This development follows updates to Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses, further amended by Federal Decree-Law No. 60 of 2023. The DMTT will apply to financial years starting on or after January 1, 2025.
This strategic measure reflects the UAE’s commitment to implementing the Organisation for Economic Co-operation and Development’s (OECD) Two-Pillar Solution. By aligning with global standards, the UAE aims to establish a fair and transparent tax system, reinforcing its position as a competitive and attractive destination for multinational business operations.
Key Highlights of OECD’s Two-Pillar adoption in the UAE
Pillar Two, known as the Global Anti-Base Erosion (GloBE) Model Rules, ensures that large MNEs pay a minimum effective tax rate of 15% on profits in each jurisdiction where they operate.
Pillar Two comprises of:
- Income Inclusion Rule (IIR): Taxes the income of a foreign subsidiary if that income was taxed below the minimum rate.
- Undertaxed Profits Rule (UTPR): Acts as a backstop to the IIR by denying deductions or requiring equivalent adjustments when the IIR has not been applied adequately.
- Subject to Tax Rule (STTR): Allows source jurisdictions to impose a top-up tax on certain related-party payments subject to tax below a minimum rate.
The UAE Ministry of Finance has confirmed that the DMTT will align with the OECD’s Global Anti-Base Erosion (GloBE) Model Rules to maintain consistency with international standards the United Arab Emirates (UAE) has taken significant steps toward implementing Pillar Two by:
- Introducing Domestic Minimum Top-Up Tax (DMTT): Effective January 2025, the UAE will impose a 15% DMTT on MNEs with consolidated global revenues of €750 million or more in at least two of the four financial years preceding the tax year. This measure aligns with the OECD’s GloBE Model Rules.
- Considering Income Inclusion Rule (IIR) and Undertaxed Profits Rule (UTPR): The UAE plans to adopt these rules but has deferred their implementation until 2025.
- Initiating Public Consultation: In March 2024, the UAE’s Ministry of Finance launched a public consultation to gather stakeholder input on the implementation of Pillar Two, including the IIR, UTPR, and DMTT.
Implications for Multinational Enterprises
The introduction of the DMTT marks a significant shift in the UAE’s corporate tax framework. Multinational enterprises with substantial global revenues must reassess their tax strategies to ensure compliance. While the UAE’s standard corporate tax rate is set at 9%, the DMTT ensures that the total effective tax rate for qualifying MNEs meets the 15% threshold.
Proposed Tax Incentives
To support growth and innovation alongside the DMTT, the UAE Ministry of Finance is exploring several corporate tax incentives:
- Research and Development (R&D) Tax Credit:
- Effective for tax periods starting on or after January 1, 2026.
- Provides refundable tax credits of 30-50%, depending on a company’s revenue and employee base in the UAE.
- High-Value Employment Tax Credit:
- Effective January 1, 2025.
- Encourages businesses to engage in high-value employment activities by granting refundable tax credits based on eligible salary costs for employees involved in such activities.
Strategic Implications
The DMTT underscores the UAE’s commitment to international standards while fostering economic growth and innovation. By aligning with the OECD framework, the UAE enhances its reputation as a leading global business hub. The introduction of complementary tax incentives further supports the UAE’s strategic objectives, attracting investment and promoting sustainable economic development.
Conclusion
The implementation of the DMTT represents a pivotal development in the UAE’s tax policy. Multinational enterprises must navigate these changes carefully to ensure compliance while leveraging the available tax incentives to optimize their operations. By joining the EU and other countries in adopting these measures, the UAE strengthens its commitment to global tax reforms and international collaboration.
Note: further updates and detailed guidelines from the UAE Ministry of Finance are expected, providing clarity on the compliance requirements and practical implementation of the DMTT and associated incentives.
