UAE ISSUES DOMESTIC MINIMUM TOP-UP TAX LEGISLATION

On 11 February 2025, the Ministry of Finance (MoF) of the United Arab Emirates (UAE) announced Cabinet Decision No. 142 of 2024, introducing the Domestic Minimum Top-Up Tax (DMTT) for multinational enterprises (MNEs) operating in the UAE. The DMTT aims to ensure MNEs are taxed at a minimum effective tax rate (ETR) of 15%, aligning with the Organisation for Economic Co-operation and Development (OECD) Pillar Two Model Rules. This decision comes in response to the UAE’s efforts to comply with the OECD/G20’s Base Erosion and Profit Shifting (BEPS) 2.0 framework, specifically the Global Anti-Base Erosion (GLoBE) Rules.

The DMTT applies to MNEs with consolidated annual revenues of €750 million or more in two of the last four fiscal years. It will be effective for fiscal years starting on or after 1 January 2025. The tax is intended to supplement the existing UAE corporate tax regime, applying a top-up tax on low-taxed UAE entities to ensure they meet the 15% minimum ETR.

Key Provisions

-Effective Date: The DMTT applies to fiscal years starting on or after 1 January 2025.

-Eligibility: MNE groups with consolidated annual revenues of €750m or more in two of the last four fiscal years.

-Minimum ETR Requirement: A top-up tax is imposed on low-taxed UAE entities, ensuring a minimum ETR of 15%.

-Integration with Existing Tax Regime: The DMTT will be applied in addition to the existing corporate tax (CT) regime in the UAE.

-Special Exemptions: Investment entities and sovereign wealth funds (SWFs) are not subject to the top-up tax under the Cabinet Decision.

-Filing and Administration: MNEs must submit the DMTT return within 15 months after the end of the fiscal year, with an 18-month deadline for the first year. Penalties for noncompliance will follow the UAE CT regime, but a grace period exists for filings related to periods before 31 December 2026.

Relief and Safe Harbors

-Transitional CbCR Safe Harbors (TCSH): These provisions allow qualified MNEs to potentially reduce the top-up tax to zero, provided certain conditions are met. The TCSH applies to fiscal years starting before 1 January 2027.

-Simplified Safe Harbors: Simplified calculation methods are available for MNE groups, and the OECD is expected to release further guidance.

-Initial Phase of International Activity: For certain MNE groups with limited international activity, the top-up tax may be reduced to zero for up to five years.

Implications for Businesses

-MNEs operating in the UAE should assess whether they fall within the DMTT scope and evaluate the impact of these changes on their tax position.

-Companies should stay updated with guidance from the UAE Federal Tax Authority (FTA) and the MoF, as well as from the OECD/G20 Inclusive Framework, to prepare for these legislative changes.

-Businesses should review their financial statements and corporate structures to ensure compliance with the new DMTT provisions and minimize potential tax liabilities.

In conclusion, the UAE’s implementation of the DMTT is a significant step toward aligning with international tax standards and ensuring that MNEs pay a minimum tax on profits. The move reflects the UAE’s commitment to the global tax framework and aims to reduce tax avoidance strategies.