conditions before mentioned, the guidelines related to transfer pricing Guidelines for Multinational Enterprises and Tax Administration issued by the Organization for Economic Cooperation and Development (OECD) have to be implemented to calculate the market value of the transaction. The methodologies should be used notwithstanding that the parties involved may both be residents in Bahrain. If you need any legal advice on any issue reach to Fotis International Law Firm.