On 1 September 2024, Bahrain's National Bureau of Revenue (BNBR) published Decree-Law No. (11) of 2024 Issuing the Implementation of Tax on Multinational Enterprises (Law). The Law introduces a Domestic Minimum Top-Up Tax (DMTT) to entities of multinational enterprises (MNE) located in Bahrain to pay a global minimum tax of 15% if the annual revenue equals or exceeds EUR 750 million in accordance with the Organisation for Economic Cooperation and Development (OECD) guidelines. This Law is set to be effective on 1 January 2025.
Scope of Application
The Law is applicable to entities of MNE groups located in Bahrain, including companies, branches, and permanent establishments, with annual revenue equal to or exceeding EUR 750 million in the consolidated financial statements of the Ultimate Parent Entity (UPE) for at least two of the four fiscal years.
The Law shall not apply to entities such as (i) government bodies, (ii) international organizations, (iii) non-profit organizations, (iv) pension funds,(v) an investment fund (as the UPE), (vi) real estate investment vehicles (as the UPE), (vii) an entity, excluding pension service entities, where at least 95% of its value is owned by one or more excluded entities, operates primarily to own assets or invest funds on behalf of these entities, and engages only in activated related to those of excluded entities, and (viii) an entity, excluding pension service entities, where at least 85% of its value is owned by certain entities, and most of its income comes from gains or losses on shares or equity interests excluded from the constituent entity income or loss calculation.
Computation of the Effective Tax Rate
The effective tax rate for Constituent Entities in the Kingdom, part of the same MNE group, is calculated by dividing the Adjusted Covered Taxes by the Net Income of the entity (Adjusted Covered Taxes ÷ Net Income = Effective Tax Rate) as provided under Article 8 of the Law. Investment entities are excluded from this calculation, and Stateless Constituent Entities are calculated separately. Regulations will provide detailed rules and conditions for applying these provisions, including for minority-owned entities, multi-parent groups, and investment entities, ensuring alignment with OECD guidelines.
Where the effective tax rate is less than the minimum prescribed rate of 15% for the fiscal year, there will be an additional rate calculated with the difference of the minimum rate and the effective tax rate (Minimum Rate – Effective Tax Rate = Additional Rate).
De-minimis Exclusions
Article 12 of the Law also includes de minimis exclusions, stating that taxes will be zero if the average constituent revenues of all controlled entities in Bahrain, which are members of the same MNE group, fall below EUR 10 million. Additionally, the average income or loss of these controlled entities must be less than EUR 1 million, calculated based on the average of the current fiscal year and the two preceding fiscal years. This is contingent on the controlled entities notifying the National Bureau of Revenue of its annual election for these exclusions. The Law further provides specific definitions for these terms.
Exemptions
The Law provides tax exemptions for certain MNE in Bahrain for fiscal years starting on or before 31 December 2026 but not ending after 30 June 2028, if they meet specific conditions. These conditions include having total revenue from Bahrain-based companies in the group under EUR 10 million, and total profit or loss before income tax under EUR 1 million. Additionally, the group's overall tax rate must be at least 16% for fiscal years starting in 2025, or 17% for those beginning in 2026. The group's profit or loss in Bahrain must also be less than a specified limit called the "Substance-based Income Exclusion". However, this does not apply to stateless entities, MNE with multiple parent companies that don't file a single report, or companies that entered certain tax arrangements after 15 December 2022. Joint ventures are included, but their financial statements are used instead of country-by-country reports to check the conditions. Further regulations will clarify the application of this Article, including rules for joint ventures, in line with the OECD guidelines.
Article 15 of the Law also provides a zero-tax rate for MNE if they meet the following conditions; (i) the multinational group must have constituent entities in no more than six countries or jurisdictions, (ii) the total value of tangible assets in all countries, except for the 'Reference Jurisdiction' (the country with the highest value of tangible assets when the global tax rules first apply to the group) must not exceed EUR 50 million, and (iv) the ownership of the Bahrain-based entities must not be controlled by a parent company that applies the Income Inclusion Rule according to the OECD guidelines.
Tax Registration
The Constituent Entities need to register with the BNBR and the authorities may, on the basis of information available to them, designate a Constituent Entity to register for tax if it meets the requirements underlined in the Law.
Tax Payments
Any payments will have to be made to BNBR through advance payments during the fiscal year and one or more instalment payments during the fiscal year following the one in which the tax is due. The payment would be paid in Bahraini Dinars unless otherwise specified by the regulations.
Concluding Remarks
In conclusion, the Law represents a significant step towards aligning the country's tax system with global standards, particularly by imposing a minimum tax rate on large multinational enterprises. This Law can positively impact Bahrain by attracting more international business, enhancing transparency, and promoting a fairer tax environment. By ensuring that MNE's contribute their fair share to the economy, it strengthens Bahrain's position as a competitive hub for global trade and investment. With its implementation in 2025, the Law is set to improve the country's fiscal stability and support long-term economic growth.
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