Bahrain Guide: What is VAT for Financial Services in Bahrain?
Financial services are directly related to money, financing, debts, and other financial securities include fund management. VAT Law and the Executive Regulations specify financial services are exempt from Bahrain VAT on meeting certain conditions. If not met for the VAT exemption in Bahrain, financial services supplied in Bahrain will be subject to VAT at the standard rate of 5%. These are mainly financial services remunerated by way of an explicit fee, commission, or discount. Exported Financial services in Bahrain meeting the conditions will be subject to VAT at zero rates.
What are Financial Services for VAT in Bahrain?
The Executive Regulations in Bahrain provide a non-exhaustive list of operations considered financial services for VAT in Bahrain. It includes the following:-
- Money related services in Bahrain – Services typically performed by banks or similar organizations in connection with the operation of current, deposit, or savings accounts
- Credit and financing services in Bahrain – Lending or advancing money to customers in consideration for interest payment
- Debts and debts related services in Bahrain – Transactions dealing with debts and their recovery
- Capital and money markets in Bahrain – Issue, allotment, renewal, amendment, rent, or transfer of ownership of a debt or equity security listed or unlisted
- Financial derivatives in Bahrain – Supply or issue of financial derivatives or deferred contracts or any necessary arrangements for them
- Asset management – Investment management services (i.e., the direction of a client’s cash and securities by a financial services company)
- Islamic Finance products in Bahrain – Islamic finance products provided by legally approved contracts, which are similar to conventional financial products in terms of the intended objective and materially achieve the same result
- Insurance and life reinsurance in Bahrain – Provision or transfer of ownership of a life insurance or reinsurance contract and insurance cover or an annuity under any investment scheme
What are Financial Services exempt from VAT in Bahrain?
- A financial service will be exempt from VAT in Bahrain if the income earned by the supplier is by way of interest, a profit margin akin to interest, or by way of an implicit margin. The implicit margin condition is met when the supplier seeks to generate income by actively trading an asset at a higher price than its acquisition price while bearing the risk of loss.
- Financial services supplied in exchange for an explicit fee, a commission, or a commercial discount does not fall within the VAT exemption in Bahrain.
- Some financial services may be remunerated by way of both a fee and interest or implicit margin. For such services, each component of the remuneration will have its VAT treatment. The fee will be subject to VAT in Bahrain at the standard rate, whereas the margin realized will be VAT exempt.
The VAT law in Bahrain prescribes financial operations that are exempt from VAT in Bahrain, irrespective of the form of consideration received. For the following, the exemption applies regardless in any case:
- The issue, allotment, or transfer of ownership of an equity security or debt security
- The execution of life insurance and reinsurance contracts and the transfer of such contracts
What is Financial Services zero-rated for VAT in Bahrain?
Financial services supplied by a taxable person resident in Bahrain that meets the conditions to qualify as exported services. Therefore, a financial service that would otherwise be exempt from VAT in Bahrain will be subject to VAT at zero rates when it is an exported service. The same applies to a financial service that would otherwise be subject to VAT at the standard rate. Taxable persons who export financial services are therefore not charging an actual VAT on their services but are entitled to recover the VAT charged on the expenses they incurred for providing these services.
The supply of gold, silver, and platinum is zero-rated in Bahrain in either of the following cases:
- Extraction carried out for the trading purpose. It includes the purchase by a person who intends to use the metal for business purposes, such as purifying it, using it in a manufacturing process, etc.
- Investment gold, silver, and platinum are metals with a purity of at least 99%, which are tradable on global bullion markets and which are certified by the Ministry of Industry, Commerce, and Tourism (MoICT) or an entity licensed by the MoICT.
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