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The United Arab Emirates (UAE) enacted Federal Decree Law No. (60) of 2023 in November 2023 introducing a top-up tax on multinational enterprises (MNEs). The top-up tax ensures that MNEs pay a minimum effective tax rate of 15% in the UAE. The decree is a very brief piece of regulation and will be effective when it is notified in the Official Gazette. It is expected that it will be implemented from 2025 and detailed terms and conditions will be released by the Federal Tax Authority (FTA).
This move aligns with global efforts to prevent tax avoidance and ensure fair taxation across borders.
New Definitions and Amendments
The law introduces 2 important definitions to the Corporate Income Tax (CIT) law, viz.
- Top-Up Tax – It is an additional tax levied on MNEs to ensure they meet a minimum effective tax rate of 15%. This tax aligns with Pillar Two of Action 1 of OECD’s Base Erosion and Profit Shifting (BEPS) project, a global initiative aimed at preventing tax base erosion and profit shifting by MNEs.
- Multinational Enterprise (MNE) is defined as a company or a group of companies that operate in more than one country, i.e. in the UAE and in other foreign jurisdictions. This definition ensures that all companies fitting this criterion are subject to the new tax provisions.
Effective Date and Implementation
The new top-up tax rules will come into effect upon the publication of the Minister's decision in the Official Gazette. This decision is anticipated to be released in 2024 following a public consultation period. The implementation of top-up tax is expected to be effective from the tax year 2025.
Until implementation of top-up tax, MNEs based in the UAE will be subject to tax at the standard rate of 9% as per the extant CIT law.
The amendment to Article 3 of the CIT Law specifies that a separate decision will outline the detailed mechanisms, terms, conditions, rules, and procedures for the implementation of the top-up tax. This decision will be crucial in determining how the new tax will be applied and enforced.
Global Context
The introduction of the top-up tax is part of a broader global initiative to ensure fair taxation of multinational enterprises. The BEPS project, spearheaded by the OECD, aims to address the challenges posed by an increasingly globalized economy, where companies often exploit tax loopholes to minimize their tax liabilities.
By implementing the top-up tax, the UAE is aligning itself with international standards and contributing to the global effort to create a more equitable tax system. This move is significant for the UAE, which has traditionally been seen as a low-tax jurisdiction.
Conclusion
Federal Decree Law No. (60) of 2023 marks a significant step in the UAE's efforts to align with global tax standards and ensure fair taxation of multinational enterprises. By introducing a top-up tax, the UAE aims to prevent tax avoidance and ensure that MNEs pay a minimum effective tax rate of 15%. The upcoming public consultation and subsequent detailed decision will be crucial in shaping the final implementation of this new tax regime.
