Following the issuance of Federal Decree Law No. 60 of 2023, the UAE Ministry of Finance has announced a significant update to its tax laws, introducing a 15% Global Minimum Tax for large multinational enterprises (MNEs) starting January 2025. This move aligns with the Organization for Economic Co-operation and Development (OECD)’s global tax agreement, ensuring that the large corporations pay a minimum of 15% tax on their income. This Article delves into the Global Minimum Tax, specifically focusing on its impact as per Corporate Taxation in the UAE.

Introduction

The international tax landscape is undergoing a significant transformation, with over 130 countries embracing a global minimum tax framework. This shift, driven by the OECD, aims to curb tax avoidance strategies employed by multinational corporations (MNCs). The UAE, a prominent player in the global economy, has joined this movement by adopting Pillar Two of the OECD's Base Erosion and Profit Shifting (BEPS) initiative. This move signifies a commitment to international tax fairness and transparency. For businesses operating within the UAE, understanding and adapting to these changes is crucial for maintaining compliance and competitiveness in the evolving global market.

What is Pillar Two plan?

Pillar Two, a part of the OECD's BEPS project, represents a global effort to address tax base erosion and profit shifting by multinational enterprises (MNCs). This framework introduces a global minimum effective tax rate of 15% on large MNCs, in every country where they operate.

Two key mechanisms underpin Pillar Two: The Income Inclusion Rule (IIR) and the Undertaxed Payments Rule (UTPR). The IIR requires the ultimate parent entity of an MNC to pay top-up tax on profits earned by subsidiaries in jurisdictions where the effective tax rate falls below 15%. The UTPR acts as a backstop, allowing other jurisdictions to collect top-up tax if the IIR is not applied. Many countries, including GCC countries like Kuwait, Qatar, are already implementing Pillar Two, demonstrating the global momentum behind this transformative tax reform.

Who is Affected in UAE?

Pillar 2 primarily impacts large multinational enterprises (MNCs) with consolidated global revenues of EUR 750 million or more in at least two out of the four financial years immediately preceding the financial year in which the DMTT applies. This threshold ensures that the focus remains on the largest and most complex corporate structures with the greatest potential for international tax planning. To illustrate the potential impact, consider the following example:

For example, an MNC with subsidiaries in low-tax jurisdictions may face a top-up tax liability in its home jurisdiction to bring the effective tax rate up to the 15% minimum. Conversely, an MNC with subsidiaries primarily in high-tax jurisdictions may not face any additional tax liability.

This example highlights the importance of strategic tax planning. Businesses should explore options such as restructuring operations, optimizing their global presence, and utilizing allowable deductions to minimize their overall tax burden while remaining compliant with the new rules.

Preparing for Compliance in UAE

On 9th December 2024, the UAE ministry of finance introduced Domestic Minimum Top-up Tax (DMTT) which will be effective in the UAE for financial years starting on or after 1st January 2025. Leading up to this date, businesses should follow a clear roadmap to ensure compliance. This roadmap includes key milestones such as:

• 2024: Updating financial systems and processes to facilitate the collection and reporting of data that may be relevant under Pillar Two or doing the necessary restructuring.

• 2025: Ensuring ongoing compliance with the new rules as 2025 being the first minimum tax year.

  
  

Conclusion 

While further details on this legislation from the UAE Ministry of Finance is awaited, this adoption of Pillar Two by UAE demonstrates its commitment to global tax standards and positions the country as a competitive and attractive business environment. By understanding the complexities of these new rules and taking the necessary steps to prepare, businesses can navigate the evolving tax landscape and ensure to be law compliance.

Here are some important highlights about the Global Minimum Tax in the UAE:

• What is the threshold? The minimum effective tax rate of 15% on profits for MNEs with consolidated global revenues of €750 million or more for at least two out of four fiscal years immediately preceding that fiscal year.

• When will be applicability from? It will apply from 1st January 2025.

• How will it work? Where the effective tax rate is below 15% for the fiscal year, there will be an additional tax to the extent of difference upto 15%.

  
  

How can we help?

Our team of qualified Tax advisors are happy to provide practical help and advice to ensure timely and cost-effective tax services. Reach out to our experts at +971-44490495 via call or email at info@finactuae.com for any kind of assistance and get all your queries addressed.