In April 2010 Malta signed the Convention for the Avoidance of Double Taxation and Prevention of Fiscal Evasion with respect to Taxes on Income with Bahrain. The treaty is in force since 28th February 2012 (L.N. 82 of 2012).
1. Definitions
The objective of double tax agreements is to structure the relation between two countries regarding taxation, and, in consequence, to facilitate economic co-operation and exchange. The new treaty provides for a definition of a resident, which although generally based on OECD Model, is slightly modified by granting Bahrain residency status to Bahrain nationals spending in the Kingdom more than 183 days in fiscal year concerned. Taking into account an important branch of Bahrain’s economy – exploitation and refining crude oil – a permanent establishment’s definition encompasses refinery and any activity carried out in relation to such exploitation, refining or production of crude oil.
2. Taxation of particular types of income
Contrary to the OECD Model, in case of dividends, interests and royalties the treaty grants exclusive taxing rights to the state of residency of their beneficial owner. This solution dismisses withholding taxes on said types of income and minimizes the risk of double taxation. It should be noted that parties of the treaty acknowledged rules of Islamic finances and substituted “interest” with “income from debt-claims” since the notion of interest is alien to Islamic legal system. Potential double taxation is avoided by the credit method.
3. Exchange of information and anti-avoidance measures
The Convention regulates an exchange of information, which importance is strengthen by the fact that Bahrain has not concluded with Malta any bilateral Agreement on Tax Information Exchange, based on the OECD model (TIEA).
Despite the latest trends and developments in the field of tracking tax evasion and tax avoidance, the treaty does not contain limitation of benefits clause, even of a general character.
