UAE Issues a Cabinet Decision on the Pillar Two Domestic Minimum Tax

Legislation

On February 8, 2025, the Ministry of Finance announced the issue of Cabinet Decision 142 of 2024 for the detailed provisions for the application of the Pillar Two domestic minimum top-up tax (DMTT) in the UAE.

This follows Federal Decree Law No. 60 of 2023, of November 24, 2023, which amends some provisions of the Federal Decree Law No 47 of 2022 (the “Corporate Tax Law”) to provide for a Pillar Two top-up tax.

The Income Inclusion Rule (IIR) and Under-Taxed Profits Rule (UTPR) are not being implemented in the UAE.

Article 2 of the Cabinet Decision provides that it will be applicable to Fiscal Years of an MNE Group that begin on or after January 1, 2025.

General

The Attachment to the Cabinet Decision (the ‘Cabinet Decision) provides for the detailed application of the DMTT in the UAE.

The approach taken is essentially to reproduce the OECD Model GloBE Rules, with the same citation references, and then to adjust and amend to implement aspects of the OECD Administrative Guidance and to tailor the DMTT to the UAEs tax regime. In addition, some aspects of the OECD Model Rules are not relevant as the UAE is not implementing an IIR or UTPR.

Safe harbours, as reflected in the OECD Safe Harbour Guidance and the Second Set of OECD Administrative Guidance are also reflected in the legislation (where relevant).

Article 2 of the Cabinet Decision provides that the DMTT applies to:

-Constituent Entities located in the UAE during that Fiscal Year, including those that are members of a Minority-owned Subgroup;

-Joint Ventures and JV Subsidiaries located in the UAE during that Fiscal Year;

-Stateless Constituent Entities created in accordance with the laws of the UAE and that are Reverse Hybrid Entities, with respect to any of their Pillar Two Income or Loss.

However, the Constituent Entities of the Domestic Main Group and a Domestic Minority-owned Subgroup, can appoint a Domestic Designated Filing Entity to pay the DMTT on behalf of the members of their Domestic Groups. Similar provisions also apply to Joint Ventures and Reverse Hybrid Entities.

Whilst the Cabinet Decision expressly includes most aspects from the February 2023, July 2023 and December 2023 OECD Administrative Guidance, Article 16 also provides that it is to be interpreted and applied consistently with the OECD Commentary and Agreed Administrative Guidance (as adopted by the Minister).

OECD Administrative Guidance

Aspects of the First Set of OECD Administrative Guidance included in the law are:

-Rebasing monetary thresholds in the GloBE Rules (Article 1.1)

-The exclusion of sovereign wealth funds from the definition of Ultimate Parent Entity (Article 1.4)

-Clarifying the definition of ‘Excluded Entity’ (Article 1.5)

-The meaning of “ancillary” for Non-Profit Organisations (Article 1.6)

-The foreign exchange hedge election (Article 2.2)

-The debt release election (Article 2.4)

-Provisions for accrued pension expenses (Article 2.5)

-Covered Taxes on deemed distributions (Article 2.6)

-Excess negative tax carry-forward guidance (Article 2.7)

-Substitute loss carry forwards (Article 2.8)

-The equity gain or loss inclusion election (Article 2.9)

-The extension of the taxable distribution method election to insurance investment entities (Article 3.1)

-The exclusion of Insurance Investment Entities from the definition of Intermediate Parent Entity and Partially-Owned Parent Entity (Article 3.2)

-Provisions on restricted tier one capital for insurance companies (Article 3.3)

-Liabilities related to Excluded Dividends and Excluded Equity Gain or Loss from securities held on behalf of policyholders (Article 3.4)

-The portfolio shareholding election (Article 3.5)

-The application of the tax transparency election to mutual insurance companies (Article 3.6)

-Deferred tax assets and tax credits under the transitional rules (Article 4.1)

-The transitional rules and transactions similar to asset transfers (Article 4.2)

-Asset carrying value and deferred taxes under the transitional rules (Article 4.3)

The following provisions of the Second Set of OECD Administrative Guidance (published on July 17, 2023), are included in the law:

-Currency Provisions

-Marketable Transferable Tax Credits

-Interjurisdictional Employees/Assets for the Substance-based Income Exclusion

-Substance-based Income Exclusion: Other Assets

The only aspects of the Third Set of OECD Administrative Guidance (issued in December 2023) included are in relation to the Safe Harbour Rules (see below).

No aspects of the Fourth Set (June 2024) or the January 2025 OECD Guidance are included in the law.

OECD Safe Harbours 

Safe harbours, as reflected in the OECD Safe Harbour Guidance are reflected in the legislation.

The legislation includes the simplifications agreed by the OECD. In particular:

-The Transitional CbCR Safe Harbour (Article 8.2.1 of the Cabinet Decision);

–Simplified Calculations Safe Harbour for Non-Material Constituent Entities (Article 8.2.2 of the Cabinet Decision).

The Transitional UTPR Safe Harbour and the QDMTT Safe Harbour are not relevant in the UAE as it is only implementing a DMTT.

The Cabinet Decision implements most of the main amendments to the Transitional CbCR Safe Harbour included in the Third Set of OECD Administrative Guidance (December 2023), including:

-Purchase Accounting Adjustments (consistent reporting condition and the goodwill impairment adjustment)

-Same Financial Statements/Local Financial Statements for Statutory Reporting

-MNEs not required to file CbC Reports

-Treatment of hybrid arbitrage arrangements

Elections in the OECD Model Rules

Most of the elections included in the OECD Model Rules are provided in the Cabinet Decision, including:

–Excluded Entity Election (Article 1.5.3 of the Cabinet Decision (also applies to non-profit organisations))

–Stock-Based Compensation Election (Article 3.2.2 of the Cabinet Decision)

–Election to use the Realization Method (Article 3.2.5 of the Cabinet Decision)

–Election to Spread Capital Gains (Article 3.2.6 of the Cabinet Decision)

–Consolidation Election (Article 3.2.8 of the Cabinet Decision)

–Unclaimed Accrual Election (Article 4.4.7 of the Cabinet Decision)

–GloBE Loss Election (Article 4.5 of the Cabinet Decision)

–Prior Year Adjustment Election (Article 4.6.1 of the Cabinet Decision)

–De minimis Election (Article 5.5 of the Cabinet Decision)

–Substance-Based Income Exclusion Election (Article 5.3.1 of the Cabinet Decision)

–Deemed Disposal of Assets Election (Article 6.3.4 of the Cabinet Decision)

–Taxable distribution method Election (Article 7.4 of the Cabinet Decision)

–Tax transparency Election (Article 7.3 of the Cabinet Decision)

–Safe Harbour Elections (Article 8.2 of the Cabinet Decision)

The Distribution Tax Regime Election is not included in the Cabinet Decision as this is not relevant to the UAE domestic tax regime.

Elections in the OECD Administrative Guidance

The elections included in the February 2023 OECD Administrative Guidance are included in the Cabinet Decision. This includes the: