When did the new rules regarding Pillar Two take effect in the UAE?

The UAE adopted the OECD Pillar Two framework by introducing the Qualified Domestic Minimum Top-Up Tax (QDMTT), effective January 1, 2025. This tax aligns with global minimum tax rules set by the OECD and G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS).

Who is impacted by Pillar Two in the UAE?

Pillar Two in the UAE applies to entities that are members of an MNE Group with annual revenue of €750 million or more in the Consolidated Financial Statements of the Ultimate Parent Entity (UPE) in at least two of the four fiscal years immediately preceding the tested fiscal year.

These MNEs must maintain a minimum Effective Tax Rate (ETR) of 15% on income generated in the UAE. If the ETR is below 15% — which is likely, as the UAE Corporate Tax rate is 9% — a Top-up Tax will be applied to Excess Profits to bring the rate up to 15%.

Certain entities are exempt, including Government Entities (such as Sovereign Wealth Funds), International Organisations, Non-Profit Organisations, Pension Funds, Qualifying Investment Funds, and Qualifying Investment Vehicles. While Excluded Entities are not subject to the Pillar Two Rules, they are still considered when applying the €750 million revenue threshold. 

The following entities are subject to Pillar Two Rules in the UAE and shall pay top-up tax for a fiscal year or may appoint a Domestic Designated Filing Entity to pay its Top-Up Tax:

1. Constituent Entities located in the UAE:  Constituent Entities are those entities that are members of an MNE Group that has an annual revenue of € 750 million or more in the Consolidated Financial Statements of the Ultimate Parent Entity in at least two of the four fiscal years immediately preceding the tested fiscal year. A Constituent Entity could also be a Permanent Establishment (PE) of a Main Entity in the MNE Group. Main Entity, in respect of a PE, is the Entity that includes the Financial Accounting Net Income or Loss of the PE in its financial statements.

2. Joint Ventures found in the UAE: The definition of a Joint Venture (JV) for Pillar Two rules departs from the one commonly used in accounting rules. A JV means an Entity whose financial results are reported under the equity method in the Consolidated Financial Statements of the UPE provided that the UPE holds directly or indirectly at least 50% of its Ownership Interests.

   A Joint Venture and its JV Subsidiaries are together known as a JV Group. For the purpose of computing any Top-up Tax of the Joint Venture (JV) and its JV Subsidiaries, they will be treated as if they were Constituent Entities of a separate MNE Group and as if the Joint Venture was the Ultimate Parent Entity of that Group.

3. Stateless Constituent Entities created in accordance with the laws of the UAE and that are Reverse Hybrid Entities: A Stateless Constituent Entity is an entity within the MNE group that is not tax resident in any jurisdiction, as it is treated as transparent in its jurisdiction of creation (i.e., the UAE). Therefore, it will not be taxed at the entity level. Furthermore, since it is considered a Reverse Hybrid Entity—where its direct owners in their jurisdiction treat the entity as opaque (a separate taxable entity), it will also not be taxed at the level of its owners.

To prepare for the implementation of Pillar Two in the UAE, organisations should consider the following actions:

1. Assess Applicability: Decide if your organisation falls within the scope of Pillar Two, particularly if you are part of a multinational group with consolidated revenues exceeding €750 million.

2. Understand the Rules: Familiarize yourself with the specific requirements and implications of the OECD's Pillar Two framework as implemented in the UAE.

3. Evaluate Current Tax Position: Conduct a thorough review of your current tax structures and positions to find potential gaps or areas of non-compliance.

4. Model Financial Impact: Use financial modelling to understand how the global minimum tax might affect your organisation's tax liabilities and overall financial performance.

5. Update Systems and Processes: Ensure that your accounting and reporting systems are capable of capturing the necessary data to comply with the new rules.

6. Engage with Experts: Consult with tax advisors or legal experts who specialize in international tax compliance to navigate the complexities of Pillar Two.

7. Communicate with Stakeholders: Keep internal and external stakeholders informed about the potential impacts and the steps your organisation is taking to ensure compliance.

Taking these proactive steps will help your organisation adapt to the new regulatory environment and minimize risks associated with noncompliance.