The UAE has introduced a new top-up tax regime as part of its commitment to global tax reforms under the OECD’s Base Erosion and Profit Shifting (BEPS) framework. Effective from 1 January 2025, this regime ensures that large multinational enterprises (MNEs) operating in the UAE pay a minimum effective tax rate, aligning the country with international standards.

Why Pillar Two Was Introduced

Multinational companies have historically shifted profits from high-tax countries to low- or no-tax jurisdictions, which can reduce the tax base in countries where economic activity occurs.

To address this, the OECD introduced BEPS 2.0 in 2019, comprising two pillars:

• Pillar One: Reallocates taxing rights to countries where users or customers are located.

• Pillar Two: Ensures large MNEs pay a minimum effective tax rate of 15%, regardless of where they operate.

The UAE’s adoption of Pillar Two demonstrates its commitment to fair taxation and global compliance standards.

UAE Implementation: Cabinet Decision 142 of 2024

Pillar Two applies to MNE groups with consolidated revenues exceeding €750 million in any two of the four previous fiscal years.

• Start Date: Financial years beginning on or after 1 January 2025.

• Top-Up Tax: MNEs will pay a tax on profits if their effective tax rate (ETR) falls below 15%.

• Typical Rate: With the UAE corporate tax at 9%, the top-up is generally 6%, subject to specific calculations.

Entities Covered

Entities within qualifying MNE groups include:

• Ultimate parent entities

• Subsidiaries

• Intermediate parent entities

• Partially owned parent entities

• Joint ventures and JV subsidiaries

Exclusions:

• Government bodies and international organisations

• Sovereign wealth funds with ≥95% ownership in subsidiaries

• Entities in the initial phase of international expansion

Calculating the Top-Up Tax

Pillar Two calculations differ from standard UAE corporate tax rules and include:

Pillar Two Income: Derived from profit after tax, adjusted through specific items to determine the taxable base.

Covered Taxes: Taxes reported in financial statements, adjusted to compute the correct ETR.

Effective Tax Rate (ETR):
ETR = Adjusted Covered Taxes ÷ Pillar Two Income

• If the ETR is below 15%, the difference is applied as the top-up tax.

Substance-Based Exclusion: Recognises genuine economic activity in the UAE:

• 5% of eligible payroll costs

• 5% of eligible tangible assets

De Minimis Exclusion: Small revenue and profit thresholds may exempt certain entities from the top-up tax.

Exclusions for Specific Income and Transactions

Certain gains may be excluded, such as:

• Court-approved liquidations

• Specific arrangements aimed at preventing insolvency

Note: Waivers or adjustments with related parties may still trigger tax obligations.

Filing Requirements

• First Year: Returns filed within 18 months of period end

• Subsequent Years: Filing within 15 months of period end

MNEs must also follow the OECD documentation framework, including model rules, commentary, and administrative guidance.

Purpose of the UAE Top-Up Tax

The regime ensures that profits are taxed where economic value is created, helping to reduce tax competition and curb avoidance. For the UAE, it:

• Aligns domestic rules with global tax standards

• Prevents other countries from taxing UAE-based income

• Enhances the UAE’s reputation as a compliant international business hub

Key Takeaways

• UAE Pillar Two applies to MNEs with €750 million+ revenue.

• Ensures a minimum 15% effective tax rate.

• Includes substance-based and de minimis exclusions.

• Filing deadlines are 18 months (first year) and 15 months thereafter.

• Strengthens UAE’s alignment with OECD BEPS 2.0 rules.

Insight: The UAE’s top-up tax represents a major step toward global tax harmonisation, making it important for multinationals to review their structures and compliance strategies ahead of 2025.