On 6 February 2025, the UAE Ministry of Finance (MoF) announced the introduction of a Domestic Minimum Top-Up Tax (DMTT) on Multinational Enterprises (MNEs), effective from 1 January 2025, through the issuance of Cabinet Decision 142 of 2024. This decision outlines detailed provisions for the application of the DMTT in the UAE, following the MoF announcement on 9 December 2024 and Federal Decree Law No. 60 of 2023, which amended certain provisions of Federal Decree Law No. 47 of 2022 (Corporate Tax Law) to incorporate enabling provisions within the existing corporate tax framework.
The UAE DMTT aligns with the GloBE Model Rules under the Pillar Two framework and includes necessary exclusions, safe harbours and transitional benefits. The DMTT applies to MNEs with consolidated global revenues of EUR 750 million or more in at least two of the four financial years immediately preceding the fiscal year in which the DMTT applies.
The implementation of Pillar Two in the UAE through the introduction of DMTT rules marks a significant transformation in the UAE's corporate tax framework. This initiative aims to ensure that MNEs pay a minimum effective tax rate of 15% on their profits, thereby reducing tax avoidance and promoting fair competition globally. This new tax policy aligns with international standards and reflects the UAE's commitment to enhancing tax transparency and compliance.
As the UAE gears up for the first year of DMTT implementation in FY 2025, it is crucial to understand the key action steps required for strategic readiness and compliance and to rationalise tax positions in line with the rules.
A full understanding of the DMTT rules is essential for businesses operating in the UAE. This knowledge enables them to grasp their obligations and develop effective strategies to manage compliance. However, this is no simple task. The UAE DMTT rules comprise a series of interlinked segments that must be considered collectively to identify the comprehensive impact on constituent entities (CEs) of MNE groups operating in the UAE. Businesses should consider a pragmatic, layered approach to manage all aspects effectively and avoid overlooking relevant areas. Some key areas of consideration include:
In cases where the Pillar Two rules are already implemented at the UPE/IPE level before their implementation in the UAE (e.g., Canada, Germany, France, Netherlands, UK, etc.), particularly for FY 2024, the group may be subject to top-up tax concerning the UAE operations in the UPE/IPE jurisdiction. In this context, the local UAE management and finance teams will have to provide necessary information and inputs to the global teams to facilitate their Pillar Two calculations, which are most likely to be undertaken during FY 2025.
Conversely, where the Pillar Two rules are not implemented at the UPE/IPE level (e.g., jurisdictions such as China, India, Saudi Arabia, the US, etc.) but are implemented in the UAE, particularly for FY 2025, the group will be subject to DMTT obligations with respect to the UAE operations. However, no additional taxes will be recovered by the UAE in respect of the group entities based in overseas jurisdictions without effective Pillar Two rules, as the UAE DMTT rules do not provide for an Income Inclusion Rule (IIR) or Undertaxed Profits Rule (UTPR). Nevertheless, it remains to be seen whether the details of these entities will need to be provided to the UAE tax authorities as part of the UAE DMTT filings. A brief synopsis of the above implications is as under:
Detailed functional and nature-oriented breakdowns will be required for specific aspects due to their different treatment under the DMTT rules compared to financial statement and federal corporate tax requirements. This is particularly relevant for elections and options provided under the DMTT rules, as well as inclusions and exclusions from Pillar Two income and covered taxes. For example, the treatment of asset gains, unrealised gains and losses, dividend and capital gains taxation, asymmetric foreign currency gains/losses and transfer pricing must be carefully considered. Some of the key areas to be managed include:
Last but not least, given the complexity and breadth of the new DMTT rules, it is essential for businesses to formulate a comprehensive implementation strategy. This strategy should encompass key action steps to navigate complexities around understanding the rules, data requirements and compliance. By doing so, businesses should be well-prepared to comply with the new requirements, mitigate risks and align their tax positions. A proactive approach will enable businesses to navigate the regulatory landscape effectively, avoid potential penalties and achieve the desired outcomes.
Ashish Athavale
Abhishek Palav
Brian Conn
Mufaddal Safdari
BDO in United Arab Emirates
The UAE DMTT aligns with the GloBE Model Rules under the Pillar Two framework and includes necessary exclusions, safe harbours and transitional benefits. The DMTT applies to MNEs with consolidated global revenues of EUR 750 million or more in at least two of the four financial years immediately preceding the fiscal year in which the DMTT applies.
The implementation of Pillar Two in the UAE through the introduction of DMTT rules marks a significant transformation in the UAE's corporate tax framework. This initiative aims to ensure that MNEs pay a minimum effective tax rate of 15% on their profits, thereby reducing tax avoidance and promoting fair competition globally. This new tax policy aligns with international standards and reflects the UAE's commitment to enhancing tax transparency and compliance.
As the UAE gears up for the first year of DMTT implementation in FY 2025, it is crucial to understand the key action steps required for strategic readiness and compliance and to rationalise tax positions in line with the rules.
