6 Essential Facts on the UAE Domestic Minimum Top-Up Tax

The United Arab Emirates has taken a significant step towards global tax compliance with the issuance of Cabinet Decision No. 142 of 2024, introducing the UAE Domestic Minimum Top-up Tax (DMTT) for multinational enterprises effective from 1 January 2025. This measure aligns the UAE with the OECD’s Pillar II Model Rules, designed to promote equitable tax practices and ensure that multinational corporations contribute fairly to the jurisdictions in which they operate. By implementing the DMTT, the UAE reinforces its commitment to harmonising domestic tax policies with international standards and fostering transparency in the global tax landscape.

Scope and Applicability

The UAE Domestic Minimum Top-up Tax applies to Constituent Entities that are part of a Multinational Enterprise (MNE) Group with annual consolidated revenue of EUR 750 million or more, as reported in the Ultimate Parent Entity’s financial statements for at least two of the four financial years preceding the financial year under review. An MNE Group is defined as any group that includes at least one entity or permanent establishment outside the jurisdiction of the Ultimate Parent Entity, covering organisations with cross-border operations.

Entities Covered

The UAE Domestic Minimum Top-up Tax rules apply to:

•             Constituent Entities based in the UAE

•             Joint Ventures and JV Subsidiaries of a Domestic JV Group

•             Reverse Hybrid Entities established under UAE law

Excluded Entities

Certain entities are exempt from UAE Domestic Minimum Top-up Tax, including:

•             Governmental Entities

•             International Organisations

•             Non-profit Organisations

•             Pension Funds

•             Investment Funds that are Ultimate Parent Entities

•             Real Estate Investment Vehicles that are Ultimate Parent Entities

Calculation of the UAE Domestic Minimum Top-up Tax

The UAE Domestic Minimum Top-up Tax (DMTT) calculation follows the GloBE Model Rules and involves several steps. First, businesses compute the total adjusted income and adjusted taxes for all non-excluded UAE entities. These figures are used to determine the Effective Tax Rate (ETR) by dividing aggregated taxes by aggregated income. If the ETR is below 15%, the difference becomes the top-up tax percentage.

Next, substance-based income exclusions are applied, which allow deductions based on eligible payroll costs and tangible assets, starting at 9.6% and 7.6% respectively, and gradually reducing to 5% by 2033. After applying these exclusions, the top-up tax is calculated by multiplying the remaining income by the top-up tax percentage. Finally, any additional tax liabilities are assessed, and adjustments are made to arrive at the total DMTT obligation.

Safe Harbours and Transitional Reliefs

The UAE Domestic Minimum Top-up Tax framework introduces specific safe harbours and relief measures designed to ease compliance and reduce administrative burdens for qualifying entities:

De Minimis Safe Harbour

The UAE Top-up Tax is nil if:

•             The aggregate average revenue in the UAE is below EUR 10m; and

•             The average DMTT Income or Loss does not exceed EUR 1m for the current and two prior financial years.

Transitional Country-by-Country Reporting Safe Harbour

The UAE Top-up Tax due may be considered nil if any of the simplified tests are met, De-Minimis Test, ETR Test or Routine Profit Test. This is only applicable for fiscal years beginning on or before1 January 2027 and excluding fiscal years ending after 1 July 2028. A qualified CbCR is a requirement to access this safe harbour.

Initial phase of international activity exclusion

The UAE Top-up Tax due may be considered nil if:

•             The MNE Group operates in no more than six jurisdictions and holds Tangible Assets below EUR 50m outside its reference jurisdiction; and

•             No interest in the UAE CEs / JVs is owned by a parent entity in the group which applies the Income Inclusion Rule.

This exclusion is available for a maximum of five years from the date the MNE Group becomes subject to the Pillar Two rules.

Simplified Computation Safe Harbour

The UAE Top-up Tax shall be deemed to be zero for a Financial Year provided that the MNE Group meets one of the following tests with respect to its operations in the UAE:

•             Routine Profits Test;

•             De Minimis Test; or

•             Effective Tax Rate Test

Key Compliance Requirements under UAE Domestic Minimum Top-up Tax

Transfer Pricing Requirements

The UAE Domestic Minimum Top-up Tax Rules mandate that transactions between related entities comply with the arm’s length principle, ensuring intercompany dealings reflect fair market values. To achieve this, adjustments may be necessary so that transactions between Constituent Entities are recorded consistently and in line with international standards.

