Through the introduction of its Domestic Minimum Top-Up Tax (DMTT), Bahrain embraces OECD-aligned global tax reforms, helping boost the local economy and possibly setting a regional precedent in ensuring equitable, sustainable fiscal policies.
The global tax landscape has been undergoing a seismic shift, spearheaded by the OECD’s Base Erosion and Profit Shifting (BEPS) initiative, which amongst others includes the Pillar 2 Rules prescribing a 15 percent global minimum taxation on large multinational groups. Against this backdrop, Bahrain’s introduction of the 15 percent DMTT through Decree Law 11 of 2024 is a pivotal moment in the country.
This reform, which came into effect on January 1, 2025, underscores Bahrain’s commitment to implement a progressive tax policy, aligning it with global norms while reflecting the region’s unique economic structure. While Bahrain was the early mover to announce the DMTT in September 2024 (with detailed regulations released on 31 December 2024), various other GCC countries (like UAE, Qatar and Kuwait) have followed suit by announcing similar international tax reforms effective from 2025.
Bahrain’s new tax law: Breaking down the DMTT
The DMTT applies to Bahrain-based entities within multinational enterprise (MNE) groups that meet a €750 million revenue threshold over two of the past four fiscal years. By introducing this tax on large MNEs, Bahrain ensures that profits generated within its borders are taxed locally rather than in foreign parent or group jurisdictions. This is particularly significant given the absence of a corporate tax regime for non-MNE businesses in Bahrain, providing a strategic balance between competitiveness and fiscal accountability.
Notably, the DMTT exempts certain entities, including foreign subsidiaries of a Bahrain-headquartered group, government bodies, pension funds, and specific investment vehicles. This carefully structured approach makes sure that the tax targets the appropriate entities while safeguarding other sectors in line with OECD’s model legislation. The law’s additional provisions – such as safe harbours and anti-avoidance measures – signal a commitment to transparency and fairness.
Bahrain’s position in the GCC tax ecosystem
Bahrain’s introduction of the DMTT sets it apart from the GCC countries where corporate tax regimes are evolving but remain diverse. Unlike Bahrain’s targeted approach, Oman imposes a flat 15 percent corporate tax across all entities, while Saudi Arabia combines corporate tax for foreign shareholders with Zakat for GCC citizens. Meanwhile, the UAE previously implemented a broader 9 percent corporate tax and has now adopted DMTT similar to Bahrain effective from 1 January 2025.
This variation reflects the economic nuances of the region, with oil revenue and free-zone dynamics shaping policy decisions. However, Bahrain’s move is in more of a proactive alignment with international tax reforms and it sets a precedent for other GCC nations. In line with the above and as per information in public domain, the UAE and Qatar have also announced a 15 percent DMTT regime for MNEs effective from this year. Additionally, Kuwait released the law for the implementation of the Top-up Tax (which took effect on January 1), which also applies to MNEs under the scope of Pillar 2, and the tax is imposed where their effective tax rate is below 15 percent.
The OECD Model rules, introduced in 2021, are a big step in global tax reform, and encompass a number of ‘inter-locking rules’ which apply to ensure 15 percent minimum tax at group level. These rules include the DMTT which taxes the low taxed entity, the Income Inclusion Rule (IIR), which taxes the parent company of low-taxed subsidiaries, and the Under-Taxed Payment Rule (UTPR), which taxes group companies to collect the tax on low-tax profits of the Group. Together, these measures help ensure fair taxation.
These rules are a key part of the OECD’s Base Erosion and Profit Shifting (BEPS) initiative, supported by over 140 countries. BEPS project aims to align taxes with the actual business activities generating profits, prevent tax avoidance through artificial measures and bring global consistency to tax policies.
Bahrain’s adoption of the DMTT aligns with these goals, ensuring large companies pay taxes locally. This keeps revenue within Bahrain to support economic growth while modernizing its tax system and maintaining the Kingdom’s appeal as a business-friendly destination.
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Broader impact of the DMTT
The introduction of the DMTT is expected to not further increase tax burden for Pillar 2 MNEs operating in Bahrain. Without this legislation, the profits of Bahrain-based entities would be taxed in parent jurisdictions/group entity jurisdiction under GMT rules. Now, Bahrain ensures that this revenue stays local, which will directly benefit its economy. This will likely boost government spending in priority sectors, supporting economic diversification and growth.
For Bahrain-based businesses, the DMTT necessitates immediate action including the registration due by end of January 2025, failure to which attracts onerous fines/ penalty at Bahrain. Companies must assess their exposure, evaluate available reliefs, and prepare for new compliance requirements, including registration, tax returns, and advanced payment systems. These measures also include stringent anti-avoidance provisions to prevent misuse and ensure fairness.
What this means for Bahrain’s role in the GCC and beyond
Bahrain’s tax reform positions it as a frontrunner in the Middle East, reflecting a forward-thinking approach to global tax challenges. By partially adopting the GMT through the DMTT, Bahrain demonstrates its commitment to BEPS principles while maintaining its reputation as a business-friendly jurisdiction.
This reform appears to have been the catalyst for other GCC countries like UAE, Qatar and Kuwait, suggesting that Bahrain’s lead has encouraged faster adoption across the region. Given the GCC’s collective commitment to the OECD framework, it is plausible that these nations will converge toward a unified approach in the coming years. This will lead to greater consistency and predictability for global businesses.
Bahrain’s new DMTT is more than just a tax policy: it’s a strategic move that balances domestic economic goals with international compliance. With the new January 2025 implementation, businesses must be ready to take on and thrive in this new era of taxation. For Bahrain, this milestone that aims to combine accountability, fairness and a focus on sustainable growth not only aligns it with global standards but also reinforces the country’s commitment towards progressive fiscal reforms.
Nilesh Ashar is senior managing director & head of Middle East Tax at FTI Consulting.
