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The Kingdom of Bahrain has introduced the Decree-Law No. (11) of 2024 to enforce a domestic minimum top-up tax (DMTT) on multinational enterprises (MNEs) in Bahrain. The law is expected to be enforced from 1 January 2025.
The law, framed in line OECD’s model rules, discusses its applicability to MNEs in Bahrain, computation of taxable income, effective tax rate, safe harbour rules, de minimis exclusion as well as reporting and compliance. In this write-up, we have analysed the scope of the law, its applicability and the entities excluded from its provisions.
Scope of the Tax
The law outlines the scope of taxation, specifying which entities and income are subject to the new tax.
The revenue test is a key criterion for determining tax liability. It is met if the MNE group's annual revenue equals or exceeds EUR 750 million in the Consolidated Financial Statements of the Ultimate Parent Entity (UPE) in at least two of the four fiscal years preceding the current fiscal year. In other words, this law applies if the constituent entity located in Bahrain is a member of an MNE group that meets the revenue test outlined in the law.
The tax applies to an entity located in Bahrain, i.e., an entity that is a tax resident of Bahrain. An entity that has a legal personality is considered a tax resident in Bahrain if it is incorporated therein or if it is incorporated overseas and has its place of effective management in Bahrain.
DMTT at 15% is imposed on the Bahrain based constituent entity’s taxable income for the relevant fiscal year. The law discusses the concept of taxable income and effective tax rate in further detail.
The filing constituent entity is responsible for paying tax on behalf of the said constituent entity located in Bahrain.
The law also applies to joint ventures and their subsidiaries located in Bahrain.
Excluded Entities
The law excludes specific entities from taxation, including government bodies, international organizations, non-profit organizations, pension funds, investment funds and real estate investment vehicles that are ultimate parent entities.
It provides detailed criteria for these exclusions, ensuring that only relevant entities are taxed. For instance, entities where at least 95% or 85% of their value is owned by excluded entities may also qualify for exclusion, depending on their income sources and activities.
Conclusion
Bahrain’s law on DMTT is in tandem with the OECD’s regulations. It underscores the Kingdom’s commitment to align its law with the globally accepted standards to attract and retain foreign investment.
MNEs and their constituent entities located in Bahrain have a time frame of 4 months until 1 January 2025 to understand and implement mechanisms for compliance with the law.
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