✅ No Income Tax = No Deduction Issue
Since Bahrain has no corporate income tax (except for Pillar Two DMTT), interest deductibility is currently not a practical concern for most businesses. The key issue is VAT treatment of financial services.
VAT on Financial Services
🏦 Conventional Interest
Interest income is VAT-exempt (financial service). Banks are partially exempt businesses. Interest expense has no VAT but affects partial exemption calculations.
🕌 Islamic Finance
Murabaha profit margin treated same as interest (exempt). Ijara lease payments are standard-rated (treated as supply of asset). Sukuk coupon payments are exempt financial services.
🏢 Intercompany Loans
Interest on intercompany loans is exempt. Transfer pricing rules apply — interest rate must be at arm's length. Pillar Two may bring thin capitalization rules for MNEs with €750M+ revenue.
📊 Pillar Two Impact
Under GloBE rules, excess interest may be disallowed in computing GloBE income. STTR (Subject to Tax Rule) may apply to interest payments to low-tax jurisdictions.