UAE Adopts OECD Pillar Two Top-Up Tax 2025: What It Means for Your Business?

Few weeks back, the United Arab Emirates (UAE) had taken a stride towards aligning its tax framework with international standards by introducing a Domestic Minimum Top-up Tax (DMTT) as part of the OECD’s Pillar Two rules. 

This move, effective for financial years starting on or after January 1, 2025, reflects the UAE’s commitment to the global fight against tax avoidance and its adaptation to the growing landscape of international taxation. 

In this blog, we’ll explore what this means for businesses, the UAE economy, and the broader Gulf region, while unpacking the intricacies of the OECD’s Pillar Two framework.

What are the OECD Pillar Two Rules?

The Organisation for Economic Co-operation and Development (OECD) introduced its Two-Pillar Solution under the Base Erosion and Profit Shifting (BEPS) initiative to address tax challenges posed by globalization and digitalization.

Pillar Two, also known as the Global Anti-Base Erosion (GloBE) rules, makes sure that large multinational enterprises (MNEs) pay a minimum effective tax rate of 15% on their profits in every jurisdiction where they operate. This global minimum tax targets companies with annual revenues of €750 million or more to curb profit shifting to low-tax jurisdictions.

Key mechanisms of Pillar Two includes as follow–

• Income Inclusion Rule (IIR):
  Taxes profits of foreign subsidiaries if they fall below the 15% threshold.
• Undertaxed Payments Rule (UTPR):
  Denies deductions or imposes additional taxes on payments to low-tax jurisdictions.
• Domestic Minimum Top-up Tax (DMTT):
  Allows the UAE to collect additional tax domestically to meet the 15% minimum, ensuring revenues stay within the jurisdiction.

The UAE’s adoption of the DMTT aligns with this framework, marking a pivotal shift in its traditionally low-tax environment. For more information on the OECD’s Pillar Two, you can visit the https://www.oecd.org/

UAE’s Domestic Minimum Top-up Tax

On December 9, 2024, the UAE Ministry of Finance announced the introduction of the DMTT, formalized through Cabinet Decision No. 142 of 2024, published on December 31, 2024. Here’s what you need to know:

• Effective Date:
  Applicable for financial years beginning on or after January 1, 2025.
• Scope:
  Targets MNEs operating in the UAE with consolidated global revenues of €750 million or more in at least two of the four preceding financial years.

• Tax Rate:
  Ensures a tax rate of 15% by imposing a top-up tax on profits taxed below this threshold.

• Alignment with OECD:
  The UAE’s DMTT closely follows the GloBE Model Rules, though it’s crucial to monitor if it receives “Qualified Domestic Top-up Tax” (QDMTT) status from the OECD. Updates on this status will be provided as they become available.

This builds on the UAE’s existing 9% corporate tax regime, introduced in June 2023, which applies to businesses with profits exceeding AED 375,000. The DMTT effectively bridges the gap between the 9% rate and the 15% global minimum for large MNEs, ensuring compliance with international norms.

Why Is the UAE Introducing the Top-up Tax?

The UAE’s decision to implement the DMTT is both strategic and pragmatic.

• Global Tax Alignment:
  As a member of the OECD Inclusive Framework, the UAE is committed to supporting the 136 signatories of the Pillar Two agreement. This move reinforces its position as a responsible global player.
  

• Revenue Protection:
  By imposing the DMTT, the UAE ensures that tax revenues from low-taxed profits stay within its borders, rather than being collected by other jurisdictions via the IIR or UTPR.
  

• Economic Diversification:
  Historically reliant on oil revenues, the UAE is diversifying its economy. The DMTT, alongside the 9% corporate tax and 5% VAT, bolsters non-oil revenue streams.
  

• Attracting Investment:
  To offset the tax increase, the UAE is introducing incentives like a 30-50% refundable R&D tax credit (effective 2026) and potential employment-based credits, maintaining its appeal as a business hub.
  

Implications for Businesses in the UAE

For multinational enterprises operating in the UAE, the DMTT introduces new compliance and operational challenges:

• Increased Tax Burden:
  Companies previously benefiting from the UAE’s 9% corporate tax or free zone exemptions will now face a 15% effective rate if they meet the revenue threshold.
  

• Data and Reporting Requirements:
  MNEs must enhance their tax accounting systems to calculate jurisdictional effective tax rates and file detailed Pillar Two returns, mirroring OECD standards.
  

• Strategic Reassessment:
  Businesses may need to rethink their regional structures, particularly if they relied on the UAE as a low-tax hub for profit consolidation.
  

However, the UAE’s proactive approach offers clarity. Unlike jurisdictions still debating Pillar Two adoption, the UAE’s concrete timeline and alignment with GloBE rules provide certainty for planning.

The Bigger Picture: Gulf Region and Beyond

The UAE isn’t acting alone. Other Gulf Cooperation Council (GCC) countries, all OECD Inclusive Framework members, are following suit:

• Bahrain:
  Rolled out its DMTT on January 1, 2025.
  

• Qatar and Kuwait:
  Announced progressive steps toward Pillar Two implementation in late 2024.
  

• Saudi Arabia and Oman:
  Expected to adopt similar measures soon.
  

This regional alignment signals a seismic shift in the GCC’s tax landscape, traditionally characterized by zero or minimal corporate taxes. The move could enhance the region’s credibility as a stable investment destination while addressing international pressure to curb tax competition. Globally, over 135 jurisdictions have committed to Pillar Two, with the EU and countries like South Korea already enacting rules. The UAE’s DMTT positions it as a leader among emerging economies adapting to this new tax reality.

Challenges and Opportunities Ahead

While the DMTT strengthens the UAE’s fiscal framework, challenges remain:

• Implementation Complexity:
  MNEs and tax authorities must navigate intricate calculations and ensure compliance with OECD guidelines.
  

• OECD Recognition:
  Without confirmed QDMTT status, there’s uncertainty about how other jurisdictions will treat the UAE’s top-up tax.
  

• Business Sentiment:
  Some firms may perceive the tax hike as a departure from the UAE’s tax haven status, though incentives could mitigate this.
  

On the flip side, opportunities abound:

• Innovation Boost:
  R&D incentives could spur technological advancement, aligning with the UAE’s Vision 2030 goals.
  

• Global Leadership:
  Early adoption enhances the UAE’s reputation as a forward-thinking economy.
  

A New Era for UAE Taxation

The UAE’s DMTT marks a transformative moment, balancing global compliance and domestic priorities. Businesses must adapt, leveraging new incentives.

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