Impact of UAE DMTT on Free Zone Entities and part of Multinational (MNE) Groups
Currently, numerous benefits are available to Freezone entities. If we talk about tax specifically, the UAE Corporate Tax offers 0% tax to the Freezone entities that satisfy certain conditions. However, the recent introduction of Cabinet Decision 142 Domestic Minimum Top-up Tax (DMTT) in 2024 and guidance for the conditions to satisfy the Freezone are changing the scenario, especially for the taxability of Free Zone Entities (FZEs) and the other entities which are part of large multinational groups.
Cabinet Decision No. 142 of 2024 has proposed that Multinational Enterprise (MNE) groups which are operating in the UAE in any form, either subsidiary or branch, would be required to pay at least a 15% Effective Tax Rate (ETR) in line with the OECD’s Pillar Two Global Minimum Tax framework.
Now the question arises, does this mean that for Free Zone entities that currently enjoy 0% Corporate Tax as Qualifying Free Zone Persons (QFZPs) would be required to pay 15% ETR?
Let’s move forward and have a look at how it is structured in the UAE CT Law and recent developments issued by CD 142.
What Is the UAE’s Domestic Minimum Top-up Tax?
The DMTT is a UAE tax mechanism designed to top up the tax paid by entities in large MNE groups if their UAE-based operations are taxed below the 15% threshold.
In the context of UAE Corporate Tax and OECD Pillar Two, the term MNE Group” refers to :
- Only MNE groups with global consolidated revenues of EUR 750 million or more in at least two of the four previous fiscal years are subject to Pillar Two rules, including the Domestic Minimum Top-Up Tax (DMTT).
- Tax calculations like Effective Tax Rate (ETR) and Top-Up Tax are done at the group level, not just the individual entity level.
- MNE groups must assess compliance with the global minimum tax across all jurisdictions they operate.
Whether the Qualifying Free Zone Person subject to DMTT?
As per the UAE Corporate Tax Law, QFZP is a Free Zone entity that:
- Maintains adequate economic substance in a Free Zone
- Earns income from Qualifying Activities (e.g. trading with foreign clients or other Free Zone entities)
- Does not earn income from Excluded Activities (e.g. finance to mainland group companies)
- Elects to be taxed at 0% under the UAE CT Law
- And doing the compliances such as audit of financial statements & complying with Transfer Pricing regulations.
The regime was designed to preserve the UAE’s Free Zone incentives while maintaining compliance with global tax norms.
Analysis
1. Definition of Covered Groups and Entities: The DMTT applies to MNE Groups with consolidated revenue ≥ EUR 750 million. & it applies to all Constituent Entities in the UAE, including Free Zone entities and QFZPs.
2. No Carve-Out for QFZPs: The law does not exclude QFZPs from the scope of DMTT. & It follows the OECD Pillar Two model, which does not recognise tax holidays or incentives like 0% Free Zone regimes when calculating the Effective Tax Rate (ETR).
3. OECD Pillar Two Conformity: The UAE’s DMTT is designed to align with the OECD’s GloBE (Global Anti-Base Erosion) Rules. & Under these rules, jurisdictional ETR is calculated without considering exemptions like Free Zone incentives.
Hence, even if a UAE entity is exempt from Corporate Tax (e.g., a QFZP), it may still be subject to DMTT. Because OECD Pillar Two rules do not recognise Free Zone tax incentives when calculating the jurisdictional ETR. So, for global tax purposes, 0% CT = 0% ETR—triggering a top-up.
Let’s have a look at the Example: (where DMTT is applied to a Free Zone Subsidiary)
(Facts)
➤ Name of Group: TechBridge Global (US Headquartered MNE), having a Subsidiary in the UAE – named TechBridge MENA FZCO (based in DMCC)
➤ Company Earned Profit in FY2024: AED 20 million
➤ Qualifying Freezone Person, who is eligible for 0% tax benefits. Corporate Tax Payable: AED 0
➤ Effective Tax Rate: 0%
➤ Top-Up Tax Due under DMTT: AED 3 million (15% of AED 20M)
➤ Since the Company - TechBridge MENA is a qualified freezone person, and it is also part of the MNE Group, DMTT would be applicable + effective tax rate is also below 15%. As per Cabinet Decision 142, since this is part of MNE, DMTT would be applicable, and it would be required to pay tax @ 15%.
Below is the step-by-step approach for the recognition of the Company on which DMTT would be applicable
1. Assess Group-Level Revenue: Confirm if your global group meets the EUR 750M turnover threshold. If so, are you operating in more than one jurisdiction?
2. Identify the Local Entity: Identify all the UAE entities in the group — not only those that apply to 9% tax, but also QFZPs, which apply to 0% tax.
3. Calculate the Jurisdictional ETR: Calculate the combined ETR of all UAE entities based entities according to Pillar Two GloBE rules.
4. Calculate Top-Up Tax Liability: If ETR is greater than 15%, the UAE entity would be required to pay DMTT, even it is not required by UAE CT law.
5. File DMTT Return (not yet notified): Awaiting FTA guidance on return formats, but it will be a confirmed obligation to submit DMTT Tax Return.
Quick One – What could be the Possible Compliance Obligations?
Below are the possible compliance obligations; the UAE Government has yet to issue further detailed guidance on it:
- Tax Return as per DMTT return formats
- Deadlines for submission of DMTT Tax Return
- Possible Interaction with Transfer Pricing Rules
- Safe Harbour Rules and carve-outs
How Flyingcolour Tax Consultant Can Help?
With the support of our Expert Team in the UAE, we work closely with UAE Free Zone companies that are part of large MNEs, for -
- Assess DMTT exposure and simulate possible Top-Up Tax calculations
- Guide on Free Zone operations to align with OECD Pillar Two requirements
- Review group structures for ETR optimisation
- Support TP documentation and local/global alignment
- Prepare for DMTT and Corporate Tax filings
To learn more about What is the Impact of UAE DMTT on Free Zone Entities and part of Multinational (MNE) Groups?, book a free consultation with one of the Flyingcolour team advisors.
Disclaimer: The information provided in this blog is based on our understanding of current tax laws and regulations. It is intended for general informational purposes only and does not constitute professional tax advice, consultation, or representation. The author and publisher are not responsible for any errors or omissions, or for any actions taken based on the information contained in this blog.