Bahrain Issues Executive Regulations for the 2025 Domestic Top-Up Tax

General

On December 15, 2024, Bahrain issued Decision no. (172) of 2024 to provide for the Executive Regulations for the DMTT law. This provides the detailed rules for the operation of the DMTT.

This follows Decree-Law No. (11) of 2024 (‘the law’) for the introduction of a domestic minimum top up tax (DMTT) (intended to be a Qualified Domestic Minimum Top-Up Tax (QDMTT)) published on September 1, 2024.

Article 44 of the law provides that the DMTT is effective from January 1, 2025.

The law is very high-level and although it provides for the DMTT to be calculated based on the OECD Model Rules, the detailed application of the rules is provided in the Executive Regulations.

The Executive Regulations include:

–Excluded Entities

-Entity Location, including Constituent Entities that are located in more than one jurisdiction and the change of a Constituent Entity’s location within a fiscal year

–GloBE Income Adjustments

–Adjusted Covered Taxes Adjustments

–ETR Calculation and Top-Up Tax Computation, including the computation of the ETR for minority-owned Constituent Entities, multi-parented Multinational Enterprise Groups, investment entities and insurance investment entities

–Substance-Based Income Exclusion

–Joint-Ventures

–De-Minimis Exclusion

–Transitional CbCR Safe Harbour, including the requirements for the financial statements of Joint Ventures and Joint Venture Subsidiaries

-Exclusion for the Initial Phase of International Activity

-Corporate Restructuring and Transfer of Assets and Holding Structures, including the transfer of assets and liabilities, restructuring, a Constituent Entity joining, merging, and leaving a Multinational Enterprise Group, and the rules related to a multi-parented Multinational Enterprise Group

-Financial Statements, including what constitutes a material competitive distortion

-Currency Rules

-Administrative Provisions, including Registration, Filing and Payment Obligations

The Regulations also include a detailed definition of a permanent establishment, as well as the determination of the arm’s length price for transfer pricing purposes and the requirement for a local and master file.

The provisions for Distribution Tax Regimes in the OECD Model GloBE Rules are not included in the law/regulations as this is not relevant for Bahrain’s domestic tax system.

Administrative Guidance

The only aspects of the OECD Administrative Guidance (AG) included in the law are:

AG1 (February 2023 OECD Administrative Guidance) 

-Consolidated deferred tax amounts (exclusion of the State from the definition of entity) (Article 1.3)

-Sovereign wealth funds and the definition of Ultimate Parent Entity (Article 1.4)

AG2 (December 2023 OECD Administrative Guidance)

-Transitional CbCR – Treatment of hybrid arbitrage arrangements (Article 2.6)

-NMCE Simplified Calculations (Article 6)

Executive Regulations

However, the Executive Regulations include a number of additional aspects, including:

-Rebasing monetary thresholds in the GloBE Rules (Section 1.1 AG1);

-Forex hedge election (Section 2.2 AG1);

-Excluded Dividends – Asymmetric treatment of dividends and distributions (Section 2.3 AG1);

-Debt Release Election (Section 2.4 AG1);

-Accrued Pension Expenses (Section 2.5 AG1);

-Excess Negative Tax Carry-forward guidance (Section 2.7 AG1);

-Equity Gain or loss inclusion election Section 2.9 AG1;

-The extension of the taxable distribution method election to insurance investment entities (Section 3.1 AG1);

-Restricted Tier One Capital (Section 3.3 AG1);

-Liabilities related to Excluded Dividends and Excluded Equity Gain or Loss from securities held on behalf of policyholders (Section 3.4 AG1);

-Portfolio shareholding election (Section 3.5 AG1);

-Deferred tax transition rules (Sections 4.1-4.3 AG1);

-MTTCs (Second Set of OECD Administrative Guidance);

-Additional rules (such as the deemed 50% requirement where employees perform work outside the employer’s jurisdiction for the SBIE) (Second Set of OECD Administrative Guidance).

The Executive Regulations also include aspects of the June 2024 OECD Administrative Guidance, including:

-Recalculated deferred tax where GloBE carrying value differs from accounting carrying value (Section 2.1.2 AG4)

-Determining GloBE status when a Flow-through Entity is held directly by another Flow-through Entity (Section 5.2.2 AG4)

Certain aspects of the OECD Administrative Guidance are not included (eg Substitute Loss carry-forwards and the allocation of taxes arising under Blended CFC Tax Regimes).

Safe Harbour and Penalty Relief Guidance

The law includes provisions for:

-The Transitional CbCR Safe Harbour (Article 13);

–Simplified Calculation Safe Harbour (Article 14)

Whilst the law includes the main aspects of the Transitional CbCR Safe Harbour from the OECD Safe Harbours and Penalty Relief Guidance, it does not include the amendments made in the December 2023 OECD Administrative Guidance (aside from the rule for Hybrid Mismatches after December 15, 2022 which is provided in Article 13B of the law).

