diff --git a/changelog/woopmnt-5531-move-spotlight-dismissal-logic-to-server b/changelog/woopmnt-5531-move-spotlight-dismissal-logic-to-server
new file mode 100644
index 00000000000..42a4a7126e5
--- /dev/null
+++ b/changelog/woopmnt-5531-move-spotlight-dismissal-logic-to-server
@@ -0,0 +1,4 @@
+Significance: patch
+Type: dev
+
+Move spotlight dismissal/re-show logic to server side.
diff --git a/client/data/promotions/types.d.ts b/client/data/promotions/types.d.ts
index c965718f3cb..048919b3e31 100644
--- a/client/data/promotions/types.d.ts
+++ b/client/data/promotions/types.d.ts
@@ -19,21 +19,11 @@ export interface PromotionVariation {
 	footnote?: string;
 }
 
-export interface PromotionTypeConfig {
-	reshow_delay_days?: number;
-	max_dismissals?: number;
-}
-
-export interface PromotionConfig {
-	[ key: string ]: PromotionTypeConfig | undefined;
-}
-
 export interface Promotion {
 	promo_id: string;
 	payment_method: string;
 	discount_rate: string;
 	duration_days: number;
-	config?: PromotionConfig;
 	variations: PromotionVariation[];
 }
 
diff --git a/includes/class-wc-payments-pm-promotions-service.php b/includes/class-wc-payments-pm-promotions-service.php
index 5a0c30c5493..f60f25fc09f 100644
--- a/includes/class-wc-payments-pm-promotions-service.php
+++ b/includes/class-wc-payments-pm-promotions-service.php
@@ -294,105 +294,25 @@ public function dismiss_promotion( string $identifier, string $variation_id ): a
 		return $response;
 	}
 
