In alignment with global tax reforms spearheaded by the Organisation for Economic Co-operation and Development (OECD), the UAE is set to introduce a 15% Domestic Minimum Top-up Tax (DMTT) on large multinational companies. This will be implemented from 1st January 2025. This move forms part of the UAE’s adoption of the Global Minimum Tax (Pillar Two) under the OECD’s Base Erosion and Profit Shifting (BEPS) framework, aiming to ensure that multinational enterprises (MNEs) pay a minimum level of tax, regardless of where they operate.
Who Will Be Affected?
The new 15% tax rate applies to large multinational companies meeting the following criteria:
- Revenue Threshold: MNEs with a consolidated global turnover of at least €750 million (approximately AED 3.15 billion) in the two preceding fiscal years will be subject to this tax.
- UAE Operations: The tax applies to qualifying income derived from UAE operations, provided these entities fall under the scope of the OECD’s Pillar Two framework.
Entities that do not meet the €750 million threshold will remain subject to the existing UAE corporate tax regime, which imposes a 9% corporate tax on taxable income exceeding AED 375,000.
This blog is a part of our Taxation and Taxes in the UAE: A Comprehensive Overview Series.
Understanding the Global Minimum Tax (Pillar Two)
The Global Minimum Tax is a key component of the OECD’s efforts to combat tax avoidance by multinational companies. It comprises two core rules:
- Income Inclusion Rule (IIR): Ensures that the ultimate parent entity of an MNE group pays the minimum tax on its income globally.
- Undertaxed Payments Rule (UTPR): Applies a top-up tax where income is taxed below the minimum rate in jurisdictions within the MNE group.
The UAE’s implementation of the Income Inclusion Rule will enable it to tax the “top-up amount,” ensuring that UAE-based MNEs contribute their fair share of taxes.
Key Legal and Compliance Implications
The introduction of the 15% tax rate has far-reaching implications for affected businesses, requiring immediate action to ensure compliance:
Transfer Pricing Adjustments
Multinational companies operating in the UAE will need to align their transfer pricing policies with the new regulations. Enhanced documentation and reporting standards will likely be mandated, necessitating accurate benchmarking and robust justifications for intercompany pricing arrangements.
Corporate Structuring
The higher tax rate may prompt businesses to re-evaluate their corporate structures. Specifically, businesses should consider:
- Whether restructuring could mitigate tax exposure.
- How the UAE’s tax treaties and double taxation agreements (DTAs) may provide relief.
Compliance and Reporting
Affected MNEs will need to:
- Implement robust systems for country-by-country reporting (CbCR).
- Prepare for enhanced disclosure requirements, including reconciliation of financial statements to taxable income.
Governance and Penalties
Failure to comply with the new tax regulations may result in significant penalties. Multinationals will need to review their governance frameworks to ensure adherence to regional and global tax rules.
Opportunities for Businesses
While the introduction of the 15% tax rate increases the tax burden on MNEs, the UAE remains an attractive business hub due to its strategic location, world-class infrastructure, and pro-business policies. The alignment with international tax standards also enhances the UAE’s reputation as a transparent and compliant jurisdiction.
Additionally, the UAE has indicated that substance-based carve-outs, such as for qualified payroll costs and tangible assets, may be available. These carve-outs could reduce the effective tax rate for certain entities, underscoring the importance of legal and tax advisory in maximizing benefits.
How Businesses Should Prepare
- Conduct a Tax Impact Assessment: Evaluate whether your entity meets the revenue threshold and understand the financial impact of the new tax rate.
- Engage in Transfer Pricing Reviews: Ensure your transfer pricing policies align with the Pillar Two requirements.
- Review Free Zone Arrangements: Assess whether your business will be affected by the tax despite being in a free zone.
- Invest in Compliance Systems: Develop infrastructure to meet reporting and documentation requirements.
Global Tax Compliance with Competitive Business Edge
The UAE’s adoption of the 15% corporate tax for large multinational companies signals its commitment to global tax compliance while maintaining its competitive edge as a business destination. Companies operating in the UAE must act swiftly to navigate the new regulatory landscape, ensuring compliance while optimizing their tax position.
ATB Legal specializes in guiding businesses through complex tax and legal transformations. Our team can assist with compliance assessments, restructuring strategies, and maximizing incentives under the new tax framework.