The Regulations provide the detailed rules for the provisions of this Safe Harbour, including the requirements for the financial statements of Joint Ventures and Joint Venture Subsidiaries, in addition to other necessary related matters in a manner consistent with the OECD Model Rules, Administrative Guidance, and Commentary.

The only aspect of the December 2023 OECD Administrative Guidance included in the Regulations is the provision for MNEs not required to file CbC Reports (Article 90L of the Executive Regulations).

Article 56 of the Executive Regulations provides that Ministerial decision will be issued for the detailed rules of the Simplified Computation Safe Harbour.

QDMTT Design Features

The law does not simply transpose the OECD Model Rules, but instead redrafts the rules for the purposes of the domestic minimum tax.

Specific QDMTT design aspects included in the law include:

Accounting Standard

Article 6(B) of the law provides that the Financial Accounting Net Income or Loss (FANIL) is determined based on the Local Financial Accounting Standard of the Constituent Entity.

Article 8 of the Executive Regulations provides further detail on this and states a Constituent Entity’s FANILis determined based on financial accounts prepared in accordance with a Local Financial Accounting Standard where all of the following conditions are met:

1. All of the Constituent Entities located in Bahrain that are members of the same MNE Group have financial accounts prepared in accordance with the Local Financial Accounting Standard.

2. The accounting period of all such accounts is the same as the fiscal year of the Consolidated Financial Statements of the MNE Group or Joint Venture Group.

3. Either all Constituent Entities are required to prepare or use local financial accounts for the purposes of determining their liability to taxes in Bahrain or to comply with any other law of Bahrain, or the financial accounts are subject to an external audit.

Where any of the Constituent Entities located in Bahrain that are members of the same MNE Group do not prepare financial accounts which meet all of the above requirements, the Constituent Entity Income or Loss is determined based on the net income or loss for the fiscal year determined for the Constituent Entity (before any consolidation adjustments aimed at eliminating intra-group transactions), which has been used in preparing Consolidated Financial Statements of the UPE.

Where this is not reasonably practicable, the FANIL of the Constituent Entity may be determined using another Acceptable Financial Accounting Standard or Authorised Financial Accounting Standard provided that all of the following conditions apply:

1. The financial accounts of the Constituent Entity are prepared based on that accounting standard.

2. The information contained in the financial accounts is reliable.

3. Permanent differences greater than EUR 1 million that arise from the application of the other Acceptable Financial Accounting Standard or Authorised Financial Accounting Standard are conformed to the treatment which would have applied under the financial accounting standard used in the preparation of the Consolidated Financial Statements of the UPE.

Initial Phase of International Activity Exemption

The exclusion for MNEs in their initial phase of international activity does not need to be included in a QDMTT, however, it can be included. The Second Set of OECD Administrative Guidance provides jurisdictions with three options regarding the temporary exclusion in their QDMTT legislation.

Option one allows the jurisdiction not to adopt it.

Option two allows the jurisdiction to adopt it but limits it to cases where no Parent Entity is required to apply a Qualified Income Inclusion Rule with respect to Constituent Entities of an MNE Group located in the QDMTT jurisdiction.

Option three allows the jurisdiction to adopt it without any limitations. (Note, if a jurisdiction opts for Option three, for the purposes of the QDMTT Safe Harbour the Switch-Over Rule would apply).

Bahrain applies Option two under Article 15 of the law.

Currency

The OECD Administrative Guidance provides for a number of rules for currency for DMTT purposes. Bahrain adopts these in Article 72 of the Executive Regulations.

Where all of the Constituent Entities of a Multinational Enterprise Group that are located in Bahrain use the Bahraini Dinar as their Presentation Currency, the Bahraini Dinar is used for DMTT purposes.

Where one or more of the Constituent Entities of a Multinational Enterprise Group that are located in Bahrain do not use Bahraini Dinar as their Presentation Currency, the Filing Constituent Entity can make an election to use either the Bahraini Dinar or the Presentation Currency of the Consolidated Financial Statements of the UPE.

GAAR

Article 41 of the law includes a General Anti-Abuse Rule so that an arrangement, or a series of arrangements carried out by an Entity, may be disregarded, or the top-up tax arising from an arrangement, or a series of arrangements that result in obtaining any Tax advantage may be based on just and reasonable adjustments.

Investment Entities

Article 8C of the law excludes Investment Entities from the jurisdictional ETR calculation. Article 42B of the Regulations also excludes Insurance Investment Entities.

