Bahrain has long sold the same proposition to international business: a licensed financial centre, an English language commercial environment and no generally applicable tax on corporate profits. The Dutch Ministry of Finance, explaining to Parliament why Bahrain belongs on a Dutch list, put that last part precisely: in Bahrain the profit tax applies only to a limited number of specific activities. For a Gulf trading house, a family office or a regional treasury, that proposition still works. It stops working the moment the group needs a European limb, because the European limb is not assessed on what Bahrain charges. It is assessed on how the Netherlands classifies a payment that ends up in Manama.
That classification is not a matter of reputation or of diplomatic temperature. It is a published list, revised each year, and Bahrain is on it. Anyone building a Bahrain and Netherlands structure who has not read the list, and the tax treaty that sits behind it, before drafting the intercompany agreements is designing around facts that are already decided.
What Bahrain charges, and what it has started to charge
The old description of Bahrain as a jurisdiction without corporate tax was accurate for most businesses and is now incomplete. The National Bureau for Revenue publishes that the Domestic Minimum Top-up Tax was introduced by Decree Law (11) for the year (2024) on multinational enterprises with annual revenues equal to or exceeding EUR 750 million globally, that it is designed in alignment with the Pillar Two requirements of the Organisation for Economic Co-operation and Development, and that it takes effect starting January 1st, 2025. The decree law itself fixes the Minimum Rate at fifteen per cent, sets entry into force at 1 January 2025 in its article 44, and treats the revenue test as met where the group reached the 750 million figure in the consolidated accounts of the ultimate parent entity in at least two of the four preceding fiscal years.
Two things follow. For a large multinational, Bahrain is no longer a zero-rate jurisdiction on Bahraini profits, and the group’s own effective rate calculation now has a Bahraini number in it. For everyone below the threshold, and that is most privately held Gulf groups, nothing has changed at the entity level. Bahrain also operates value added tax, published by the Bureau at a standard rate of 10 per cent since 1 January 2022, which affects cash flow and compliance but not the profit tax analysis.
The distinction matters when advisers describe the structure to a European counterparty. A group inside the top-up tax can say, accurately, that its Bahraini profits bear a minimum charge, and can point to the central record kept by the Inclusive Framework on BEPS, which lists Decree-Law No. (11) of 2024 as holding transitional qualified status, with the safe harbour available, from 1 January 2025. That status is what lets the Bahraini charge be recognised abroad rather than merely asserted. A group below the threshold cannot borrow it.
The Netherlands still lists Bahrain as a low-taxed state
The Dutch designation is separate from all of that. The Regeling laagbelastende staten en niet-coöperatieve rechtsgebieden voor belastingdoeleinden, in the version in force from 1 January 2026, names the same twelve low-taxed states twice. Article 2 names them for the purposes of the controlled foreign company rule in article 13ab of the Wet op de vennootschapsbelasting 1969, and article 2a names them for the purposes of the conditional withholding tax. Both readings run Anguilla, the Bahamas, Bahrain, Bermuda, the British Virgin Islands, Guernsey, the Isle of Man, Jersey, the Cayman Islands, Turkmenistan, the Turks and Caicos Islands and Vanuatu. Bahrain is in both.
The criterion behind the designation is set out in article 1.2, first paragraph, of the Wet bronbelasting 2021, which asks whether a state, on 1 October of the calendar year preceding the period concerned, subjects entities to a profit tax at a rate of less than 9 per cent or does not subject them at all. The test is the rate the state applies generally, and it is not softened by a top-up tax that reaches only groups above a EUR 750 million revenue threshold. That is why the introduction of a Bahraini minimum tax does not by itself remove Bahrain from the Dutch list, and why an adviser who assumed it would has assumed something the regulation does not say.
The practical consequence is that two Dutch regimes engage without an inspector having to argue motive, but they engage on different facts and point in opposite directions. The conditional withholding tax looks at where the recipient of a payment is established. The controlled foreign company rule in article 13ab of the Wet op de vennootschapsbelasting 1969 looks the other way, at a Bahraini entity in which a Dutch taxpayer holds more than 50 per cent of the nominal paid-up capital, of the votes or of the profit, and it draws that entity’s interest, royalty, dividend and similar income into the Dutch base unless the entity carries on a substantive economic activity.
There is a second consequence that groups notice later. Being on the list is a fact that travels. Banks running onboarding checks, counterparties running their own tax due diligence and acquirers running vendor diligence all read the same regulation, and a structure that terminates in a listed state is a question they are obliged to ask. The answer can be perfectly good. It still has to be prepared, in writing, before someone else asks it in a transaction timetable.
What the conditional withholding tax reaches
Article 4.1 of the Wet bronbelasting 2021 sets the conditional withholding tax at the highest percentage referred to in article 22 of the Wet op de vennootschapsbelasting 1969. On the table in force for 2026, that highest percentage is 25.8 per cent, the rate applying above 200,000 euro of taxable profit, with 19 per cent below it. The charge covers interest, royalties and dividends flowing to associated entities in defined situations, of which payment to a listed low-taxed state is the plainest.
