Bahrain to Implement 15% Top-Up Tax in 2025, Pioneering OECD Pillar Two Adoption in GCC

Author: The Law Reporters

The Kingdom of Bahrain has announced the introduction of a Domestic Minimum 15% Top-Up Tax (DMTT) for financial periods starting on or after January 1, 2025. This marks Bahrain as potentially the first Gulf Cooperation Council (GCC) country to implement Pillar Two of the Organization for Economic Cooperation and Development’s (OECD) Base Erosion and Profit Shifting (BEPS) project.

Bahrain's move to introduce the DMTT aligns with its commitment to adhere to international standards on tax transparency and prevent harmful tax practices. The legal basis for the DMTT is outlined in Decree Law No. 11 of 2024, with more detailed regulations expected to follow soon. These regulations will provide guidance on the application of the law, with the OECD Pillar Two model rules serving as a reference point.

Key Aspects of the DMTT Law:

  1. Scope: The DMTT will apply to Multinational Enterprises (MNEs) operating in Bahrain that have global revenues of at least EUR 750 million in two of the last four financial years. The tax is imposed on the taxable income of these MNEs and is payable by a designated filing constituent entity on behalf of the group.
  2. Excluded Entities: Certain entities are exempt from the DMTT, including government bodies, international organizations, non-profits, pension funds, and some investment and real estate funds. However, these entities' revenues must still be considered when calculating the EUR 750 million revenue threshold.
  3. Tax Computation and Effective Tax Rate (ETR): Taxable income will be calculated based on financial accounting net income or loss, with adjustments as specified under the DMTT Law. The ETR for entities in Bahrain will be determined by a prescribed formula, and if the ETR falls below the 15% minimum, additional tax will be levied. The law also allows for a substance-based carve-out related to payroll costs and certain tangible assets.
  4. Substance-Based Income Exclusion: The DMTT Law permits the exclusion of certain payroll costs and tangible assets from the tax base, reducing the taxable income for qualifying entities.
  5. De-Minimis Exclusion: Entities with revenue below EUR 10 million and income under EUR 1 million in Bahrain may elect to be excluded from the DMTT under specific conditions.
  6. Tax Registration: MNEs subject to the DMTT must register with Bahrain's National Bureau for Revenue (NBR), though no deadline for registration has been provided yet.
  7. Tax Returns and Payment: Entities subject to DMTT are required to file tax returns for each financial year and make advance payments during the year, followed by installment payments in the following year.
  8. Transitional Provisions: Deferred tax assets and liabilities will be factored into the ETR calculation for MNEs, unless otherwise excluded.

Impact on MNEs:

The introduction of the DMTT will have a significant impact on large MNEs operating in Bahrain. These companies must familiarize themselves with the new tax rules to ensure compliance and assess the effects on their global tax strategies. Proper planning and adjustments will be essential to mitigate potential risks associated with the DMTT implementation.