Pushdown Limitation

Tax paid or incurred by a Constituent Entity-owner under a CFC Tax Regime that is pushed down to a domestic Constituent Entity in the GloBE Rules must be excluded, as provided in the OECD Administrative Guidance. This is included in Article 43 of the Executive Regulations.

Article 43 also prevents the pushdown of tax to hybrids, PEs and for taxes on distributions (aside from Bahrain withholding tax on distributions).

Registration

Article 17 of the law provides that the Filing Constituent Entity shall register with the Tax Authority in accordance with the rules prescribed by the Regulations. Article 62A of the Regulations requires registration no later than 120 days from the first day of the Transition Year. This is defined as the first fiscal year for which a Multinational Enterprise Group comes within the scope the DMTT, irrespective of whether it had been within scope in any fiscal year other than the immediately preceding fiscal year.

However, Article 62B of the Regulations provide that where the 750 Million Euro threshold is met for at least two of the four fiscal years immediately preceding January 1, 2025, a Filing Constituent Entity must register no later than 30 days from January 1, 2025.

The Tax Authority may also require any Excluded Entity to register for QDMTT purposes.

Article 18 of the law provides that the following Entities shall appoint one among them as the Filing Constituent Entity, which shall be responsible for paying the Tax and handling all tax administration matters, including registration, filing of returns, making elections, and submitting notifications:

-The Constituent Entities of a Multinational Enterprise Group that are located in Bahrain and who meet the 750 million euro revenue threshold

-A Joint Venture and its Joint Venture subsidiaries.

On December 8, 2024, Bahrain updated its registration portal to include a form for QDMTT registration. The functionality can be accessed after logging into the NBR portal on the taxpayer home page.

Filing

Article 21 of the law provides that a Filing Constituent Entity must submit a Tax Return to the Tax Authority for each fiscal year, through the form prescribed in the Regulations. Article 66A of the Regulations provides that this must be filed within 15 months from the last day of the Reporting fiscal year.

Article 66C-E of the Regulations provides that the Filing Constituent Entity must disclose the following information in its Tax Return:

1. A Tax Computation Schedule, which includes a self-assessment of Tax Due to the tax authority for the fiscal year.

2. An Information Schedule, which includes, where applicable, information related to Constituent Entities, Joint Ventures and Joint Venture Subsidiaries which are members of the Multinational Enterprise Group, and which may be located outside Bahrain.

3. Any other information specified by the tax authority.

A Filing Constituent Entity may submit a Tax Return solely comprising a Tax Computation Schedule if GloBE Information Return has been submitted by:

-The UPE of the MNE Group which is located in a jurisdiction that has a Qualifying Competent Authority Agreement in effect with Bahrain for the Reporting fiscal year.

-A Constituent Entity of the MNE Group, other than the UPE, which is located in a jurisdiction that has a Qualifying Competent Authority Agreement in effect with Bahrain for the Reporting fiscal year.

Where this applies, the Tax Return submitted by a Filing Constituent Entity will include the identity and location of the entity which filed the information.

Article 66H of the Regulations provides for a simplified tax return (consistent with the OECDs Transitional Simplified Reporting Election), for fiscal years beginning on or before December 31, 2028, but not for any fiscal year that ends after June 30, 2030.

Payment

Article 22 of the law provides that the top-up tax due for the fiscal year shall be paid by advance payments during the fiscal year and one or more instalment payments during the fiscal year following that in respect of which Tax is due.

Article 70 of the Regulations states that advance payments are made in respect of each full three-month period or part of a three-month period during a fiscal year, except where the length of the fiscal year is shorter than three months, in which case no advance payments of tax is payable. Each advance payment is payable no later than 60 days after the end of each Advance Payment Period.

However, the first advance payment for a Transition Year that is the first fiscal year that begins on or after January 1, 2025 can be paid by the Filing Constituent Entity on the due date for the second advance payment for that year.

Article 70D provides that the Filing Constituent Entity can elect to calculate advance payments using the Prior Year Method or the Current Year Method.

Prior Year Method

The advance payment is determined in accordance with the formula:

((A ÷ B) x C), where:

A: A reasonable estimate of the tax for the prior fiscal year for Constituent Entities, Joint Ventures, and Joint Venture Subsidiaries of an MNE group located in the Bahrain.

For the purposes of the Transition Year, the reasonable estimate of the tax for those entities is computed as if they had fallen within the scope of the DMTT in the prior fiscal year.

B: The number of days in the prior fiscal year.

C: The number of days in the Advance Payment Period for which the relevant advance payment is due.

Current Year Method

The advance payment is be an amount determined in accordance with the formula:
(A – B), where:

A: A reasonable estimate of the tax that would be due if the period starting from the first day of the fiscal year and ending on the last day of the Advance Payment Period, had been a fiscal year for the purposes of the DMTT.

B: The sum of all advance payments already made, if any, for the fiscal year.