The number is worth reading twice. It is levied on the payment rather than on a margin, it recurs for as long as the arrangement runs, and it is not a reduced rate negotiated for the occasion. Where no tax treaty stands between the payment and the charge, that is where the analysis ends.
Bahrain has a treaty, and the treaty decides the case
Bahrain has a tax treaty with the Netherlands, signed on 16 April 2008 and in force since 24 December 2009, and the treaty changes the answer. Article 11 provides that income from debt claims arising in one state and beneficially owned by a resident of the other is taxable only in that other state. Article 12 says the same for royalties. The Dutch legislator saw the point coming: article 1.2, eighth paragraph, of the Wet bronbelasting 2021 defers the designation of a treaty state by three calendar years, and the government wrote in the nota naar aanleiding van het verslag on bill 35 305 that where the conditions for applying the treaty are met, no withholding tax on interest and royalties can be levied under the treaty with Bahrain. The three-year window has long since run, the treaty has not been amended since it entered into force, and the treaty position is what remains.
So the Bahraini treasury lending into a Dutch subsidiary, and the Bahraini licensor holding group trade marks, are not exposed to a gross 25.8 per cent charge by operation of the list alone. They are exposed to the loss of a treaty entitlement that has to be earned and held. The conditions are residence, beneficial ownership and the absence of abuse, and both states listed the 2008 convention among the agreements they wish to be covered by the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting, neither reserving out of the principal purpose test, which therefore travels with the treaty. Article 2.1 of the Wet bronbelasting 2021 also keeps a separate limb for entities interposed with the main purpose of avoiding tax at the level of another person, and that limb does not depend on the list.
The design conclusion is the opposite of the one groups usually draw from the list. The exposure on an interest or royalty leg into Bahrain is not a rate to be budgeted. It is a binary: the treaty holds and the Dutch charge falls away, or the treaty is denied and the full domestic charge returns with nothing left to reduce it.
The participation exemption is not on the list
What is often missed is that the flow in the other direction is governed by different rules and is frequently unaffected. The Dutch participation exemption in article 13 of the Wet op de vennootschapsbelasting 1969 leaves out of account the benefits from a participation, which exists where the taxpayer holds at least 5 per cent of the nominal paid-up capital of a company, subject to its own conditions. It says nothing about where the ultimate shareholder sits.
So a Dutch holding company owned from Bahrain can still receive European subsidiary dividends and realize European disposal gains under the participation exemption, provided the subsidiaries themselves qualify. The Bahraini connection bites on the way out of the Netherlands, not on the way in. That asymmetry is the single most useful structural fact in this file, and it points at where the design effort belongs.
It also explains why the Dutch dividend withholding tax, set at 15 per cent of the proceeds by article 5 of the Wet op de dividendbelasting 1965, is not the end of the analysis for a Bahraini parent. Article 10 of the treaty caps what the state of the paying company may charge at nil where the beneficial owner is a company whose capital is wholly or partly divided into shares and which holds directly at least 10 per cent of the capital of the payer, and at 10 per cent in all other cases. That nil rate does not stand on its own. Paragraph 9 of the same article provides that where a dividend within that first limb is paid by a company resident in the Netherlands and, under the law in force in Bahrain, its taxation there results in a tax burden of less than 10 per cent of the gross amount, the Netherlands may levy a tax of up to 10 per cent. Paragraph 10 disapplies that recovery only for a narrow set of recipients: the Government of Bahrain or a political subdivision or local authority of it, or a company resident in Bahrain whose capital is exclusively beneficially owned by that Government, or whose shares are regularly traded on the Stock Exchange of Bahrain, or which is engaged in an active trade or business in Bahrain. Paragraph 11 leaves a further route open by mutual agreement between the competent authorities. Set against the Bahraini profile this article began with, in which the profit tax reaches only a limited number of specific activities, that permission is live on an ordinary upstream dividend.
A permission is not an outcome. A treaty allocates taxing rights, it does not impose a tax, and the Netherlands has declined this one in its own law. Article 4, second paragraph, of the Wet op de dividendbelasting 1965 sets the withholding aside where the recipient is established in a state with which the Netherlands has concluded a treaty that provides a regulation for dividends, which Bahrain is, and where at the moment of distribution it holds a participation to which the participation exemption would have applied had the recipient been established in the Netherlands. That much is nil.
