Multinational Enterprises and UAE's Top-Up Tax: A 2025 Guide
Disclaimer: The content in this blog is intended for educational and informational purposes only. It does not constitute legal or tax advice. Businesses are advised to consult professional advisors based on their specific facts.
In order to align the UAE with OECD’s Pillar Two Global Minimum Tax framework, the Ministry of Finance, UAE, has introduced Domestic Global Minimum Top-up Tax (DMTT) through Cabinet Decision No.142 of 2024. This new initiative by the UAE government will have a significant impact on Multinational Enterprises (MNEs) who has a presence in the UAE through subsidiaries, branches or joint ventures.
The Domestic Minimum Top-up Tax (DMTT) has come into effect from 01 January 2025, and the MNEs must reassess their UAE presence, tax implications to comply with the global standards. In this article, let us understand the key aspects of the new top-up tax and what steps are required to be taken by UAE MNEs to prepare in advance.
What Is the Domestic Minimum Top-up Tax?
The core concept of the Domestic Minimum Top-up Tax (DMTT) is to ensure that large multinational enterprises operating in the UAE pay a minimum effective rate (ETR) of 15% for the profits earned within the country. This top-up tax provides a fair deal among the tax authorities around the globe and prevents the shifting of profit from high-tax countries to low-tax countries.
The Domestic Minimum Top-up Tax (DMTT) is one of the core concepts of the OECD’s Pillar Two GloBE Rules, which aims to prevent the chances of Base Erosion and Profit Shifting (BEPS). The countries, like the UAE, that follow the OECD Pillar Two framework can tax the entities operating within the country with a minimum effective tax rate of 15%.
Cabinet Decision No.142 of 2024 has no intention of adopting Income Inclusion Rules (IIR) and Undertaxed Payment Rules (UTPR).
Income Inclusion Rule (IIR): This is the first top-up tax rule in the Pillar Two framework. Under IIR, the Ultimate Parent Entity can impose top-up tax on their international subsidiaries, branches, joint ventures, etc., unless the specific country has not implemented Qualified Domestic Minimum Top-up Tax (QDMTT).
Example: The parent entity is in the UK, and the subsidiary is in Australia. If Australia has no DMTT and the effective tax rate of the subsidiary is below 15%, let us say 10%, the difference, 5% top-up tax, can be collected by the UK tax authority (considering that the UK tax authority has included IIR in their framework)
Undertaxed Payment Rule (UPR): This is a backup rule for IIR. If the country where the Ultimate Parent Entity (UPE) is situated has not included IIR in their framework, any country where other subsidiaries or branches are located in the MNE group can charge the top-up tax. If such multiple counties are involved, then based on the number of employees and the amount of tangible assets located in each country determine the share of top-up tax to each countries.
Who Is Subject to the DMTT?
The Domestic Minimum Top-up Tax applies only to UAE entities that are part of Multinational Groups which meet the following criteria:
- The Multinational Group has earned global revenue of Euro 750 million in at least two out of four preceding years.
- Have operations in the UAE either through a subsidiary, a branch, other Permanent Establishment, joint venture, etc., which includes Free Zone and Offshore companies registered in the UAE.
- They are not considered as excluded entities, such as government entities, investment funds, certain non-profit organisations and pension funds.
How Does the DMTT Work?
Here's a simplified breakdown:
1. Determine Jurisdictional Effective Tax Rate :
The combined tax paid by all UAE entities in the group is divided by their combined income.
2. Compared to the 15 per cent Benchmark:
If the ETR is below 15 per cent, the Top-Up Tax equals the difference multiplied by the income.
3. Top-Up Tax Payable in the UAE:
The DMTT ensures this tax is collected in the UAE, rather than by a foreign country under Pillar Two rules.
1. Calculate the Effective Tax Rate
The first step is to calculate the Effective Tax Rate of the UAE entity. This is calculated by dividing the total tax paid against the total income earned from the UAE combined income. The total income earned is not as per the UAE Corporate Tax report; it is calculated from the financial statement of the entity after certain adjustments.
