Executive summary

On 11 February 2025, the Ministry of Finance (MoF) of the United Arab Emirates (UAE) released Cabinet Decision No. 142 of 2024 on the Imposition of Top-Up Tax on Multinational Enterprises (Cabinet Decision), introducing a Domestic Minimum Top-Up Tax (DMTT) on multinational enterprises (MNEs). The issuance of the Cabinet Decision aims to ensure that MNEs operating in the UAE pay a minimum tax on profits, aligning with the Organisation for Economic Co-operation and Development (OECD) Pillar Two Model Rules.

The DMTT applies to MNE groups operating in the UAE with consolidated annual revenues equal to or exceeding €750m in two of the last four fiscal years. Effective from fiscal years starting on or after 1 January 2025, the DMTT Imposes a top-up tax on low-taxed UAE entities, ensuring a minimum effective tax rate (ETR) of 15% in the UAE.

Detailed discussion

Background

The UAE's introduction of the DMTT, implementing a minimum tax rate of 15%, is intended to align with the OECD/G20's BEPS 2.0 framework. The issuance of the Cabinet Decision follows the Ministry of Finance's introduction of Federal Decree-Law No. 60 of 2023 in October 2023, the holding of a public consultation on Global Minimum Tax in March 2024, and the December 2024 announcement of a UAE DMTT for MNEs. The introduction of the DMTT marks a significant milestone, as the UAE joins other Gulf Cooperation Council (GCC) countries to legislate the implementation of BEPS 2.0 Pillar Two Rules (Global Anti-Base Erosion (GLoBE) Rules).

What are the key provisions of the Cabinet Decision?

The Cabinet Decision outlines the general provisions for the application of the DMTT. The key provisions include:

• Effective date: Applies to fiscal years starting on or after 1 January 2025
• Applicability: Applies to MNE groups operating in the UAE with consolidated annual revenues equal to or exceeding €750m in two of the last four fiscal years; special rules for threshold testing could apply in the case of mergers and demergers
• Minimum ETR requirement: Imposes a top-up tax on low-taxed UAE entities, ensuring a minimum ETR of 15% in the UAE
• Integration with existing UAE corporate tax (CT) regime: Serves as a supplementary tax to the existing CT regime in the UAE

The Cabinet Decision does not address the implementation of the Income Inclusion Rule (IIR) or the Undertaxed Profits Rule (UTPR).

Who is impacted by the UAE DMTT?

Investment entities: Investment entities are not subject to the top-up tax.

Sovereign wealth funds (SWFs): SWFs meeting the definition of a governmental entity are not considered as ultimate parent entities.

Joint ventures (JVs): Entities that have at least a 50% ownership interest and that are accounted for using the equity method are considered JVs. Additionally, the top-up tax for JVs would be calculated by considering the JVs as separate MNE groups.

What does this mean for MNE groups?

Members of MNE groups must calculate a top-up tax to meet a minimum ETR of 15%.

All UAE constituent entities of the MNE groups, including those held under JV structures, will be subject to the whole amount of the UAE DMTT, irrespective of their ownership interest.

What are the filing and administration considerations from a compliance perspective?

DMTT return submission: MNE groups should submit the DMTT return within 15 months after the end of the fiscal year, with an 18-month deadline for the first year. MNE groups may appoint a designated filing entity (or entities) for submissions or file individually. Registration with the Federal Tax Authority (FTA) is required, although the details have yet to be announced.

DMTT payment: Top-up tax payments must be made alongside the DMTT return submission.

Pillar Two information return: Members of an MNE that will be required to file a Pillar Two information return and notification will be specified in a decision by the Minister of Finance. In such cases, the return will be due within 15 months after the last day of the reporting period. The Pillar Two information return is expected to follow the standard GloBE Information Return template.

Currency: The computation must be made using the functional currency of the standalone financial statements. Where two or more standalone financial statements use different functional currencies, an election can be made to use either the presentation currency of the consolidated financial statements of the ultimate parent entity or UAE Dirhams.

Penalties: Penalties for noncompliance with UAE DMTT requirements shall be applicable as prescribed under the UAE CT regime. However, no penalties shall apply with regard to filing the DMTT return or the Pillar Two information return, for periods beginning on or before 31 December 2026, but not including periods that end after 30 June 2028, if the MNE group has taken reasonable measures to ensure correct application of the UAE DMTT provisions.

What relief is provided under the UAE DMTT?

Transitional CbCR Safe Harbors (TCSH): The Cabinet Decision includes provisions relating to the TCSH, which would, on election and subject to satisfying the certain conditions, deem the top-up tax for the UAE to be zero. The TCSH applies to fiscal years starting before 1 January 2027 and excludes those ending after 1 July 2028. To benefit from the TCSH, qualified Country-by-Country Reporting (CbCR) must be prepared.

Simplified safe harbors: Permanent simplified-calculation safe harbors are available to MNE groups under the UAE DMTT framework. The OECD is expected to publish detailed guidance on simplified calculations; guidance for nonmaterial constituent entities is already available.

Initial phase of international activity: Top-up tax for UAE constituent entities is reduced to zero if (i) the MNE group has entities in no more than six jurisdictions, (ii) the net book value of tangible assets does not exceed €50m (excluding the highest value jurisdiction), and (iii) no ownership interests are held by a parent entity applying the Qualified IIR. The provision is valid for up to five years, subject to conditions.

What are the other key considerations covered by the Cabinet Decision?

Accounting standards: In-scope entities must adhere to International Financial Reporting Standards (IFRS), subject to meeting certain conditions, and if such conditions are not met, financial statements used to prepare the consolidated financial statements could be used.

Anti-abuse rules: General anti-abuse rules outlined in Article 50 of the UAE CT Law apply to the UAE DMTT.

Filing clarifications: Provisions under the UAE CT Law with respect to filing clarifications are applicable for the UAE DMTT.

Implications

Businesses operating in the UAE should evaluate whether they fall under the scope of the UAE DMTT and conduct thorough impact assessments to understand how these new rules will affect their financial statement tax provision requirement. Businesses should also monitor further developments from the UAE FTA or the MoF, as well as additional guidance from the OECD/G20 Inclusive Framework to prepare for the legislative changes.