News Alert: UAE Formally Implements OECD Pillar 2 Global Minimum Tax Through Comprehensive Cabinet Decision No. 142 of 2024
The UAE Federal Tax Authority (FTA) has enacted Cabinet Decision No. 142 of 2024, a sweeping legislative framework to implement the OECD’s Pillar 2 Global Minimum Tax rules. Effective immediately, the law mandates a 15% minimum effective tax rate for large multinational enterprises (MNEs) operating in the UAE, marking a transformative shift in the nation’s tax landscape. The decision aligns the UAE with over 140 jurisdictions adopting the OECD’s two-pillar solution to combat base erosion and profit shifting (BEPS). Below is a detailed analysis of the framework’s critical components, compliance obligations, and strategic implications for businesses.
1. Scope and Application
The rules apply to MNE Groups with annual consolidated revenue of €750 million or more in at least two of the four fiscal years preceding the tested fiscal year. This threshold is adjusted proportionally for non-12-month fiscal years. Entities within the scope include UAE-based Constituent Entities (CEs), such as subsidiaries, permanent establishments (PEs), joint ventures, and stateless entities (e.g., reverse hybrid entities created under UAE law).
Notably, Excluded Entities are exempt from the top-up tax, including governmental entities, international organizations, non-profits, pension funds, and certain investment funds or real estate vehicles acting as ultimate parent entities. Sovereign wealth funds meeting governmental entity criteria are also excluded. However, entities held by non-profits may lose excluded status if their aggregate revenue (excluding non-profit and excluded entities) exceeds €750 million or contributes over 25% of the MNE Group’s total revenue.
2. Top-Up Tax Calculation and Charging Provisions
The UAE’s Effective Tax Rate (ETR) is calculated as the ratio of Adjusted Covered Taxes (current and deferred taxes, excluding Pillar Two-related taxes) to Net Pillar Two Income (total income minus losses of UAE CEs). If the ETR falls below 15%, a Top-Up Tax is levied on the Excess Profit, defined as Net Pillar Two Income minus a Substance-Based Income Exclusion.
The exclusion comprises two carve-outs:
Payroll Carve-Out: 5% of eligible payroll costs for employees in the UAE, phasing down annually to 5.8% by 2032.
Tangible Asset Carve-Out: 5% of the carrying value of eligible tangible assets (property, plant, equipment, natural resources), phasing down to 4.4% by 2032.
Exclusions from Pillar Two Income include dividends, equity gains/losses (unless elected otherwise), international shipping income, and qualified ancillary shipping activities (e.g., leasing ships, container storage). Adjustments are mandated for asymmetric foreign exchange impacts, policy-disallowed expenses (e.g., fines over €50k), and transactions violating the arm’s length principle.
3. Compliance and Reporting Obligations
Top-Up Tax Returns must be filed within 15 months of the fiscal year-end (18 months for transitional years) by UAE-based CEs, joint ventures, or a Domestic Designated Filing Entity appointed to consolidate liabilities. The return requires granular disclosures aligned with the OECD’s Pillar Two Information Return, including entity-level data, ETR computations, and elections.
Joint and Several Liability applies to UAE domestic groups, meaning all CEs within a group are collectively responsible for top-up tax payments. Reverse hybrid entities and non-legal entities (e.g., partnerships) extend liability to partners or beneficiaries proportional to their ownership.
Penalties for non-compliance are waived until 2026 for entities demonstrating “reasonable measures” to adhere to the rules, offering transitional relief for complex calculations.
4. Transitional Rules and Safe Harbors
To ease implementation, the UAE introduces transitional safe harbors:
CbCR Safe Harbour (2025–2027): MNEs may bypass full ETR calculations if they report UAE revenue <€10M and profit <€1M, achieve a simplified ETR ≥16% (2025) or 17% (2026), or align profits with substance-based exclusions.
Simplified Calculations: Non-material CEs (excluded from consolidation due to size) may use Country-by-Country Report (CbCR) data for revenue, income, and tax computations.
Deferred Tax Adjustments require MNEs to recast existing deferred tax assets/liabilities at the 15% minimum rate during the transition period. Cross-border asset transfers post-November 2021 must align Pillar Two tax bases with pre-transfer carrying values to prevent artificial inflation of deferred tax attributes.
5. Strategic Implications and Next Steps
The UAE’s Pillar 2 framework demands urgent action from MNEs:
Restructuring Considerations: Groups must evaluate the tax efficiency of UAE entities, particularly those benefiting from existing incentives (e.g., free zones), as substance-based carve-outs phase down.
Elections and Planning: Key elections, such as the Five-Year Election for stock-based compensation adjustments or the Pillar Two Loss Election to defer tax assets, require careful analysis to optimize outcomes.
Data Readiness: Robust systems are needed to track financial data (IFRS/local GAAP), payroll costs, asset values, and tax adjustments across jurisdictions.
Conclusion
Cabinet Decision No. 142 positions the UAE as a proactive participant in global tax reforms while balancing competitiveness through transitional relief and substance incentives. MNEs must act swiftly to assess exposures, leverage safe harbors, and align compliance processes with the FTA’s requirements. Further guidance from the Ministry of Finance and OECD administrative updates are expected to clarify ambiguities, particularly around hybrid entities and cross-border allocations.
Recommended Actions:
Conduct a Pillar 2 impact assessment for UAE entities.
Review intercompany pricing and financing arrangements to mitigate low-taxed income risks.
Engage advisors to navigate elections, filings, and potential disputes.
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