The Bahrain government issued a decree law on 1 September 2024 that introduces a domestic minimum top-up tax (DMTT) for multinational enterprises (MNEs) that is in line with the OECD GloBE model rules. The tax will apply as from 1 January 2025.
A translation of the decree law has been uploaded to the National Board of Revenue (NBR) website and the NBR has also published FAQs. Executive Regulations will be issued in the near future. The introduction of the DMTT fulfils Bahrain’s obligations under the OECD/G20 BEPS 2.0 project. Bharain had signed the Inclusive Framework in 2018 and already introduced the county-by-country reporting and an economic substance regime and is the first Gulf Cooperation Council country to introduce a DMTT regime.
The DMTT—found in the Implementation of Minimum Tax on Multinational Enterprises Decree Law—will be triggered when an MNE group’s annual revenue equals or exceeds EUR 750 million in the consolidated financial statements of the ultimate parent entity (UPE) for at least two of the four fiscal years immediately preceding that fiscal year (“revenue test”). If the aggregate results of constituent entities (CEs) in Bahrain do not result in an effective tax rate (ETR) of 15%, Bahrain will impose an additional tax to bring the rate up to 15%. Bahrain currently does not have a corporate income tax regime. There is no income inclusion rule or under-taxed payment rule prescribed at this stage.
The key features of the decree law are as follows:
Scope: The DMTT will be imposed on the taxable income for the fiscal year of a CE in Bahrain that is a member of an MNE group that meets the revenue test and the tax will be payable by a filing CE on behalf of the CEs in Bahrain. A CE is an entity within an MNE group or a permanent establishment of a main entity that is part of a MNE group.
For purposes of application of the law, an entity that is a legal person will be considered a tax resident of Bahrain if it is incorporated or established in accordance with the laws of Bahrain or if it has its place of effective management in Bahrain having been established under the laws of a foreign jurisdiction.
Excluded Entities: Certain entities are excluded from the application of the law, such as government bodies, international organisations, nonprofit organisations, pension funds, investment funds (being the UPE), real estate investment vehicles (being an UPE), etc. It is important to note, however, that the revenue of excluded entities must be taken into account for purposes of the revenue test.
Calculation of the Tax: The steps for computation of the DMTT are based on formulaic approaches as follows:
Tax Return: The filing CE must file a tax return for each fiscal year in the prescribed format and file an amended tax return if it or a joint venture (or joint venture subsidiary) discovers an error in the original return. The filing CE also will have to inform the NBR if the MNE group does not meet the revenue test for a particular fiscal year and may choose not to file a tax return for that year.
Tax Payments, Refunds, Maintenance of Records and Tax Audits: Tax due will have to be paid to the NBR through advance payments during the fiscal year and one or more instalment payments during the fiscal year following the year in which the tax is due. Tax will have to be paid in Bahraini Dinars, unless otherwise specified by the Executive Regulations. The filing CE may request a refund if excess tax has been paid. Specific procedures will be detailed in the regulations for the maintenance and verification of records, including financial statements, accounting books, invoices, etc.
The NBR may conduct a tax audit to verify the accuracy of the tax return or to ensure compliance with the law.
The filing CE will have to determine the tax due and the NBR may reassess, if based on the facts and circumstances, it finds that the original or amended tax return contains an error. The NBR may also assess tax if adequate information is not provided to support the tax return or if a filing CE does not submit a tax return within the deadline specified in the Executive Regulations.
Reviews, Objections and Appeals: The law provides for levels of tax adjudication starting with a review petition to be filed with the NBR, objections to the Tax Objection Committee and further appeals to the competent court.
Penalties: Administrative fines will be imposed for noncompliance and the law includes definitions of and sanctions for tax evasion.
GAAR: A general anti-avoidance rule will allow the NBR to disregard a transaction/ arrangement/ series of arrangements, if in its opinion, the primary purpose or one of the primary purposes of the transaction (or a part thereof) is to obtain a tax advantage. The NBR can then determine the resultant tax liability.
