Bahrain’s National Bureau for Revenue (NBR) has released Version 1.6 of its VAT Real Estate Guide, clarifying the treatment of lease incentives. While rent reductions and rent-free periods remain exempt, fit‑out contributions may trigger VAT where costs are recharged by tenants.

Bahrain’s National Bureau for Revenue (NBR) issued Version 1.6 of its VAT Real Estate Guide on 29 January 2026. The publication outlines the VAT framework for the real estate sector in Bahrain, and the key change in this update is the addition of guidance on lease incentives.

This document sets out the general principles of VAT in relation to the real estate sector in the Kingdom of Bahrain (Bahrain).  VAT was introduced in Bahrain with effect from 1 January 2019 with a standard rate of VAT of 5%. With effect from 1 January 2022, the standard rate of VAT was revised to 10%.

This guide is intended to provide general information only and contains the current views of the National Bureau for Revenue (NBR) on its subject matter. This guide is not a legally binding document, it should be used as a guideline only and is not a substitute for obtaining competent legal advice from a qualified professional. The main principles of the VAT system in the Kingdom of Bahrain are set out in the VAT General Guide issued by the NBR which is available on the NBR’s website, www.nbr.gov.bh. This document should be read in conjunction with the VAT General Guide.

Lease incentives 

A lease incentive is an additional benefit (monetary or non-monetary) provided by a landlord to encourage a tenant to enter into a new lease, renew an existing lease or continue occupying a property. These incentives are commonly used in the real estate market to attract tenants to vacant properties or to retain existing tenants, especially in competitive markets or during periods of high vacancy. The main types of incentives include (but are not limited to):

  •   Fit-out contribution – The landlord funds part or all of the tenant’s fit-out costs (such as fixtures, equipment and interior finishes) to help the tenant prepare the premises for use.
  • Rent reduction – A fixed or percentage discount on the contractual rent, applied for part or all of the lease term, reducing the tenant’s ongoing rental expense.
  •  Rent-free period – A period during which no rent is payable, often at the start of the lease, to assist with relocation, fit-out works or initial cash flow constraints.
  • Passive lease incentives – Non-cash benefits such as upgrades to common areas or building facilities, carried out by the landlord to enhance the property and improve the tenant’s experience.

VAT treatment 

Under Bahrain VAT legislation, the sale, lease or licence of real estate located in Bahrain, regardless of whether the real estate is residential, commercial or land, is treated as an exempt supply of real estate for VAT purposes (as described above in section 2.2).

Rent reductions and rent-free periods follow the same treatment of the principal supply (i.e. the lease of real estate) and do not give rise to any VAT implications.

However, there may be instances where such incentives constitute a VATable supply, particularly in the case of fit-out contributions. Usually under these arrangements, the tenant incurs costs in their own name and subsequently recharges these costs to the landlord (for example, for certain fit-out works, services or other expenses).

For VAT purposes, the reimbursement of such expenses is treated as a separate supply of goods or services by the tenant. Accordingly, the reimbursement is generally subject to VAT at the applicable rate, provided the tenant is a VATable person and the underlying supply falls within the scope of VAT in Bahrain.