Pillar 2 & UAE’s DMTT: What Multinationals Need to Know

The UAE has taken a significant step towards aligning with the global tax landscape by introducing the Domestic Minimum Top-up Tax (DMTT) for Multinational Enterprises (MNEs). This move is in line with the OECD's Two-Pillar solution, ensuring that large corporations pay a minimum tax rate of 15%.

Key Highlights:

1.Implementation Timeline:

• The DMTT will apply to financial years starting on or after 1 January 2025.

2.Scope of Application:

• The legislation applies to MNE Groups with annual consolidated revenue of EUR 750 million or more in at least two of the four fiscal years preceding the tested year.

3.Core Concepts:

• The Income Inclusion Rule (IIR) requires the Ultimate Parent Entity (UPE) to pay a top-up tax if the group's effective tax rate (ETR) in any jurisdiction falls below 15%.
• The Undertaxed Profits Rule (UTPR) acts as a backstop, imposing taxes when low-taxed entities are not covered by a qualifying IIR.
• The Qualified Domestic Minimum Top-up Tax (QDMTT) allows the UAE to retain tax revenues by collecting the top-up tax locally, ensuring funds stay within the country.

4.Safe Harbours:

• Transitional Safe Harbour: Applicable for financial years starting before 1 January 2027, allowing a zero top-up tax if certain revenue and profit thresholds are not met.
• Permanent Safe Harbours: Available through de minimis exclusions and simplified effective tax rate (ETR) tests.

5.Tax Incentives:

• R&D Tax Incentive: Offering a 30–50% tax credit starting from 1 January 2026.
• High-Value Employment Incentive: A refundable tax credit on eligible salary costs effective 1 January 2025.

6.Compliance and Reporting:

• Constituent Entities (CEs) must file a Top-up Tax Return with the Federal Tax Authority (FTA) within 15 months after the end of the reporting fiscal year — extended to 18 months for the first transition year.
• MNEs may designate a single UAE entity to file and pay on behalf of all UAE-based CEs.

Andersen's Take:

The introduction of DMTT is a strategic move, aligning the UAE's tax framework with global standards while preserving domestic tax revenues. Key insights include:

• Qualifying Domestic Minimum Top-up Tax: The UAE’s alignment with the GloBE Model Rules ensures that top-up taxes remain within the country, minimizing additional taxes under IIR or UTPR.
• Impact on Free Zones: Free zone entities are not excluded, meaning they may still face top-up taxes if they fall under the rules.
• Safe Harbours: Businesses should leverage both transitional and permanent safe harbours to simplify compliance and avoid unnecessary tax liabilities.
• Substance-Based Income Exclusion (SBIE): Companies with strong local substance—such as payroll and tangible assets—can significantly reduce their top-up tax exposure.
• Compliance Framework: The new regime introduces clear deadlines and reporting requirements, emphasizing the need for robust, tech-enabled tax compliance strategies.
• Growth Opportunities: The R&D and employment incentives present new avenues for MNEs to offset tax burdens while fostering innovation and high-value job creation.

What This Means for Businesses: The UAE’s DMTT rules aim to preserve tax revenues domestically while meeting global standards. Businesses, especially those operating in free zones, should assess their exposure to top-up tax and explore safe harbour options. With new R&D and employment incentives, MNEs can also leverage these benefits to offset their tax liabilities. Next Steps: MNEs must:

• Determine if they meet the EUR 750 million threshold.
• Model the potential impact of DMTT.
• Ensure data readiness for accurate Pillar Two calculations.
• Train their finance teams.

Stay updated with FTA announcements.

Proactive planning will be key to navigating this new tax landscape. For tailored guidance on the UAE’s Pillar Two implementation, reach out to Andersen UAE.

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