It is not the whole charge. The same distribution is within reach of the conditional withholding tax as well. Article 3.1 of the Wet bronbelasting 2021 levies that tax on dividends as defined in article 3.4a, which are dividends payable by a Dutch withholding agent associated with the recipient, and article 2.1 makes the recipient liable under its first limb where it is established in a low-taxed jurisdiction, which is the designation Bahrain carries in article 2a of the regulation. The rate is the one article 4.1 sets. The legislator foresaw the two taxes meeting on one dividend, and article 5.2, headed samenloop dividendbelasting, resolves the meeting by reducing the conditional charge by the dividend tax withheld on the same benefit. Where article 4 has set that withholding aside, the amount deducted is nil. The word vrijstelling appears nowhere in the Wet bronbelasting 2021.
So the exemption in the dividend tax does not produce an exempt dividend. It removes the only deduction the conditional charge allows. What could limit that charge is the ceiling in the treaty set out above, ten points where paragraph 9 applies and nil where the recipient answers one of the conditions in paragraph 10. Whether the ceiling reaches the conditional charge at all runs through article 2, fourth paragraph, of the treaty, which extends the Convention to taxes substantially similar to the existing ones imposed after signature. That is a step to be established in the file, not assumed.
What can bring the dividend tax back is the third paragraph of that article 4, and it looks straight at the structure. The set aside falls away where the recipient holds the participation with the main purpose, or one of the main purposes, of avoiding the levy of tax at the level of another and there is an artificial arrangement, which the provision defines as one not put in place for valid commercial reasons reflecting economic reality. The fourth paragraph requires the recipient to show that it is the beneficial owner. Article 2.1 of the Wet bronbelasting 2021 carries that same pairing word for word, but in its third limb, which opens by confining itself to a recipient established in a state that is neither the Netherlands nor a low-taxed jurisdiction. A Bahraini recipient falls outside that limb and inside the first one, which asks only where the recipient sits. The two charges therefore turn on different things: the dividend tax on the purpose and the commercial reality of the holding, the conditional withholding tax on location alone. Facts about the holding decide whether the dividend tax stays at nil. Facts about Bahrain, and the reach of the treaty, decide what the conditional charge can come to.
Substance is asked for twice, in different languages
A Gulf group that establishes in the Netherlands is answering two substance questions at once, and they are not the same question. The Dutch question is whether the company is effectively managed in the Netherlands and whether its functional profile supports the returns allocated to it. The source state question, asked by whichever European state is paying the dividend or the interest, is whether the Dutch recipient is the beneficial owner or a conduit for a shareholder in a listed jurisdiction.
The second question is harder for this profile than for most. A structure whose ultimate owner sits in a state named in the Dutch regulation invites the conduit analysis rather than merely permitting it. The file has to answer it on facts: a board that decides, personnel whose seniority matches the decisions, premises, records and a balance sheet capable of carrying the risks the group attributes to the entity.
In one mandate we rebuilt a Gulf owned European holding whose entire board sat outside Europe and whose minutes were prepared abroad and signed in circulation. Nothing about the ownership changed. What changed was who decided, where, and on what information. The point is not that Gulf ownership is a problem. It is that Gulf ownership through a listed state removes the benefit of the doubt, and the treaty entitlement that makes the Bahraini leg work is what the benefit of the doubt would otherwise have protected.
Designing around the payment, not around the entity
The workable structures share a discipline. They put the deductible cross-border payment where it can be defended on its own facts, not where the chart makes it convenient. Equity return, which is what the participation exemption and the treaty network are built to carry, moves reasonably well. Interest and royalties into Bahrain move too, but only on the strength of the treaty, and a treaty position is a file rather than a rate. It has to survive the principal purpose test years after the agreements were signed.
That usually means the intellectual property and the group funding function sit where the people who perform the functions actually are, with a balance sheet that carries the risk being priced. It sometimes means accepting a less elegant chart in exchange for a file that survives examination in three states rather than one.
It also means being honest about the cost of the alternative. Retaining a Bahraini licensor for a European operating group is not a decision to pay a known percentage every year. It is a decision to carry an all or nothing risk on a recurring payment, and to restructure later under worse conditions if the risk lands.
What to settle before anything is signed
The sequence that works starts with the list and the treaty and ends with the agreements, not the other way round. Confirm the current version of the Dutch regulation, because entries do move: the United Arab Emirates was named in the version in force on 1 January 2023 and gone from the one in force on 1 January 2024, and Barbados went the same way between the 2025 and 2026 versions. Confirm whether the group is inside or outside the Bahraini top-up tax threshold, because the answer changes what can be said about its effective rate. Establish, in writing and before the money moves, whether each Bahraini recipient meets the treaty conditions. Then decide which payments cross which border, and only then draft.
The last step is the one groups skip. The Dutch entity has to be resourced to be what the documents say it is, and the Bahraini entity has to be described as what it actually does. A structure in which both descriptions are true is duller than the alternatives, and it is the only kind that reads the same way in Manama, in The Hague and in the state that is paying the dividend.
This article is informational and does not constitute tax or legal advice. The treatment of any structure depends on its facts and on the law of each jurisdiction involved. Each engagement is subject to scope and applicable regulation.