-	/**
-	 * Filter variations based on config and dismissal history.
-	 *
-	 * @param array $promotions Array of promotions with variations.
-	 *
-	 * @return array Filtered promotions array.
-	 */
-	private function filter_variations_by_dismissals( array $promotions ): array {
-		foreach ( $promotions as &$promotion ) {
-			if ( empty( $promotion['variations'] ) ) {
-				continue;
-			}
-
-			$promo_id             = $promotion['promo_id'];
-			$variation_dismissals = self::get_promotion_variation_dismissals( $promo_id );
-
-			// Group variations by type to apply type-specific config.
-			$variations_by_type = [];
-			foreach ( $promotion['variations'] as $variation ) {
-				$type = $variation['type'] ?? 'default';
-				if ( ! isset( $variations_by_type[ $type ] ) ) {
-					$variations_by_type[ $type ] = [];
-				}
-				$variations_by_type[ $type ][] = $variation;
-			}
-
-			$filtered_variations = [];
-
-			foreach ( $variations_by_type as $type => $type_variations ) {
-				// Get config for this variation type.
-				// Defaults: 1 dismissal allowed, no delay (must configure to show multiple variations).
-				$type_config    = $promotion['config'][ $type ] ?? [];
-				$max_dismissals = $type_config['max_dismissals'] ?? 1;
-				$reshow_delay   = $type_config['reshow_delay_days'] ?? 0;
-				$delay_seconds  = $reshow_delay * DAY_IN_SECONDS;
-
-				// Count dismissals for variations of this type.
-				$type_dismissals       = 0;
-				$most_recent_dismissal = 0;
-				foreach ( $type_variations as $variation ) {
-					$dismissed_at = $variation_dismissals[ $variation['id'] ] ?? null;
-					if ( null !== $dismissed_at ) {
-						++$type_dismissals;
-						if ( $dismissed_at > $most_recent_dismissal ) {
-							$most_recent_dismissal = $dismissed_at;
-						}
-					}
-				}
-
-				// Check if max dismissals reached for this type.
-				if ( $type_dismissals >= $max_dismissals ) {
-					continue;
-				}
-
-				// Check if still in delay period.
-				if ( $most_recent_dismissal > 0 && $delay_seconds > 0 ) {
-					$time_since_dismissal = time() - $most_recent_dismissal;
-					if ( $time_since_dismissal < $delay_seconds ) {
-						continue;
-					}
-				}
-
-				// Find first non-dismissed variation of this type.
-				foreach ( $type_variations as $variation ) {
-					$dismissed_at = $variation_dismissals[ $variation['id'] ] ?? null;
-					if ( null === $dismissed_at ) {
-						$filtered_variations[] = $variation;
-						break;
-					}
-				}
-			}
-
-			$promotion['variations'] = $filtered_variations;
-		}
-		unset( $promotion );
-
-		return $promotions;
-	}
-
 	/**
 	 * Get mock promotions data for testing.
 	 * TODO: Remove this method when server endpoints are available.
 	 *
-	 * @return array Mock promotions data (array of promotions).
+	 * The real server will receive dismissals via store_context and determine
+	 * which variation (if any) to return based on dismissal history and timing.
+	 *
+	 * @return array Mock API response with promotions data.
 	 */
 	private function get_mock_promotions_data(): array {
-		// Mock available promotions with variations.
+		// Simple mock data with a single spotlight variation.
+		// The real server will handle filtering based on dismissals sent in store_context.
 		$promotions = [
 			[
-				'promo_id'      => 'klarna-2026-promo',
-				'discount_rate' => '100%',
-				'duration_days' => 90,
-				'config'        => [
-					'spotlight' => [
-						'reshow_delay_days' => 7,   // Days to wait before showing next variation.
-						'max_dismissals'    => 2,   // Total dismissals before permanent hide.
-					],
-				],
-				'variations'    => [
+				'promo_id'       => 'klarna-2026-promo',
+				'payment_method' => 'klarna',
+				'discount_rate'  => '100%',
+				'duration_days'  => 90,
+				'variations'     => [
 					[
 						'id'          => 'klarna-2026-promo__spotlight_primary',
 						'type'        => 'spotlight',
@@ -405,36 +325,6 @@ private function get_mock_promotions_data(): array {
 						'tc_url'      => 'https://woocommerce.com/terms',
 						'footnote'    => '*Terms and conditions apply. Offer valid for new customers only.',
 					],
-					[
-						'id'          => 'klarna-2026-promo__spotlight_secondary',
-						'type'        => 'spotlight',
-						'badge'       => 'Last chance',
-						'badge_type'  => 'warning',
-						'heading'     => 'Final Reminder: Zero Processing Fees',
-						'description' => 'Don\'t miss out! Get 0% processing fees for 90 days on all card payments',
-						'cta_label'   => 'Activate Now',
-						'cta_url'     => '#',
-						'tc_url'      => 'https://woocommerce.com/terms',
-						'footnote'    => '*Terms and conditions apply. Limited time offer.',
-					],
-				],
-			],
-			[
-				'promo_id'      => 'promo-affirm-cashback-2024',
-				'discount_rate' => '2%',
-				'duration_days' => 60,
-				'variations'    => [
-					[
-						'id'          => 'promo-affirm-cashback-2024__banner_primary',
-						'type'        => 'banner',
-						'badge'       => 'New',
-						'badge_type'  => 'info',
-						'heading'     => '2% Cashback on Affirm Transactions',
-						'description' => 'Earn cashback on all Affirm payments for 60 days',
-						'cta_label'   => 'Learn More',
-						'cta_url'     => '#',
-						'tc_url'      => 'https://woocommerce.com/terms',
-					],
 				],
 			],
 		];
diff --git a/tests/unit/admin/test-class-wc-rest-payments-pm-promotions-controller.php b/tests/unit/admin/test-class-wc-rest-payments-pm-promotions-controller.php
index d092cc8ff24..98ff271860f 100644
--- a/tests/unit/admin/test-class-wc-rest-payments-pm-promotions-controller.php
+++ b/tests/unit/admin/test-class-wc-rest-payments-pm-promotions-controller.php
@@ -183,4 +183,77 @@ public function test_get_promotion_activation_time() {
 		$this->assertSame( $timestamp, $result );
 		$this->assertNull( WC_Payments_PM_Promotions_Service::get_promotion_activation_time( 'promo2' ) );
 	}
+
+	/**
+	 * Test that dismissing a promotion records the timestamp and clears cache.
+	 */
+	public function test_dismiss_promotion_records_timestamp_and_clears_cache() {
+		// First, get promotions to populate cache.
+		$this->controller->get_promotions();
+
+		// Verify cache is set.
+		$cache_before = get_transient( WC_Payments_PM_Promotions_Service::PROMOTIONS_CACHE_KEY );
+		$this->assertNotFalse( $cache_before, 'Cache should be set after getting promotions' );
+
+		// Dismiss the primary spotlight.
+		$request = new WP_REST_Request( 'POST' );
+		$request->set_param( 'identifier', 'klarna-2026-promo' );
+		$request->set_param( 'variation_id', 'klarna-2026-promo__spotlight_primary' );
+
+		$response = $this->controller->dismiss_promotion( $request );
+		$data     = $response->get_data();
+
+		$this->assertTrue( $data['success'] );
+		$this->assertSame( 'dismissed', $data['status'] );
+
+		// Verify dismissal was recorded.
+		$dismissal_time = WC_Payments_PM_Promotions_Service::get_variation_dismissal_time(
+			'klarna-2026-promo',
+			'klarna-2026-promo__spotlight_primary'
+		);
+		$this->assertNotNull( $dismissal_time );
+		$this->assertEqualsWithDelta( time(), $dismissal_time, 5 ); // Within 5 seconds.
+
+		// Verify cache was cleared.
+		$cache_after = get_transient( WC_Payments_PM_Promotions_Service::PROMOTIONS_CACHE_KEY );
+		$this->assertFalse( $cache_after, 'Cache should be cleared after dismissal' );
+	}
+
+	/**
+	 * Test that dismissals are included in store context for server requests.
+	 *
+	 * When dismissals change, the context hash changes, which triggers a fresh
+	 * request to the server (instead of using cached data).
+	 */
+	public function test_dismissals_invalidate_cache_for_fresh_server_request() {
+		// Get promotions to populate cache.
+		$this->controller->get_promotions();
+
+		// Store the current cache.
+		$cache_before = get_transient( WC_Payments_PM_Promotions_Service::PROMOTIONS_CACHE_KEY );
+		$this->assertNotFalse( $cache_before );
+		$hash_before = $cache_before['context_hash'];
+
+		// Add a dismissal (simulating what happens after dismiss_promotion clears cache).
+		$dismissals = [
+			'klarna-2026-promo' => [
+				'klarna-2026-promo__spotlight_primary' => time(),
+			],
+		];
+		update_option( WC_Payments_PM_Promotions_Service::PROMOTION_DISMISSALS_OPTION, $dismissals );
+
+		// Clear cache and memo to simulate fresh request.
+		delete_transient( WC_Payments_PM_Promotions_Service::PROMOTIONS_CACHE_KEY );
+		$this->promotions_service->reset_memo();
+
+		// Get promotions again - this should create a new cache with different hash.
+		$this->controller->get_promotions();
+
+		$cache_after = get_transient( WC_Payments_PM_Promotions_Service::PROMOTIONS_CACHE_KEY );
+		$this->assertNotFalse( $cache_after );
+		$hash_after = $cache_after['context_hash'];
+
+		// The context hash should be different because dismissals changed.
+		$this->assertNotSame( $hash_before, $hash_after, 'Context hash should change when dismissals change' );
+	}
 }