Understanding the DMTT Rules
A full understanding of the DMTT rules is essential for businesses operating in the UAE. This knowledge enables them to grasp their obligations and develop effective strategies to manage compliance. However, this is no simple task. The UAE DMTT rules comprise a series of interlinked segments that must be considered collectively to identify the comprehensive impact on constituent entities (CEs) of MNE groups operating in the UAE. Businesses should consider a pragmatic, layered approach to manage all aspects effectively and avoid overlooking relevant areas. Some key areas of consideration include:
- Identifying In-Scope Entities: Businesses must identify which entities within their group are subject to the DMTT rules, which includes subsidiaries, joint ventures and permanent establishments, among others. Specific rules apply to joint ventures, minority-owned CEs, stateless entities, non-material CEs, sovereign wealth funds and flow-through entities. Additionally, certain categories of entities are excluded from the rules, such as nonprofit organisations, investment funds, real estate investment vehicles and pension funds. It is crucial to have a clear understanding of which entities will be impacted by these rules.
- Implications of Safe Harbour and Transitional Provisions: The DMTT rules include several safe harbour and transitional provisions to simplify compliance and reduce the administrative burden during the initial implementation phase. These provisions include the permanent de minimis exclusion safe harbour, permanent simplified calculations safe harbour, transitional CbCR safe harbour and transitional relief for the initial phase of international activity, among others. Some of these provisions may also result in certain CEs falling outside the scope of the DMTT rules. Businesses should evaluate the provisions to understand how they can benefit and reduce their administrative burden.
- Understanding the Nuances of Determining Pillar Two Income/Loss and Covered Taxes: Accurate computation of Pillar Two income or loss and covered taxes is essential for determining DMTT liability. Businesses must familiarise themselves with the specific rules for computing these aspects, as numerous listed and optional adjustments must be made to determine these figures. The rules incorporate a variety of off-book treatments (different from the treatment under the corporate tax law and financial accounting standards) and recapture provisions, which may further complicate the calculations.
- Determining the Effective Tax Rate and Top-Up Tax Liabilities: Businesses need to calculate effective tax rates on a jurisdictional blending basis at the UAE level to determine whether they are taxed below the minimum 15% rate. Additionally, top-up tax liabilities must be determined after considering substance-based income exclusions, which may effectively nullify the top-up tax liability. There may also be scenarios where additional current top-up tax obligations arise even in the presence of a Pillar Two loss. Therefore, a holistic understanding of these provisions is imperative to accurately gauge the actual impact. Being well-versed in these requirements will allow businesses to strategically plan their tax positions, avoid penalties and rationalise their financial outcomes.
Understanding Pillar Two Implementation Status in a Parent Entity Jurisdiction
Businesses also need to understand the implementation status of the Pillar Two rules in the jurisdiction of the Ultimate Parent Entity (UPE) or Intermediate Parent Entity (IPE), as this could have significant ramifications for the group as a whole with respect to their UAE operations.In cases where the Pillar Two rules are already implemented at the UPE/IPE level before their implementation in the UAE (e.g., Canada, Germany, France, Netherlands, UK, etc.), particularly for FY 2024, the group may be subject to top-up tax concerning the UAE operations in the UPE/IPE jurisdiction. In this context, the local UAE management and finance teams will have to provide necessary information and inputs to the global teams to facilitate their Pillar Two calculations, which are most likely to be undertaken during FY 2025.
Conversely, where the Pillar Two rules are not implemented at the UPE/IPE level (e.g., jurisdictions such as China, India, Saudi Arabia, the US, etc.) but are implemented in the UAE, particularly for FY 2025, the group will be subject to DMTT obligations with respect to the UAE operations. However, no additional taxes will be recovered by the UAE in respect of the group entities based in overseas jurisdictions without effective Pillar Two rules, as the UAE DMTT rules do not provide for an Income Inclusion Rule (IIR) or Undertaxed Profits Rule (UTPR). Nevertheless, it remains to be seen whether the details of these entities will need to be provided to the UAE tax authorities as part of the UAE DMTT filings. A brief synopsis of the above implications is as under:
| Status of Pillar Two Implementation | Potential Impact | |
| UPE / IPE | UAE | |
| Implemented | Not implemented | No action is required in the UAE, but top-up tax* and associated compliance obligations may apply in the UPE/IPE jurisdictions. Consequently, input from UAE teams may be necessary. |
| Not implemented | Implemented | DMTT obligations may arise in the UAE concerning UAE operations, along with associated compliance requirements. However, IIR/UTPR recovery will not occur in the UAE but it may arise in other jurisdictions. |
Understanding the Data Requirements
Understanding the data requirements for DMTT purposes is crucial for compliance with the rules. The DMTT calculation relies on various data points collated from multiple sources, such as financial statements, country-by-country reports and internal records. Businesses must take care that these data points are accurately captured and integrated into their compliance processes.Detailed functional and nature-oriented breakdowns will be required for specific aspects due to their different treatment under the DMTT rules compared to financial statement and federal corporate tax requirements. This is particularly relevant for elections and options provided under the DMTT rules, as well as inclusions and exclusions from Pillar Two income and covered taxes. For example, the treatment of asset gains, unrealised gains and losses, dividend and capital gains taxation, asymmetric foreign currency gains/losses and transfer pricing must be carefully considered. Some of the key areas to be managed include:
- Data Collation and Integration: Businesses will have to implement robust technological solutions to ensure seamless collation and assimilation of data from various sources. This will help maintain accuracy and consistency in DMTT calculations and assist in managing the compliance tasks (particularly, the periodic provisioning) seamlessly.