Registration and Deregistration

Entities within the scope of the UAE Domestic Minimum Top-up Tax must register with the Federal Tax Authority (FTA), while those that no longer meet the criteria are required to deregister. The FTA will announce timelines and detailed procedures for both processes in due course.

Filing and Payment

Affected entities must file a Top-up Tax Return and pay any tax due to the FTA within 15 months after the end of the tax period, or 18 months for the initial transition year. Groups may appoint a designated filing entity to manage submissions and payments on behalf of all UAE entities. Detailed guidance on the registration and filing process will be issued by the FTA.

Pillar Two Information Return

In addition to the Top-up Tax Return, certain entities designated by the Minister will be required to submit a Pillar Two Information Return. The FTA will provide the template, expected to align with the OECD Inclusive Framework’s GloBE Information Return, with a filing deadline of 15 months from the end of the tax period.

Record-Keeping Requirements

Groups must retain all records, documentation, and financial data used to determine their DMTT liability for seven years following the end of the relevant tax period.

Penalties for Non-Compliance with UAE Domestic Minimum Top-up Tax (DMTT)

Compliance with DMTT requirements falls under the UAE Corporate Tax regime, and violations can lead to significant penalties as outlined in Article 36 of the UAE Corporate Tax Law.

For more details on penalties and best practices for avoiding non-compliance, check out our previous article on UAE Tax Best Practices.

Preparing for UAE Domestic Minimum Top-up Tax (DMTT)

The introduction of the UAE Domestic Minimum Top-up Tax (DMTT) represents a major development in the country’s corporate tax framework, aligning with global standards under the OECD’s Pillar Two initiative. Multinational Enterprise (MNE) Groups operating in the UAE must take proactive measures to ensure compliance and minimise financial and operational risks.

Assessment

The first step is to evaluate whether your company meets the criteria for the UAE top-up tax and estimate its financial impact. This includes reviewing the applicability of substance-based income exclusions or reliefs and determining whether safe harbour provisions under the DMTT framework can be utilised to simplify compliance and reduce exposure.

Compliance Planning

Once the impact is understood, businesses should develop a comprehensive compliance plan. This plan must address registration with the Federal Tax Authority (FTA), timely filing and payment obligations, proper financial statement presentation, and deregistration procedures where applicable. Early preparation is essential to avoid operational disruptions and mitigate penalties for non-compliance.

Registration

MNE Groups within the scope of the UAE Domestic Minimum Top-up Tax must complete registration with the FTA by the prescribed deadline, which will be announced by the authority. Failure to register on time may result in penalties under UAE Corporate Tax regulations.

Safe Harbour Assessment

Businesses should review whether they qualify for safe harbour provisions, such as simplified computation methods or transitional reliefs, which can significantly reduce complexity and potential top-up tax exposure.

Transfer Pricing Compliance

Groups must ensure that intercompany transactions adhere to the arm’s length principle under the UAE Domestic Minimum Top-up Tax framework. This may involve adjusting recorded amounts to reflect fair market values and updating global and domestic transfer pricing policies to maintain consistency across constituent entities.

Engage with Experts

Consulting with experienced tax advisers, such as WellTax, is highly recommended. These specialists can provide expert guidance on navigating the UAE’s regulatory framework, ensuring full compliance and helping businesses align their tax strategies with global standards.

Conclusion

The introduction of the UAE Domestic Minimum Top-up Tax (DMTT) represents a major milestone in aligning the UAE’s tax framework with global standards under the OECD’s Pillar Two Model Rules. While this move enhances transparency and fairness, it also introduces new compliance obligations for multinational enterprise groups operating in the UAE. From registration and filing requirements to transfer pricing adjustments and safe harbour assessments, businesses must act proactively to avoid disruptions and penalties.

Partnering with experienced tax professionals can make this transition seamless. With deep expertise in the UAE’s regulatory landscape, they can help organisations assess applicability, plan compliance strategies, and implement robust processes to ensure full alignment with UAE Domestic Minimum Top-up Tax (DMTT) requirements. Engaging the right advisers today will position your business for success in this evolving global tax environment.

Check out our article, “Corporate Tax Planning in the UAE”, for an in-depth guide on keeping your business compliant with evolving UAE regulations.