UAE Top-Up Tax for Multinational Enterprises: An Explainer

The UAE is implementing the Global Minimum Tax (GMT) under the OECD’s BEPS framework, including a 15 percent Domestic Minimum Top-Up Tax (DMTT).

By Giorgia Sgueglia

What is the UAE’s new top-up tax?

The United Arab Emirates (UAE) is progressing with the implementation of the Global Minimum Tax (GMT), aligning with the OECD’s Base Erosion and Profit Shifting (BEPS) Inclusive Framework to stay in step with global tax standards. A key development in this effort is the introduction of a 15 percent Domestic Minimum Top-Up Tax (DMTT), announced by the UAE’s Ministry of Finance (MoF) on December 9, 2024, and set to take effect on January 1, 2025. This measure, outlined in Cabinet Decision 142 of 2024, aims to ensure that large multinational enterprises (MNEs) with subsidiaries in the UAE contribute their fair share of tax, supporting the global push to curb tax avoidance.

The DMTT is a central part of the UAE’s broader strategy to implement the OECD’s Global Anti-Base Erosion (GloBE) rules under Pillar Two, which ensures that MNEs are taxed at a minimum global rate of 15 percent. This measure prevents profit-shifting to low- or no-tax jurisdictions, reinforcing the UAE’s commitment to international tax reforms and maintaining its reputation as a competitive, business-friendly destination. The introduction of the DMTT also aligns with the significant transformation of the UAE’s tax system under the Taxation of Corporations and Businesses (TCB) Law, amended by Federal Decree-Law No. 60 of 2023. This reform represents a pivotal shift from the UAE’s historically tax-free environment to a more structured corporate tax regime, with a nine percent tax rate on profits exceeding AED 375,000.

By implementing both the TCB Law and the DMTT, the UAE ensures compliance with global tax reforms, such as the OECD’s BEPS framework and the GloBE rules. These measures aim to curb tax avoidance by imposing a top-up tax on MNEs that fail to meet the global minimum tax threshold of 15 percent. This dual approach protects the UAE’s fiscal integrity, enhances its standing in the global tax community, and supports the country’s goal of remaining a competitive business hub.

Additionally, the TCB Law includes several exemptions and reliefs for businesses, such as those for smaller enterprises and entities in specific sectors. These measures ensure that the tax burden remains manageable for qualifying businesses, allowing the UAE to continue attracting investment while maintaining a tax system that aligns with international standards.

DMTT implementation in the UAE

The DMTT will apply to MNEs operating in the UAE, which have annual revenues exceeding EUR 750 million (US$793.5 million) for at least two of the past four fiscal years. This means that both foreign MNEs with UAE-based subsidiaries and UAE-based MNEs operating globally will be subject to this tax. Instead of foreign jurisdictions collecting the tax on these UAE-based entities, the UAE will collect the top-up tax difference, thereby keeping the revenue within the country.

Under the DMTT, the tax is calculated by assessing the effective tax rate (ETR) of an MNE group. The ETR is derived by dividing the adjusted covered taxes of the group by the net qualifying income earned by its UAE constituent entities. In simpler terms, this involves making adjustments to financial accounting net income, based on the relevant laws and regulations.

Additionally, the UAE’s DMTT Rules align largely with the OECD’s Pillar Two Model Rules and include provisions on penalties, compliance requirements, record-keeping, and a general anti-avoidance rule (GAAR). The UAE’s tax authority will use Country-by-Country Reporting (CbCR) data from large MNEs for tax transparency purposes.

Motivations for the DMTT

The UAE’s decision to implement the DMTT is driven by several key factors. Firstly, it ensures tax revenue stays within the country rather than being collected by jurisdictions with more favorable tax regimes. This approach allows the UAE to retain greater control over its tax revenue, securing its financial position.

Secondly, the DMTT supports the UAE’s goal of maintaining its global competitiveness. Known for its low-tax business environment, the UAE is aligning itself with global tax rules through the introduction of the DMTT, without undermining its status as a key global business hub. By doing so, it mitigates the risk of sanctions or reputational damage that could result from non-compliance with international tax standards.

The UAE’s commitment to the OECD’s BEPS (Base Erosion and Profit Shifting) framework is another driving force behind the DMTT. As a signatory to the OECD’s Inclusive Framework, the UAE is obligated to implement global tax reforms. Complying with the DMTT enhances the UAE’s standing in international relations, particularly with major global economies like the EU, the US, and China.

Finally, the introduction of the DMTT, alongside a nine percent corporate tax rate, reflects the UAE’s shift away from its traditional zero-tax model. This change signals the country’s ongoing evolution and strategic focus on encouraging business growth and diversification. Despite the tax adjustments, the UAE continues to offer a competitive business environment, bolstered by its advantageous location and the absence of personal income tax, making it an attractive destination for long-term investment.

Exemptions and reliefs

The DMTT applies to UAE-based entities that are part of an in-scope MNE group with annual consolidated revenues exceeding EUR 750 million. However, certain entities are exempt from the DMTT, such as government entities, non-profit organizations, pension funds, and investment funds, provided they meet specific conditions.

Additionally, there are further exemptions, including the De-Minimis Exclusion, which exempts entities with minimal profits in the UAE from the DMTT. The Substance-Based Income Exclusion (SBIE) allows companies with genuine economic activities in the UAE to exclude some of their profits from the DMTT. Lastly, the Simplified Calculation Relief provides benefits for companies involved in international shipping, allowing them to use simplified calculations and exclusions.

One of the notable relief measures available is the Transitional CBCR Safe Harbor, which applies to fiscal years starting before January 2027 and ending before July 2028. Under this provision, no Top-Up Tax will be due for fiscal years if the qualifying revenue of UAE constituent entities is under EUR 10 million (USD 10.6 million) or if the average qualifying income or loss is less than EUR 1 million (USD 1.06 million).

Additionally, the Simplified ETR Relief may also apply. If an MNE’s simplified Effective Tax Rate (ETR) is equal to or greater than 16 percent in fiscal years starting in 2025 or 17 percent in 2027, then the DMTT may not be applicable.

Looking ahead

The UAE’s introduction of the DMTT marks a significant step in its alignment with global tax standards, although the OECD has not yet classified the DMTT as a Qualified Domestic Top-Up Tax (QDMTT), meaning it does not yet count toward meeting the global minimum tax requirement for MNEs. Nevertheless, this move demonstrates the UAE’s commitment to ensuring tax compliance and adapting to the shifting global tax environment.

Multinational enterprises (MNEs) operating in the UAE must carefully assess their compliance with the DMTT by calculating effective tax rates and paying the applicable tax. Additionally, they should monitor any available reliefs and remain updated on potential future changes to the tax framework as issued by the UAE authorities.

Conclusion

The introduction of the DMTT represents a pivotal moment in the UAE’s tax reforms, reflecting its ongoing efforts to balance global tax integration with its competitive business environment. While this shift moves the UAE away from its traditional low-tax model, it remains an attractive destination for business, provided MNEs stay vigilant in meeting their compliance obligations. Adapting to the new tax regime and staying informed on regulatory changes will be essential to avoid penalties and ensure long-term success.

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