UAE Pillar Two legislation issued

07 February 2025 – On 20 December 2021, the Organization for Economic Co-operation and Development (OECD) published the Global Anti-Base Erosion (GloBE) Model Rules, also known as Pillar Two. These rules have been complemented and clarified by the Commentary and various Administrative Guidance. The Model Rules provide governments with a template for implementing the Pillar Two agreement, reached by 137 jurisdictions in the OECD/G20 BEPS Inclusive Framework.

The GloBE Rules aim to impose a global minimum tax of 15% on multinational enterprises (MNEs) with group revenue equal to or greater than EUR 750 million (Revenue threshold). For this purpose, the effective tax rate must be calculated in the jurisdiction where the MNE has a taxable presence, and any top-up tax should be collected through the Qualified Domestic Minimum Top-Up Tax (QDMTT), Income Inclusion Rule (IIR), or Undertaxed Payment Rule (UTPR) mechanisms.

In some jurisdictions the GloBE rules have been implemented and come into force as from 1 January 2024 and various countries are in the process of adopting them. In the context of the Middle East, governments have either announced the intention to introduce the rules or have enacted legislation to implement a Domestic Minimum Top-Up Tax. 

In the United Arab Emirates (UAE), the recently issued Cabinet Decision No. 142 of 2024 introduces the Pillar Two legislation. Below we have outlined some key takeaways from the Law.

UAE Pillar Two legislation 

The Pillar Two legislation is comprehensive and aligned with the Model Rules, Commentary and Administrative Guidance. Additionally, it is stated that the Ministry of Finance may issue further rules, conditions, controls and procedures to ensure the provisions meet the objectives of the GloBE rules.

The UAE has only introduced the Domestic Minimum Top-Up Tax as a chargeable mechanism and intends to implement a regime that qualifies for the QDMTT Safe Harbour. As a result, if all the conditions of this Safe Harbour are met, groups will not need to prepare a separate computation for GloBE purposes, and then, no additional top-up tax should be paid in another jurisdiction in relation to low taxed profits in the UAE.

Please find below key aspects of the Law: 

• Implementation date: Pillar Two will apply as from 1 January 2025.
• Scope: The Law will apply to UAE (i) tax residents that are Constituent Entities (CE), (ii) Joint Ventures (JV) and (iii) Certain Reverse Hybrid entities of MNEs that meet the Revenue threshold. Therefore, the rules will not apply to purely domestic UAE groups (i.e., with no presence outside the UAE). 
• Excluded entities: In line with the OECD rules, certain entities are excluded such as government bodies, international organizations, pension funds, investment funds and real estate funds (that are the Ultimate Parent Entity within a group). It also includes a special provision that states that Sovereign Wealth Funds that qualify as Government Entities are not the Ultimate Parent Entity (UPE) of any group.
• Top-up tax collection: 
  • Any top-up tax will be collected through the QDMTT, i.e., the UAE will tax and collect any top-up tax from UAE low-taxed entities (LTCE) within scope. 
  • The UAE will not apply the IIR and UTPR to collect any top-up tax of LTCEs of the group located in other countries. 
  • The top-up tax due in the UAE will apply to 100% of the jurisdictional top-up tax (i.e., regardless of the MNE Group’s ownership interest). As a result, JVs, and other partially owned entities will pay the total amount of the top-up tax allocated to them.
  • Entities can appoint a Domestic Designated Filing Entity to pay the top-up tax and file the return on behalf of other members of the group.
• Effective tax rate (ETR) computation:  
  • In principle, the Pillar Two Income or Loss of each CE should be prepared based on standalone financial statements prepared in accordance with IFRS (special conditions apply). 
  • In line with the GloBE rules, the ETR calculation of JVs, Minority-owned CEs and Stateless entities that are Reverse Hybrid entities, needs to be conducted separately from the other “regular” CEs of the group. 
• Safe Harbours: 
  • Transitional CbCR Safe Harbour rules will be applicable to Fiscal Years that begin before 1 January 2027 and end before 1 July 2028. If either the De minimis, simplified ETR or Routine Profit test can be met, no top-up tax will be due in the UAE. 
  • Simplified calculation Safe Harbour will also apply, if certain tests are met.
• Anti-abuse rules: 
  • General anti-avoidance rule (GAAR) provisions of the UAE Corporate Tax Law will apply. 
• Administration / compliance: 
  • Entities within the scope should register with the Tax Authority. However, the deadline was not prescribed yet. 
  • The Pillar Two Information Return will be filed in the template published by the OECD and using the presentation currency of the Consolidated Financial Statements of the UPE.

Next steps 

With the above developments, it is important that MNEs with presence in the UAE start preparing for the new rules as this could have a significant impact, not only in terms of additional taxes but also a material increase of the compliance burden. Therefore, it would be recommended to get started with impact assessments and readiness checks (if not done already). Our tax experts listed below would be happy to discuss the above matters in more detail.