- Staff Training: Businesses will need to invest in training staff to enhance their understanding of the DMTT requirements and their ability to handle complex data collation and reporting tasks. This will help the team be well-equipped to assimilate the impact of regulatory changes and manage compliance effectively.
- Technology Solutions: Businesses will have to explore advanced technology solutions, such as data analytics platforms and automation-oriented specific Pillar Two tools to streamline the data collection and reporting process. This will reduce the risk of errors and improve efficiency.
- Regular Reviews: Businesses will have to implement robust review mechanisms to identify any discrepancies or gaps and effectively address them in a timely manner. This proactive approach will help manage issues promptly and maintain compliance with the DMTT rules.
Understanding the Compliance and Reporting Requirements
The UAE DMTT rules impose additional compliance obligations on in-scope MNE entities. These include registration, filing a top-up tax return and, in certain cases, filing a Pillar Two information return. These obligations are in addition to those under the existing federal corporate tax framework within the UAE. Further, businesses must provide necessary disclosures in their financial statements for FY 2025 (interim or otherwise) to effectively disclose and quantify the impact of the DMTT rules on their tax obligations in the UAE. Disclosures regarding the substantive enactment of the UAE DMTT rules will need to be provided in the financial statements for FY 2024 as and when they are finalised during FY 2025. Understanding the compliance and reporting obligations is crucial for businesses to adopt tangible action steps to ensure adherence with the requirements.
Formulating a Comprehensive Strategy
Last but not least, given the complexity and breadth of the new DMTT rules, it is essential for businesses to formulate a comprehensive implementation strategy. This strategy should encompass key action steps to navigate complexities around understanding the rules, data requirements and compliance. By doing so, businesses should be well-prepared to comply with the new requirements, mitigate risks and align their tax positions. A proactive approach will enable businesses to navigate the regulatory landscape effectively, avoid potential penalties and achieve the desired outcomes.
How BDO Can Help
- Impact Assessment: BDO can assist businesses in conducting an initial impact assessment to analyse the implications of the DMTT rules on their operations. This assessment will include a review of existing tax structures to identify in-scope MNE entities, evaluating safe harbour and transitional provisions to leverage potential benefits, highlighting specific considerations regarding the computation of Pillar Two income/loss, adjusted covered taxes, jurisdictional effective tax rate and top-up tax liabilities. BDO can also assist in formulating numerical simulations and models for key Pillar Two financial metrics to understand potential impacts. BDO can help identify potential gaps and provide actionable steps for resolution, including assistance in obtaining clarifications from the tax authorities on specific matters.
- Implementation Status in Overseas Jurisdiction: BDO can assist businesses in managing information requests from their global head office, particularly in gathering the necessary financial and tax data to support their Pillar Two obligations and compliance. Additionally, BDO UAE, in collaboration with BDO Global Teams, can extend support to businesses in managing multi-jurisdictional assessments and compliances under the Pillar Two regulations.
- Data Requirements: BDO can assist businesses in conducting an initial data assessment and readiness evaluation to identify and address the data requirements of the rules. This includes assessing the existing organisational structure to understand the internal data responsibility matrix, assisting in the identification of specific data points required for compliance with the UAE DMTT requirements and providing guidance on the collation of these data points. BDO can help identify discrepancies between current data capabilities and provide actionable steps to address these gaps and assist in identifying and implementing relevant technology and automation solutions to meet the data requirements.
- Compliance and Reporting Requirements: BDO can assist businesses in addressing the compliance and reporting requirements under the DMTT rules. This includes assessing potential compliance requirements, supporting the process of obtaining Pillar Two registration once the mechanism is prescribed, and assisting in reviewing the form and manner of undertaking compliance filings. BDO can help formulate an internal framework for managing these filings, identify and address tax accounting considerations along with potential disclosure requirements, and assist in collating the data and requirements for group-level reporting and compliance.
- Strategy Formulation and Ongoing Support: BDO can assist businesses in formulating an overall strategy for managing and navigating the complexities of the DMTT rules, as well as keeping up with the changing regulatory landscape as new requirements are introduced. This includes supporting the formulation of an internal policy framework for Pillar Two, covering technology, data, compliance and reporting. BDO can undertake periodic training and development sessions for key stakeholders and provide follow-on advisory support to keep the business informed of the evolving regulatory landscape. This helps monitor the impact of updates on their overall Pillar Two strategy and associated tax positions.
Comments
The first year of Pillar Two implementation in the UAE requires meticulous planning and strategic action to ensure compliance and optimise tax positions. By understanding the rules, conducting thorough analyses and engaging with stakeholders, businesses can navigate the complexities and achieve successful implementation in the UAE in FY 2025.Ashish Athavale
Abhishek Palav
Brian Conn
Mufaddal Safdari
BDO in United Arab Emirates