2. Determine the Top-up tax triggered
If the Effective Tax Rate is below 15 per cent, calculate the difference tax at 15 per cent less and multiply by the income.
3. Top-up Tax Payable in the UAE
Rather than foreign countries collecting taxes for the UAE's profit, DMTT ensures the top-up tax is collected by the UAE tax authority only
Example:
Group: GlobalTech Ltd, Headquartered in France
UAE Subsidiary: GlobalTech MENA FZCO
UAE Profit: AED 100 million
UAE Tax Paid: AED 0 Free Zone Qualifying Income
Effective Tax Rate: 0 per cent
DMTT Payable in UAE: 15 per cent of AED 100M -AED 15M
In the absence of DMTT, the Top-up tax of AED 15 million would have been taxed by France under the OECD Pillar Two framework using the Income Inclusion Rule IIR. With the implementation of DMTT, the UAE retains the right to top up tax and retain tax revenue within the country.
What about Free Zone Companies?
UAE Free Zone Companies, which are part of MNEs, especially those that are eligible to claim 0% Corporate Tax under the Qualifying Free Zone person, must re-evaluate their tax position. With the implementation of DMTT, if the Effective Tax Rate is less than 15% in the Qualifying Free Zone Person case, it is 0%. The Free Zone entity that is part of an MNE will end up paying 15% top-up tax, regardless of their eligibility under the UAE Corporate Tax Law.
Key Point: The Corporate Tax benefits remain, but DMTT overrides them for MNEs under global tax rules.
Effective Date: The UAE DMTT regime will apply to Financial Years starting on or after January 1, 2025.
The UAE DMTT is aiming to achieve:
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Prevent foreign countries from taxing UAE entities' profit under the Income Inclusion Rule or Undertaxed Payment Rule.
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Safeguard the tax sovereignty of the country.
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Match with global standards and encourage the transparency of taxation for MNEs.
Reporting and Compliance Obligations
The detailed guidelines are awaited from the UAE authorities regarding the Pillar Two Reporting. However, the authority confirmed that the deadline for reporting for MNEs under Pillar Two is 15 months from the end of the financial year. To support the transition, the UAE extended the deadline for the first fiscal year reporting to 18 months. It is expected that the eligible entities are required to:
- Identify the status of the company under the DMTT scope.
- Calculate GloBE income and taxes for constituent entities in the UAE.
- In addition UAE Corporate Tax return, file the DMTT-specific returns.
- Maintain all the intercompany documentation and the transfer pricing report
Strategic Considerations for Multinationals
1. Review Entity Structure:
Assess which UAE entities fall under the DMTT regime and what restructuring options exist, and plan things in advance. There are safe harbour rules under DMTT.
2. Evaluate Free Zone Strategy:
Free Zone entities may need to re-evaluate their Qualifying Free Zone status if DMTT applies regardless.
3. Align with Global Pillar Two Compliance:
Coordinate DMTT compliance with group-wide Pillar Two reporting in other jurisdictions.
4. Ensure Transfer Pricing Readiness:
UAE’s Corporate Tax Law already includes TP provisions -DMTT will intensify scrutiny.
5. Implement Accounting Adjustments:
MNEs must adapt their reporting systems to calculate jurisdictional ETR in compliance with OECD standards.
How Flyingcolour Tax Consultant Can Help
Flyingcolour Tax Consultant help multinational businesses and holding groups in the UAE to:
- Assess DMTT applicability and impact
- Map group entities and ownership structures
- Set up internal systems for Pillar Two readiness
- Coordinate UAE DMTT with foreign IIR/UTPR obligations
- Ensure timely filing and audit support
To learn more about Understanding UAE’s Top-Up Tax on Multinational Enterprises: What You Need to Know Before 2025, 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.