UAE Corporate Tax: Subsidiaries of multinationals have ample time to be in sync

On December 9, 2024, the UAE’s Ministry of Finance announced that the Domestic Minimum Top-up Tax (DMTT) would apply from January 1, 2025.

Recently, the Ministry provided clarity on many areas related to the top-up tax, which aligns with the OECD’s Pillar 2 global minimum tax rules and targets multinational enterprises with consolidated revenues exceeding 750 million euros.

The 750 million euro threshold applies to revenues recorded in the consolidated financial statements of the parent Entity in at least two of the four financial years immediately preceding the tested fiscal year. If any of these is of a period other than 12 months (shorter or longer), the threshold will be adjusted proportionally to correspond with the length of the relevant fiscal year.

The decision outlines specific excluded entities that are not subject to the DMTT. These are:

• Governmental entities

• International organisations

• Non-profit organisations

• Pension funds

• Investment funds that are ultimate parent entities

• Real estate investment vehicles that are ultimate parent entities

Additional exclusions apply to entities substantially owned by entities described above, provided they operate primarily to hold assets or conduct activities ancillary to those of the excluded entities.

While the decision specifies excluded entities, free zone persons are not explicitly mentioned as excluded under the framework. As free zones are not classified as excluded entities, the domestic minimum top-up tax will apply to qualifying free zone persons as well.

One feature of the UAE’s approach is the introduction of a ‘qualified domestic minimum top-up tax’, which ensures that any additional taxes required under the 15% global minimum tax are paid directly to the UAE rather than to foreign jurisdictions. This strategic move protects businesses from double taxation and keeps revenue within the UAE, reinforcing its appeal as a global business hub.

Under Article 5.3, companies can also significantly reduce their taxable income through the ‘substance-based income exclusion’. This exclusion includes a payroll carve-out and a tangible asset carve-out. Multinationals can deduct 5% of eligible payroll costs and 5% of the carrying value of tangible assets located in the UAE.

This rewards companies for having substantive operations in the country, rather than just a legal presence.

The UAE also provides extended filing deadlines for MNEs adjusting to the new rules. Businesses have 15 months to file their top-up tax returns, and for the first year of compliance, this extends to 18 months. This business-friendly approach is in line with OECD rules as well as gives companies more time to adapt to complex new tax requirements.

The introduction of the domestic minimum top-up tax is a significant step in aligning the UAE’s tax framework with global standards while maintaining its attractiveness as a business hub.

Other GCC countries are also progressing with Pillar Two implementation - Kuwait, Bahrain, and Oman have enacted similar legislation, aligning their domestic tax structures with OECD standards.