UAE Introduces Domestic Minimum Top-up Tax for MNEs

February 11, 2025

On the 6th of February 2025, the UAE Ministry of Finance released the legislation introducing a Domestic Minimum Top-up Tax (“DMTT”) for multinational enterprises (“MNEs”), through the publication of Cabinet Decision No. 142 of 2024 introducing a 15% Global Minimum Tax effective January 1, 2025. This follows the announcement made by the Ministry on December 9, 2024. The legislation is broadly aligned with the Organisation for Economic Co-operation and Development (OECD) Inclusive Framework.

The key provisions of the decisions have been outlined below:

Applicability

The decision applies to MNEs with annual consolidated revenue of at least EUR 750 million in two of the four preceding fiscal years.
Constituent entities, Joint Ventures (JV), and JV subsidiaries in the UAE will be subject to top-up tax if their effective tax rate falls below the global minimum tax rate of 15%.

Excluded Entities

To boost the UAE’s competitiveness as a leading investment hub, the rules have been structured to exclude certain entities, such as governmental entity, International Organisation, Non-Profits, organizations, Pension Funds, Investment Funds, and Real Estate Investment Vehicles that is an Ultimate Parent Entity.
Sovereign Wealth Funds that qualify as Government Entities are not the Ultimate Parent Entity (UPE) of any group shall also be excluded.
An excluded entity is also an Entity:
- where at least 95% of the value of an Entity is owned (directly or through a chain of Excluded Entities) by one or more Excluded Entities mentioned above (other than a Pension Services Entity) and where that Entity: (i) operates exclusively or almost exclusively to hold assets or invest funds for the benefit of the Excluded Entity or Entities; and/or (ii) only carries out activities that are ancillary to those carried out by the Excluded Entity or Entities.
- where at least 85% of the value of an Entity is owned (directly or through a chain of Excluded Entities), by one or more Excluded Entities mentioned above (other than a Pension Services Entity) provided that substantially all of the Entity’s income is Excluded Dividends or Excluded Equity Gain or Loss that is excluded from the computation of Pillar 2 Income or Loss.
- Entities owned 100% by Non-profit Organizations can be classified as Excluded Entities under certain revenue conditions, especially when the revenue of Non-profits and Excluded Entities is disregarded.

International Shipping Income Exclusion 

For an MNE Group that has International Shipping Income, each Constituent Entity’s International Shipping Income and Qualified Ancillary International Shipping Income shall be excluded from the computation of its Pillar Two Income or Loss for the Jurisdiction in which it is located. Where the computation of a Constituent Entity’s International Shipping Income or Qualified Ancillary International Shipping Income results in a loss, the loss shall be excluded from the computation of its Pillar Two Income or Loss.
In order for a Constituent Entity’s International Shipping Income and Qualified Ancillary International Shipping Income to qualify for the exclusion from its Pillar Two Income or Loss under this Article, the Constituent Entity must demonstrate that the strategic or commercial management of all ships concerned is effectively carried on from within the Jurisdiction where the Constituent Entity is located.

Substance Based Income Exclusion (SBIE)

In order to compute Top-up Tax, the Net Pillar 2 Income for the UAE shall be reduced by the SBIE to determine the Excess Profits.
The SBIE amount is the sum of the payroll carve-out and the tangible asset carve-out for each Constituent Entity, except for Constituent Entities that are Investment Entities, located in the UAE.
The payroll carve-out for a Constituent Entity located in the UAE is equal to 5% of its Eligible Payroll Costs of Eligible Employees that perform activities for the MNE Group in the UAE.
The tangible asset carve-out for a Constituent Entity located in the UAE is equal to 5% of the carrying value of Eligible Tangible Assets located in the UAE.
To provide transitional relief, the 5% value will be replaced by the higher exclusion rate for the first 8 fiscal years as specified in the law.

De Minimis Exclusion – A Permanent Safe Harbour for Non-Material UAE Entities 

The application of the De Minimis Exclusion allows the Filing Constituent Entity in the UAE to elect for Top-up Tax to be deemed zero if specific conditions are satisfied. These include:

Eligibility for De Minimis Exclusion:

The Top-up Tax for UAE-based Constituent Entities can be reduced to zero for a FY if:

- The Average Pillar 2 Revenue is less than EUR 10 million.

- The Average Pillar 2 Income or Loss is either a loss or less than EUR 1 million.

- This is an annual election, meaning it must be made each FY.

Are there any exceptions to the rule?

The election does not apply to Stateless Constituent Entities (entities with no jurisdictional residence) with their financials excluded from the calculation for the de minimis exclusion.

Transitional CBCR Safe Harbour

For FYs that begin before 1 January 2027 and end before 1 July 2028, an MNE Group can elect for the Jurisdictional Top-up Tax of the UAE to be deemed as zero if:

De minimis test: The MNE Group reports Total Revenue of less than EUR 10 million and Profit (loss) before Income Tax of less than EUR 1 million in the UAE on its Qualified Country-by-Country Report (“CBCR”) for the FY.
Simplified ETR test: The MNE Group has a Simplified ETR that is equal to or greater than 16% (for FYs that begin in 2025) and 17% (for FYs that begin in 2026) in the UAE. The Simplified ETR is calculated by dividing the Jurisdiction’s Simplified Covered Taxes by its Profit (Loss) Before Income Tax as reported on the MNE Group’s Qualified CBCR; or
Routine Profits test: the MNE Group’s Profit (loss) before Income Tax in the UAE is equal to or less than the SBIE amount, for entities reported in the UAE in the CBCR.

Initial Phase of MNE Group’s International Activity

As part of a transitional measure and to create a tax environment conducive to economic growth, during the initial phase of an MNE Group’s international activity, the Top-up Tax shall be reduced to zero, provided that none of the ownership interests of the Entities located in the UAE are held by a parent entity subject to a Qualified Income Inclusion Rule in another Jurisdiction.
An MNE Group is in the initial phase of its international activity if, for a FY: (a) it has Constituent Entities in no more than six Jurisdictions; (b) the sum of the Net Book Values of Tangible Assets of all Constituent Entities located in all jurisdictions other than the reference Jurisdiction does not exceed EUR 50 million.

Top-ups Tax Registration, Return Filing, and Payment

A UAE Entity that is subject to Top-up Tax under these rules and any Designated Filing Entity will be required to register with the Federal Tax Authority. The manner and timeline of this registration is still to be confirmed.
Each Constituent Entity and JV (including JV subsidiaries) located in the UAE shall file the Top-up Tax Return to the Federal Tax Authority within 15 months after the end of the Reporting financial year.
However, for the first financial year, the Top-up Tax return shall be filed within 18 months after the end of the first applicable FY.
The relevant UAE constituent entity must pay any Top-up Tax due in UAE Dirhams. This payment shall be made at the time of filing the Top-up Tax return (i.e. 15 months after the FY or 18 months after the transitional year).

In light of recent developments, it is essential for MNEs with operations in the UAE to start preparing for the upcoming regulations, as these could have a substantial impact on taxes and compliance requirements. To assist MNEs in navigating the Pillar 2 readiness journey, we at FAME Advisory DMCC have crafted a phased approach that includes:

Conduct high-level initial impact assessments of how the new rules could affect the MNE’s operations.

Review the shareholding structure, identify jurisdictions with the greatest and least impact, and plan accordingly.

Critically assess existing and alternative supply chains, analyzing how the new rules could impact tax costs, cash flow, profitability, and financial statements.