The UAE perspective on domestic minimum top up tax

The UAE signed to the Inclusive Framework proposed by OECD in 2019. As part of the initiative, the UAE introduced multiple legislations such as the introduction of CBCR, making the UBO register mandatory, introducing Economic Substance Regulations, and bringing in changes to its treaties by signing into the Multilateral Instrument, notifying most of its treaties to be covered under the same. Thereafter, with a view to improve the overall business climate and perception of the UAE, the Corporate Tax was introduced from 2024. Now, with a view to not lose its fair share from collection of Global Minimum tax, the UAE introduced the domestic minimum top up tax for eligible multinationals operating in the country.

The primary objective of introducing the domestic minimum tax is to ensure that the UAE collects its rightful share of tax on income generated within the country. Previously, multinational corporations (MNCs) operating in the UAE would often pay taxes on this income in their parent company’s jurisdiction. With the new legislation, however, the UAE now levies tax directly on income sourced within its borders by such entities. This has led to the implementation of the domestic minimum top-up tax regime.

With a view to keep matters simple and align with introduction as suggested by OECD, the UAE has kept the regulations and details very similar to model rules and drafts proposed by OECD – to ensure that there is consistency in application and intent. This also ensures that MNCs are able to plan and implement compliances across jurisdictions, knowing that the application of rules is consistent across geographies. Further, the UAE has confirmed that all the OECD guidance on these matters will continue to apply to UAE law and rules where it is not specified clearly. Thus, all the guides and explanations issued by OECD clarifying various aspects of application and computation of effective tax rate and top up tax will apply in equal measure and in the same manner in the UAE as well. Thus, the UAE need not issue all these details again.

In practice, this means that a company operating in the UAE as part of a multinational group must prepare its UAE financial statements and calculate its effective tax rate as prescribed. If the effective tax rate falls below 15 per cent, which is expected in most cases, the difference, referred to as the “top-up tax,” becomes payable to the UAE tax authorities. Consequently, such companies face two tax compliance requirements: first, filing their corporate tax return under UAE corporate tax provisions, which must be submitted within nine months from the end of the financial year; and second, preparing and computing UAE financial statements under the domestic minimum top-up tax rules to determine the effective tax rate. If the rate is below 15 per cent, they must calculate the top-up tax, applying permitted adjustments based on substance. The information return, along with payment of the top-up tax, must then be completed within 15 months of the financial year-end.

The UAE has not yet officially released the format for returns under the domestic minimum top-up tax, though it is expected to align closely with the OECD-prescribed framework. Accordingly, entities likely to fall within scope should begin preparing for this compliance requirement without delay. While the law applies to financial years beginning on or after January 1, 2025, providing some lead time for implementation, companies must proactively assess their position and ensure readiness well in advance.

Further, the UAE has also introduced safe harbour rules in lines with OECD proposition based on turnover and profits and those benefits could be availed by respective entities. Further, the UAE has also given concessions in relation to MNC groups, which has operations in less than 6 countries and having assets less than ¤50 million, and who can still avail exemption for the first five years. These are very good concessions offered by the UAE to smaller MNC groups who can look to avail the benefit. This is a welcome move by the UAE, which provides concessions for such entities that can fall within these criteria.

One unintended consequence of the law, as of now, which I hope should be corrected, is that there is no specific exclusion for UAE based large groups, which have operations and assets in more than the 6 countries and assets worth ¤50 million. Ideally, UAE based groups which are headquartered in the UAE should have been completely excluded from the applicability of this law as it does not apply to them. However, in absence of such exclusion, at the moment, they all need to prepare for compliance. The whole idea for the UAE was to collect taxes which would have been collected by other countries. Here, in case of UAE headquartered groups, no other country is going to collect taxes for them on UAE sourced income, thus to levy top up tax on that is not called for.

It is absolutely important for MNC groups to assess the impact for them before preparing for compilation of information as required, as its one consolidated UAE financials will required to be prepared – one will need to assess its accounting system readiness to support these requirements and also if required adopt necessary tools. Its new regulation and compliance with this law will require one to be prepared.

I would think that while UAE was required to align with OECD’s proposal but may be it should have spent more time in analysing its impact and should have made suitable concessions to not collect this tax from those which otherwise should not have been impacted. Further, now MNC groups will need to evaluate wholistically not only provisions of the Corporate tax law but also domestic minimum top up tax too. So, while you may aim for some concessions under corporate tax law but if one would end up still being subject to domestic minimum top up tax – then there may not be actual incentives to plan for any benefits under the UAE corporate tax law.

As a tax professionals, we are in for an interesting time and we should aim to keep our learning more rigorous and continuous to really be able to grasp and adhere to all the requirements which are coming up in a short span of time in UAE. This is certainly challenging times for businesses to align with all these newer compliances which are being introduced.