The UAE Introduces 15% Domestic Minimum Top-up Tax (DMTT) and New Corporate Tax Incentives
Introduction
The UAE has introduced a 15% Domestic Minimum Top-up Tax (DMTT), set to take effect for financial years starting on or after January 1, 2025. The DMTT will apply to multinational enterprises (MNEs) operating in the UAE that have consolidated global revenues of €750 million (approximately AED three billion) or more in at least two of the four financial years immediately before the financial year in which the DMTT applies. This has been implemented[i] through amending Federal Decree-Law No. 47 of 2022[ii] via Federal Decree-Law No. 60 of 2023.[iii] The amendment also expands definitions by adding “Top-up Tax” and “Multinational Enterprise” and authorises the Cabinet to define specific rules, conditions, and exemptions for the tax. Article Two of Federal Decree-Law No. 60 of 2023 stipulates that the revenues from the top-up tax, along with corporate tax revenues and administrative penalties, will be shared between the Federal and Local Governments.
The introduction of the DMTT aligns with the OECD’s Two-Pillar Solution, requiring large MNEs to pay a minimum effective tax rate of 15% on their profits in each country where they operate, addressing issues such as base erosion and profit shifting (BEPS). This initiative also reflects the UAE’s firm commitment to fostering a fairer and more transparent global tax system.
Global Minimum Tax
In October 2021, 137 countries participating in the OECD/G20 Inclusive Framework on BEPS reached a historic agreement known as the two-pillar solution.[iv] This agreement is designed to handle the twin challenges brought about by globalisation and the digitalisation of the economy. Pillar One focuses on achieving a fairer allocation of tax revenues. It ensures MNEs pay taxes not only where they have production facilities or a formal presence but also in places where they have their customers and generate sales—called “Market Jurisdictions.”
Pillar Two, on the other hand, introduces a Global Minimum Tax. It sets a baseline effective tax rate of 15% to be applied to large MNEs with consolidated revenues of €750 million or more globally. If the effective tax rate in a jurisdiction falls below this threshold, a top-up tax is applied to ensure compliance with the minimum rate. The first critical rule under Pillar Two is the Income Inclusion Rule (IIR). This rule places responsibility on the Ultimate Parent Entity (UPE) of a MNE to pay a top-up tax if any part of the group’s income is taxed below the minimum 15% rate in a particular country.[v] Additional rules under Pillar Two include the Under-Taxed Profits Rule (UTPR) and the Subject to Tax Rule (STTR).
The drive for a Global Minimum Tax is expected to have a significant financial impact worldwide. The estimated annual global revenue gains from the minimum tax element of Pillar Two is expected to be about USD 220 billion, or roughly 9% of global corporate income tax revenues.[vi] This figure is higher than the OECD’s earlier estimate of USD 150 billion, indicating the substantial potential that these reforms have in reshaping international tax revenues.
The UAE’s Corporate Tax Regime
Though the UAE will implement the DMTT for large MNEs, it is important to note that the UAE’s own corporate tax rate is set at 9%. Here are the corporate tax rates for businesses operating in the UAE.
Source: Corporate Tax Guide for Free Zone Persons[vii]
Over the past two decades, global corporate tax rates have been on a downward trend. According to the OECD, the average combined statutory corporate income tax rate for jurisdictions under the Inclusive Framework dropped from 28.0% in 2000 to around 21.7% in 2019[viii]. Between 2019 and 2024, the rates have stabilised, staying close to 21.1% in 2024. While these tax rates have indeed fallen, they still remain more than double the corporate tax rate in the UAE, making the UAE an attractive jurisdiction for businesses looking for a low corporate tax environment.
New Corporate Tax Incentives
Beyond adopting the DMTT, the UAE is also exploring new corporate tax incentives to encourage innovation and competitiveness. One such incentive being considered is a Research and Development (R&D) Tax Incentive. The R&D Tax Incentive is designed to foster innovation and drive economic growth in the UAE. This incentive would be expenditure-based, offering a tax credit ranging between 30% and 50%.[ix] The amount of the tax credit would depend on the company’s revenue and the number of employees it has in the UAE.[x] The R&D activities must also be conducted within the UAE, and their scope should align with the OECD’s Frascati Manual guidelines, a globally recognised guide for collecting and using R&D data that provides key definitions, guidelines, and classifications to help statisticians and policymakers accurately gather and analyse R&D statistics for science and innovation.[xi] The proposed R&D tax incentive is expected to come into effect for tax periods starting on or after January 1, 2026.
Another incentive under consideration is a refundable tax credit for high-value employment activities. This measure, proposed to take effect on January 1, 2025, would grant companies a tax credit as a percentage of eligible salary costs for employees who are engaged in high-value employment functions. Such employees might include C-suite executives or other senior personnel who perform core business functions that add substantial value to the UAE economy.
Conclusion
The introduction of the DMTT and the exploration of R&D and high-value employment tax incentives show the UAE’s balanced approach in meeting global obligations and promoting local economic objectives. By aligning with the OECD’s Two-Pillar Solution, the UAE demonstrates its commitment to international standards of fairness and transparency in taxation. At the same time, by maintaining a comparatively low corporate tax rate and considering new incentives, the UAE preserves a competitive edge for businesses and would continue to attract and retain innovative, growth-focused enterprises.
Find how AKW Consultants can help your business with calculating consolidated revenues, determining eligibility for the Domestic Minimum top-up tax, and ensuring compliance with the UAE Corporate Tax Law and OECD Pillar Two requirements.
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