Other BriefingsBahrain to Implement 15% Domestic Minimum Top-Up-Tax on MNEs from January 1, 2025
Bahrain has introduced a 15 percent Domestic Minimum Top-Up Tax (DMTT) on profits of Bahraini subsidiaries of large multinational enterprises, effective from January 1, 2025. This marks Bahrain’s first general profit tax beyond the oil and gas sector.
Bahrain has taken a significant step in corporate taxation, introducing a Domestic Minimum Top-Up Tax (DMTT) of 15 percent on profits earned by Bahraini subsidiaries of large multinational enterprises (MNEs). This initiative, set out in Decree-Law No. (11) of 2024, will impact financial years starting from January 1, 2025, and marks Bahrain’s first general profit tax outside of the oil and gas sector.
The DMTT will apply to multinational groups with consolidated revenues exceeding €750 million across at least two of the previous four years. It aligns Bahrain with the OECD’s Inclusive Framework on Base Erosion and Profit Shifting (BEPS) 2.0, specifically under Pillar Two, which aims to ensure a global minimum tax standard for MNEs.
Implications for multinational enterprises in Bahrain
The tax framework establishes Bahrain as the first Gulf Cooperation Council (GCC) nation to implement such measures, bolstering its tax sovereignty and curbing potential revenue losses from foreign tax claims on Bahrain-sourced profits. As DMTT-compliant nations grow in number globally, Bahrain’s approach aims to position itself strategically against similar tax jurisdictions.
Notably, while the DMTT framework draws heavily from the OECD’s Global Anti-Base Erosion (GloBE) Model Rules, it does not incorporate the income inclusion rule (IIR) or undertaxed payments rule (UTPR) typically used to address non-domestic income. This selective approach may mitigate the administrative burden on multinational groups while aligning Bahrain’s practices with the OECD’s core tenets.
Key provisions and compliance requirements
The legislation includes mechanisms to exclude certain entities, such as government bodies, non-profit organizations, and international organizations, from DMTT obligations. Additionally, Bahrain offers a “Substance-Based Income Exclusion,” which reduces taxable income based on a company’s tangible assets and payroll costs in Bahrain, providing incentives for entities contributing to the local economy.
For companies newly entering international markets, the law introduces a transitional safe harbor, reducing DMTT liabilities for MNEs with limited international presence and assets, for an initial five-year period. Tax compliance will involve mandatory registration, installment payments, and regular filings with Bahrain’s National Bureau for Revenue (NBR). Detailed regulations will be issued to further guide companies on compliance and tax filing.
Finance and tax teams may face significant adjustments to meet DMTT obligations, including assessing the effective tax rate (ETR), managing single-entity data across jurisdictions, aligning accounting standards, and handling tax accounting for deferred taxes. Compliance efforts will likely require upskilling internal stakeholders or seeking third-party support, especially for Bahrain-based financial institutions. Particular attention should be given to the handling of exchange rates, as MNEs must accurately consolidate data from entities operating with various functional currencies.
Summary
The DMTT law signifies Bahrain’s commitment to evolving global tax standards while addressing local tax revenue considerations. As more countries adopt similar frameworks, MNEs operating in Bahrain are advised to assess potential impacts on their operations, conduct thorough financial reviews, and prepare for adjustments in tax provisions in line with Bahrain’s new tax regime.
Upcoming regulatory guidelines are expected to clarify operational specifics and compliance steps, making timely preparation essential for in-scope entities.
FAQs: Application of the domestic minimum top-up-tax in Bahrain
Q1. What is the domestic minimum top-up tax (DMTT) and who does it apply to?
A1. The DMTT is a 15 percent tax on the taxable income of Bahraini subsidiaries and joint ventures of multinational enterprises (MNEs). It will take effect from January 1, 2025, and applies to MNEs with annual revenues exceeding €750 million in at least two of the last four fiscal years. Exclusions include sovereign wealth funds, government bodies, international organizations, and non-profit organizations.
Q2. How will the DMTT impact multinational enterprises operating in Bahrain?
A2. The DMTT aims to create a tax-neutral environment for MNEs, allowing them to contribute taxes locally, which can boost the Bahraini economy. This move aligns Bahrain with global minimum tax rules, ensuring that MNEs do not face double taxation on their profits in other jurisdictions.
Q3. What reliefs are available under the DMTT, and which industries may benefit?
A3. Key reliefs include a Transitional CbCR Safe Harbor for the first two years, relief for MNEs in the initial phase of international activity, and substance-based exclusions based on payroll and tangible assets. Industries such as R&D, capital-intensive sectors, and low-profit-making MNEs may particularly benefit from these provisions.
Q4. What are the compliance obligations for multinational enterprises under the DMTT?
A4. MNEs must register with Bahrain’s National Bureau for Revenue (NBR), file an annual tax return, and make advance and installment tax payments. These obligations are in addition to any notifications and filings required under OECD Global Minimum Tax (GMT) rules that apply to the MNE Group globally.
Q5. What are the consequences of non-compliance with the DMTT regulations?
A5. Non-compliance can lead to significant penalties, including fines of up to BHD 100,000 for failure to register, up to 30 percent of the tax due for late filings, and 1 percent of unpaid tax per month for late payments. Additionally, businesses may face stringent administrative fines and potential criminal liability for serious defaults.
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