On 1 September 2024, Bahrain issued Decree-Law No. 11 of 2024, introducing a domestic minimum top-up tax for Multinational Enterprise Groups (MNE Groups) effective from 1 January 2025. This briefing covers the background of the new tax regime, key features of the law, and the pending legislative aspects. It also examines the impact on MNE Groups operating in Bahrain.
1. Introduction
With the introduction of a domestic minimum top-up tax, the Kingdom of Bahrain implements the Global Anti- Base Erosion Rules (GloBE Rules), pub- lished by the OECD/G20-Inclusive Framework, arising from the Two-Pil- lar Solution of the Base Erosion and Profit Shifting (BEPS) Project led by the OECD/G20.
The BEPS Project was initially launched to ensure that multinational enterprises (MNEs) pay their fair share of taxes in the countries where they op- erate. This led to the OECD preparing 15 Action Points (referred to as BEPS Pro- ject 1.0) aimed at equipping govern- ments with domestic and international rules to combat tax avoidance and en- sure profits are taxed where the eco- nomic activities and value creation oc- cur.
However, BEPS Project 1.0 did not fully address the challenges posed by the dig- italization of the economy, leading to the release of BEPS Project 2.0, which introduced a Two-Pillar Solution. While Pillar One focuses on the reallo- cation of certain income to the jurisdic- tions in which sales are made and the standardisation of remuneration of routine marketing and distribution ac- tivities, Pillar Two’s Global Anti-Base Erosion Rules ensure that Constituent Entities (CE) belonging to MNE Groups with global consolidated revenues above EUR 750 million (AED 3.15 bil- lion) are taxed at an effective rate of at least 15%.
Bahrain incorporated these Pillar Two proposals into its domestic legislation through Decree-Law No. 11 of 2024 (Bahrain Minimum Tax Law), which will take effect for fiscal years starting on or after 1 January 2025.
Before the introduction of this mini- mum top-up tax, Bahrain did not im- pose any corporate income tax.
2. What are the key features of the Bahrain Minimum Tax Law?
Unlike the tax systems of other countries, such as the UAE, the Bahrain Minimum Tax Law does not impose a ‘classical’ tax system on the broader economy (which taxes residents on their worldwide income and non-residents on domestically sourced income).
Instead, the law only applies a domestic minimum top-up tax (DMTT) to CEs in Bahrain that belong to MNE Groups with consolidated annual revenues exceeding €750 million in two of the last four fiscal years, aiming to tax them at a minimum effective rate of 15%. Subject to certain adjustments, the 15% rate will apply to the financial net accounting income.
The law does not apply to Excluded Entities, such as government bodies, inter-national organizations, non-profits, and pension funds.
It also clarifies that the rules and guidance issued by the OECD regarding profit shifting and the GloBE Model Rules should be considered when interpreting the provisions of the new law.
However, the Bahrain Minimum Tax Law currently does not include the Income Inclusion Rule (IIR) or the Undertaxed Payment Rule (UTPR), which would tax non-Bahraini profits under certain conditions.
The law does provide safe harbor rules, including the Transitional Country-by- Country Reporting Safe Harbor and the Simplified Computation Safe Harbor.
It also features several exclusions, such as the Substance-based Income Exclusion (Substance Carveout), De Minimis Exclusion, and an exclusion for the initial phase of international activity.
Other notable features include special rules for joint ventures, subsidiaries, and permanent establishments, as well as provisions for the location of an Entity, including Flow-Through Entities.
However, certain omissions remain, such as the application of provisions for Excluded Entities, conditions under which Bahrain is considered the location of a Permanent Establishment, and the treatment of CEs located in multiple jurisdictions.
The Bahraini Cabinet is expected to adopt Executive Regulations to clarify and address these gaps. Companies should closely monitor these developments to understand the full impact of the new law.
Filing CEs must register with the National Bureau for Revenue (NBR), though a registration deadline has not yet been set.
Additionally, filing CEs must submit a tax return to the NBR for each fiscal year using a specific form. DMTT payments must be made in installments, including advance payments.
3. What is the formula for calculating the DMTT in an individual case?
To calculate the DMTT, companies should follow these steps:
Step 1: Calculate the CE’s Net Income or Loss (Financial Accounting Net Income / Loss with relevant adjustments).
Step 2: Calculate Covered Taxes and Adjusted Covered Taxes (aligned with GloBE Model Rules).
Step 3: Compute the Effective Tax Rate (Adjusted Covered Taxes ÷ Net CE Income).
Step 4: Apply the DMTT to determine the Additional Tax Rate (Minimum Tax – Effective Tax Rate).
Step 5: Calculate the Taxable Income (CE’s Net Income – Substance Carve-out).
Step 6: Determine the Tax Due (Filing CE’s Additional Tax Rate × Taxable Income + Additional Current Tax + Additional Tax for Permanent Differences).
4. Have other GCC countries introduced a minimum top-up tax yet?
Gulf Cooperation Council (GCC) countries have implemented direct tax systems, but Bahrain is the first to introduce a comprehensive minimum tax aligned with GloBE Model Rules at the domestic level. While other GCC countries have adopted preliminary legislation relating to GloBE Rules, they have yet to fully implement Pillar Two standards.
In the coming months, it will be important to see whether Bahrain will adopt the full GloBE Rules, including the IIR and UTPR. This will also be of interest to other GCC countries, such as the UAE, which held public consultations on global tax rules in 2024 and is expected to implement Pillar Two standards soon.
5. Conclusion and Outlook
The Bahrain Minimum Tax Law will take effect on 1 January 2025 and marks a significant milestone in the Kingdom’s taxation policies. Reports suggest that the Bahraini government is also considering introducing a corporate income tax, though no specific details or implementation date have been announced.
While the scope of the Minimum Tax Law is currently limited, companies operating in Bahrain should monitor these broader developments and prepare accordingly.
Dr. Constantin Frank-Fahle, LL.M.
Founding Partner
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