UAE’s Cabinet Decision on Top-Up Tax for Multinational Enterprises

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The UAE has implemented a Top-up Tax for multinational enterprises (MNEs) to align with global minimum tax principles. Cabinet Decision No. 142 of 2024 issued in February 2025 sets forth the rules and conditions for applying the tax to entities with significant global revenue.

This article tries to provide an overview of the 70-page long Cabinet Decision examining its key aspects of the decision.

Scope and Applicability

The Top-up Tax applies to Constituent Entities that are part of an MNE Group with annual consolidated revenue of at least EUR 750 million in at least two of the four preceding fiscal years. Additionally, the tax applies irrespective of the entity’s local UAE tax obligations.

The Decision defines various terms in detail viz. the MNE Group, Ultimate Parent Entity, Constituent Entities etc. Further, it also explains various inclusions and exclusions as well as adjustments to be made for arriving at Pillar Two Income or the Effective Tax Rate.

MNEs subject to the Top-up Tax must file detailed tax returns and maintain supporting documentation demonstrating their tax position.

Charging Provision and Computation of Pillar Two Income

Entities Subject to Top-up Tax

Entities liable for the tax include UAE-based Constituent Entities, Joint Ventures, and certain Stateless Entities. However, government entities, investment entities, non-profit and international organizations are exempt from this tax. Additionally, some exemptions apply to specific business structures depending on their function and ownership composition.

This is one of the most basic aspects – “applicability”. Companies having a global presence must determine, in consultation of experts, whether they are covered under by the UAE’s Pillar Two rules or not. 

Determining Pillar Two Income

The Pillar Two Income of an entity is determined based on financial accounting net income, adjusted for various factors such as excluded dividends, foreign exchange gains or losses, and policy disallowed expenses. These adjustments ensure accurate tax liability computation, avoiding double taxation or tax base erosion. Furthermore, businesses need to maintain accurate records to substantiate income calculations and to reconcile financial and tax reporting standards effectively.

In real life scenarios, determining the Pillar Two Income can be challenging owing to difference in accounting years of different entities, difference in accounting standards and tax provisions across jurisdictions. Adjustments made and tax positions taken while preparing financial statements must be adequately documented.

Adjusted Covered Taxes and Temporary Differences

Covered Taxes include income taxes recorded in financial statements, taxes levied in lieu of corporate income tax, and taxes based on retained earnings. Deferred tax adjustments ensure that temporary differences do not distort the final tax liability.

Exclusions apply to deferred tax assets related to specific expenses such as research and development and cost recovery allowances on tangible assets.

Effective Tax Rate (ETR) Calculation

The ETR is computed by dividing Adjusted Covered Taxes by Net Pillar Two Income. If the ETR is below the minimum required rate, a Top-up Tax is applied to bring the entity’s tax liability in line with global standards. The Decision explains these terms in sufficient detail.

Conclusion

The UAE’s implementation of the Top-up Tax signifies a commitment to global tax transparency while preserving the nation’s investment-friendly environment. MNEs must proactively assess their tax liabilities, leverage available exclusions, and ensure compliance with the Decision to mitigate financial risks.

The Cabinet Decision is in alignment with the OECD principles. Accordingly, various OECD guidelines may be used as a reference material for interpretation. 

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