Bahrain, as a signatory to the Inclusive Framework and as a nil corporate tax jurisdiction, needed to introduce e the Pillar Two decree. MNE groups that meet the revenue test should analyse the initial impact of the law to understand any potential tax liability. It is also important to explore the initial compliance mechanism, strategise group taxes, chart out group tax policies for the CEs and the filing CE, revamp accounting systems to accommodate the data requirements, train tax and accounting teams on the new requirements and build suitable ring fences from the perspective of tax exposure and penalties.
Asrujit Mandal
Muhammad Hanzla
BDO in Bahrain
A translation of the decree law has been uploaded to the National Board of Revenue (NBR) website and the NBR has also published FAQs. Executive Regulations will be issued in the near future. The introduction of the DMTT fulfils Bahrain’s obligations under the OECD/G20 BEPS 2.0 project. Bharain had signed the Inclusive Framework in 2018 and already introduced the county-by-country reporting and an economic substance regime and is the first Gulf Cooperation Council country to introduce a DMTT regime.
Overview of the DMTT
The DMTT—found in the Implementation of Minimum Tax on Multinational Enterprises Decree Law—will be triggered when an MNE group’s annual revenue equals or exceeds EUR 750 million in the consolidated financial statements of the ultimate parent entity (UPE) for at least two of the four fiscal years immediately preceding that fiscal year (“revenue test”). If the aggregate results of constituent entities (CEs) in Bahrain do not result in an effective tax rate (ETR) of 15%, Bahrain will impose an additional tax to bring the rate up to 15%. Bahrain currently does not have a corporate income tax regime. There is no income inclusion rule or under-taxed payment rule prescribed at this stage.The key features of the decree law are as follows:
Scope: The DMTT will be imposed on the taxable income for the fiscal year of a CE in Bahrain that is a member of an MNE group that meets the revenue test and the tax will be payable by a filing CE on behalf of the CEs in Bahrain. A CE is an entity within an MNE group or a permanent establishment of a main entity that is part of a MNE group.
For purposes of application of the law, an entity that is a legal person will be considered a tax resident of Bahrain if it is incorporated or established in accordance with the laws of Bahrain or if it has its place of effective management in Bahrain having been established under the laws of a foreign jurisdiction.
Excluded Entities: Certain entities are excluded from the application of the law, such as government bodies, international organisations, nonprofit organisations, pension funds, investment funds (being the UPE), real estate investment vehicles (being an UPE), etc. It is important to note, however, that the revenue of excluded entities must be taken into account for purposes of the revenue test.
Calculation of the Tax: The steps for computation of the DMTT are based on formulaic approaches as follows:
- Computation of the Effective Tax Rate: The ETR of the CEs in Bahrain and members of the same MNE group will be determined as adjusted covered taxes for the CEs in Bahrain divided by the net CE income, where the adjusted covered taxes will be equal to current tax expense for the fiscal year as reflected in the financial accounts, and the financial accounting net income or loss will be the positive figure of aggregate income and losses of all CEs in Bahrain. Further, the net CE income or loss to be used for purposes of the calculations will be the income before making any consolidation adjustments aimed at eliminating intragroup transactions.
- Computation of the tax and de minimis exclusions: Where the ETR is below the minimum prescribed rate of 15% for the fiscal year, there will be an additional tax on the CE to the extent of the difference between the minimum rate and the ETR. Further, the taxable income for the CE in Bahrain will need to be calculated as the net CE income as reduced by the substance-based income exclusion (SBIT) per the law. The tax due will then be calculated as the additional tax rate multiplied by the adjusted taxable income.
- Substance-Based Income Exclusion: The SBIT for 2025 is 9.6% of the sum of eligible payroll costs incurred and 7.6% of the average carrying values of the tangible assets of CEs in Bahrain.
- De Minimis Exclusions: Tax will be zero if the average CE revenue for the current and two preceding fiscal years of all CEs group members in Bahrain is lower than EUR 10 million and the average CE income is less than EUR 1 million or is a loss. To benefit from the exclusion, the filing CE must make an annual election and notify the NBR.
