UAE Cabinet Decision No. 142 of 2024: Introduction of Top-up Tax on Multinational Enterprises (Effective from 1 January 2025)
Date of Issue: 31 December 2024
Effective Date: 1 January 2025
The UAE Cabinet has issued Cabinet Decision No. 142 of 2024 introducing a Top-up Tax on Multinational Enterprises (MNEs) as part of the country’s commitment to the OECD’s Pillar Two Global Minimum Tax framework. This Decision, which comes into effect from fiscal years beginning on or after 1 January 2025, introduces a mechanism to ensure that large MNE Groups are subject to a minimum level of taxation in the UAE.
Key Highlights of the Cabinet Decision:
1. Scope of Application
- Applicable to Multinational Enterprise Groups (MNE Groups) with consolidated revenues of EUR 750 million or more in at least two of the four fiscal years preceding the tested fiscal year.
- The Decision applies to Constituent Entities that are part of such MNE Groups, including Entities, Permanent Establishments, and specific JV and Reverse Hybrid Entities located in the UAE.
- Excluded Entities such as Government Entities, Non-profit Organizations, Pension Funds, Investment Funds acting as UPEs, and Real Estate Investment Vehicles are exempt from Top-up Tax.
2. Imposition and Computation of Top-up Tax
- Top-up Tax will be levied on the low-taxed profits of MNE Groups to ensure a minimum effective tax rate is achieved.
- Effective Tax Rate (ETR) is calculated by dividing the total adjusted covered taxes of UAE Constituent Entities by their net Pillar Two income.
- The Top-up Tax is the amount required to bring the ETR up to the agreed Minimum Rate (expected to be 15% under OECD Pillar Two rules).
3. Calculation of Pillar Two Income or Loss
- Pillar Two Income or Loss is based on financial accounting net income or loss of each Constituent Entity, adjusted for specific inclusions and exclusions like:
- Excluded Dividends and Equity Gains or Losses.
- Net taxes expense, policy disallowed expenses.
- Certain stock-based compensation adjustments.
- International Shipping Income exclusion.
4. Adjusted Covered Taxes
- Taxes considered include corporate income taxes and similar taxes but exclude Top-up Taxes paid under other jurisdictions’ minimum tax rules.
- Detailed mechanisms for adjusting covered taxes for deferred tax assets/liabilities, including elections and transitional rules, are provided.
5. Substance-based Income Exclusion
- The computation of excess profits (on which Top-up Tax is levied) is reduced by a carve-out for:
- 5% of eligible payroll costs of UAE-based employees.
- 5% of the carrying value of eligible tangible assets in the UAE.
6. Filing and Compliance
- UAE-based MNE Constituent Entities are required to calculate, report, and pay Top-up Tax.
- MNE Groups may designate a Domestic Filing Entity for compliance.
- Provisions for administrative and procedural aspects are included to ensure proper implementation and enforcement.
7. Special Provisions for Investment Entities
- Investment Entities located in the UAE are excluded from the Top-up Tax regime.
8. Effective Date
- Applicable for financial years starting on or after 1 January 2025.
Conclusion:
The introduction of the Top-up Tax regime in the UAE marks a significant shift in the country’s approach to taxing multinational enterprises, aligning with global efforts to combat base erosion and profit shifting (BEPS). MNE Groups operating in the UAE should urgently review their global structures and assess the impact of these rules on their tax liabilities.
KGRN Chartered Accountants can assist MNE Groups in understanding and preparing for the new Top-up Tax compliance requirements. For advisory and support, please reach out to our Corporate Tax and International Tax experts.
