Introduction: The Changing UAE Tax Landscape
The United Arab Emirates has taken a significant step in aligning with global tax standards with the introduction of Cabinet Decision No. 142 of 2024 on the Imposition of Top-up Tax on Multinational Enterprises. This landmark legislation, which took effect on January 1, 2025, implements the OECD’s Pillar Two framework in the UAE, establishing a minimum effective tax rate of 15% for qualifying multinational enterprises.
This development represents a paradigm shift for businesses operating in the UAE, historically known for its tax-friendly environment. With these new regulations, multinational enterprises (MNEs) with annual revenue of EUR 750 million or more must now navigate a complex landscape of compliance requirements, reporting obligations, and strategic considerations.
Our firm has been analyzing these developments extensively, and in this blog, we’ll explore both the technical aspects of these regulations and practical strategies for company restructuring to optimize tax positions while ensuring compliance.
Key Provisions of UAE’s Global Minimum Tax Framework
Scope and Applicability
Cabinet Decision 142 of 2024 establishes a Top-up Tax system applicable to Constituent Entities that are members of MNE Groups with annual revenue of EUR 750 million or more. The decision will apply to fiscal years beginning on or after January 1, 2025.
Core Mechanisms
The framework centers on several key mechanisms:
1- Effective Tax Rate Calculation: The Effective Tax Rate equals the sum of Adjusted Covered Taxes divided by Net Pillar Two Income. When this rate falls below the Minimum Rate (15%), a Top-up Tax percentage is calculated as the difference.
2- Substance-based Income Exclusion: The framework provides for exclusions based on:
- 5% of Eligible Payroll Costs for employees performing activities in the UAE
- 5% of the carrying value of Eligible Tangible Assets located in the UAE
3- Simplified Calculations Safe Harbour: Entities can elect certain safe harbors if they meet specific tests (Routine Profits Test, De Minimis Test, or Elective Tax Rate Test).
4- Transition Rules: Special provisions apply for fiscal years beginning before January 1, 2027, and ending before July 1, 2028, with transition rates of 15% for 2025 and 16% for 2026.
Global Restructuring Trends in Response to Minimum Tax
The introduction of global minimum tax regimes worldwide has already triggered significant corporate restructuring activities. Key trends include:
- Legal Entity Rationalization: Companies are eliminating purely tax-driven entities, particularly those in low-tax jurisdictions.
- Substance-Based Reorganization: Organizations are ensuring that their corporate structures reflect genuine economic substance rather than tax advantages.
- Technology-Enabled Compliance: Firms are investing in advanced tax technology solutions to manage the increased reporting and compliance burden.
- Cross-Functional Integration: Tax, finance, legal, and IT teams are collaborating more closely to ensure the effective implementation of restructuring strategies.
How Our Firm Can Assist with Strategic Restructuring
Legal Entity Rationalization
Our firm provides comprehensive legal entity rationalization services to optimize your corporate structure in light of the new global minimum tax framework.
Implementation Framework:
- Entity Purpose Assessment: Evaluate each entity against operational vs. tax-driven criteria
- Tax Impact Analysis: Calculate potential Top-up Tax liability under current structure
- Rationalization Roadmap: Develop a phased approach to entity elimination or consolidation
- Legal Implementation: Execute the necessary legal steps to implement the rationalization plan
Case Study: Successful Restructuring for UAE Multinational
Situation: A multinational group with EUR 900 million in annual revenue operating across 12 jurisdictions, including significant operations in the UAE, needed to restructure in preparation for the new Top-up Tax regime.
Our Approach:
- Conducted jurisdiction-by-jurisdiction ETR analysis
- Identified three entities in low-tax jurisdictions with insufficient substance
- Developed a restructuring plan to rationalize entities and relocate certain functions to the UAE
- Implemented compliance framework and technology solution
Results:
- Reduced potential Top-up Tax liability by 65%
- Simplified legal structure by eliminating 4 entities
- Implemented a robust compliance framework well ahead of the deadline
- Achieved sustainable ETR above the minimum threshold
Conclusion: Proactive Planning is Key
The UAE’s implementation of the Global Minimum Tax framework represents a significant shift in the tax landscape for multinational enterprises. Companies that take a proactive approach to restructuring will be best positioned to minimize tax liabilities while ensuring full compliance with the new regulations.
Our firm offers comprehensive support throughout this journey, from technical analysis and strategic planning to implementation and ongoing compliance. By combining deep technical expertise in UAE tax law with practical restructuring experience, we help our clients navigate this complex transition efficiently and effectively.
Contact us today to schedule a consultation on how we can assist with your company restructuring needs in light of UAE’s new Global Minimum Tax framework.
Legal Disclaimer: This blog is for informational purposes only and is not a substitute for professional legal, financial, or tax advice. It has been prepared by Khairallah Advocates & Legal Consultants, not a financial auditor. For personalized advice on compliance and regulatory updates, reach out to Khairallah Advocates & Legal Consultants. Our team is ready to assist you with solutions for your business needs.
Having said that, Contact Khairallah Advocates & Legal Consultants and benefit from our free 30-min legal consultation.
*Disclaimer: our blogs, law updates and FAQ’s are freely distributed for educational purposes and to showcase recent updates and regulations in the UAE’s framework.
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