- CbCR Safe Harbor: For any fiscal year beginning on or before 31 December 2026 but not including a fiscal year ending after 30 June 2028, the tax for the fiscal year will be deemed to be zero if the following requirements are met in that fiscal year:
- The total revenue of CEs of an MNE group in Bahrain is less than EUR 10 million and the total profits of those CEs are less than EUR 1 million or there is a loss as indicated in the relevant country-by-country reports (CbCR);
- The MNE group’s profit or loss before taxes in Bahrain as indicated in the CbCR is equal to or less than the SBIT.
- An alternative ETR-based threshold and certain exclusions to this provision have also been prescribed.
- Simplified Computation Safe Harbor: A simplified computation will be available, under which the tax for the CE in Bahrain will be zero if the CE income is less than the SBIT or if the average annual revenue for all CEs located in Bahrain for the fiscal year and two preceding fiscal years is less than EUR 10 million and the average CE income of all such entities is less than EUR 1 million or if such entities have a net CE loss, or if the ETR of all CEs in Bahrain is at least at the minimum rate. Computation mechanisms are expected to be included in the Executive Regulations.
- Exclusion for Initial Phases of International Activities: The tax of the CEs in Bahrain will be zero if the MNE group has CEs in no more than six jurisdictions and the sum of the net book value of tangible assets of all CEs located in all jurisdictions, other than the “reference jurisdiction” (i.e., the one in which the MNE group has the highest value of tangible assets at the time the GloBE rules first applied to the group), does not exceed EUR 50 million and the ownership interests in the CEs in Bahrain are not held by a parent entity that applies the income inclusion rule per the OECD guidance.
Tax Return: The filing CE must file a tax return for each fiscal year in the prescribed format and file an amended tax return if it or a joint venture (or joint venture subsidiary) discovers an error in the original return. The filing CE also will have to inform the NBR if the MNE group does not meet the revenue test for a particular fiscal year and may choose not to file a tax return for that year.
Tax Payments, Refunds, Maintenance of Records and Tax Audits: Tax due will have to be paid to the NBR through advance payments during the fiscal year and one or more instalment payments during the fiscal year following the year in which the tax is due. Tax will have to be paid in Bahraini Dinars, unless otherwise specified by the Executive Regulations. The filing CE may request a refund if excess tax has been paid. Specific procedures will be detailed in the regulations for the maintenance and verification of records, including financial statements, accounting books, invoices, etc.
The NBR may conduct a tax audit to verify the accuracy of the tax return or to ensure compliance with the law.
The filing CE will have to determine the tax due and the NBR may reassess, if based on the facts and circumstances, it finds that the original or amended tax return contains an error. The NBR may also assess tax if adequate information is not provided to support the tax return or if a filing CE does not submit a tax return within the deadline specified in the Executive Regulations.
Reviews, Objections and Appeals: The law provides for levels of tax adjudication starting with a review petition to be filed with the NBR, objections to the Tax Objection Committee and further appeals to the competent court.
Penalties: Administrative fines will be imposed for noncompliance and the law includes definitions of and sanctions for tax evasion.
GAAR: A general anti-avoidance rule will allow the NBR to disregard a transaction/ arrangement/ series of arrangements, if in its opinion, the primary purpose or one of the primary purposes of the transaction (or a part thereof) is to obtain a tax advantage. The NBR can then determine the resultant tax liability.
Comments
Bahrain, as a signatory to the Inclusive Framework and as a nil corporate tax jurisdiction, needed to introduce e the Pillar Two decree. MNE groups that meet the revenue test should analyse the initial impact of the law to understand any potential tax liability. It is also important to explore the initial compliance mechanism, strategise group taxes, chart out group tax policies for the CEs and the filing CE, revamp accounting systems to accommodate the data requirements, train tax and accounting teams on the new requirements and build suitable ring fences from the perspective of tax exposure and penalties.Asrujit Mandal
Muhammad Hanzla
BDO in Bahrain