UAE: UAE Introduces 15% Minimum Tax for Multinationals with QDMTT Starting in 2025

On 11th February 2025, Ministry of Finance (UAE) released Cabinet Decision No. 142 of 2024 on the imposition of top up tax on multinational enterprises. The key highlights of the cabinet decision are provided below:

Effective Date 

From fiscal years beginning on or after 01 January 2025. 

Applicability

• Constituent entities (including JVs) located in the UAE which are members of an MNE group whose consolidated group revenue exceeds EUR 750 million for at least 2 out of the 4 preceding years. 
• Permanent Establishments will be treated separately for reporting and tax purposes and specific treatments are provided for unique classification entities such as JVs, minority owned constituent entities etc. 

Exclusions 

The Decision provides a list of Excluded Entities:

• Government entities
• Pension funds
• International organizations
• Investment & real estate funds (being the Ultimate Parent Entity)
• Nonprofit organizations
• Permanent Establishments of all of the above
• Entities (excluding pension funds) 95% or more owned by the above, primarily holding/investing assets or providing ancillary services
• Entities 85% or more owned (excluding pension funds) earning at least 85% of income from excluded dividends or gains under Pillar Two

IIR, UTPR & STTR

The decision does not include rules for Income Inclusion Rule (IIR), Undertaxed Profits Rule (UTPR) mechanisms, it is primarily focused on Qualified Domestic Minimum Top-Up Tax (QDMTT). Subject-to-Tax Rule (STTR) may apply based on the tax treaty. 

SBIEs 

The UAE’s net pillar two income is reduced by Substance-Based Income Exclusions (SBIEs), which is the sum of payroll and tangible assets carve outs across CEs excluding UAE located investment entities. 

Payroll carve-out: 5%* of eligible UAE employee costs, excluding capitalized, shipping-related, and ancillary income expenses.

Tangible assets carve-out: 5%* of UAE Property, Plant and Equipment (PPE), natural resources, Right-of-use (ROU) assets, and qualifying government licenses tied to tangible investments.

*The Decision provides for 7.6% tangible and 9.6% of the payroll in the first FY both phasing down to 5% over 8 years. 

Calculation of top up tax

Excess profit will be the difference between net pillar two income and SBIEs. Top up tax is calculated on the excess profits based on the applicable tax rate. 

Safe Harbour Rules 

Routine profit test – The top-up tax for UAE based CEs can be reduced to zero for a Financial Year if pillar two income is less than SBIEs. 

Effective tax rate test – The top-up tax can be reduced to zero if effective tax rate of UAE is at least 15%.

Deminimis test (Annual Election) – The top-up tax can be reduced to zero if the CE satisfies twin conditions of revenue being less than EUR 10 million and profit is less than EUR 1 million.

UAE Free Zones 

The OECD deems UAE "Free Zones" as "not harmful" for tax purposes. However, the Federal Tax Authority (FTA) requires free zone companies and exempt entities to assess and pay top-up tax if applicable.

Compliance Requirements 

Registration – All CEs to register with FTA within such time as prescribed.

Filing obligations: The top-up tax return must be filed within 15 months of the fiscal year or 18 months after the first transition year.

Information to be reported: Includes MNE group details, safe harbours, exclusions, and GloBE computations.

Payment of taxes – Top-up taxes to be paid at the time of filing the top-up tax.

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Reference/Citation

The OECD forum on Harmful tax practices (FHTP) - October 2023

FAQs by Federal Tax Authority, UAE

https://mof.gov.ae/uae-domestic-minimum-top-up-tax/ 

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