UAE's top-up tax on large multinational companies is given 'transitional qualified status'

Country imposed 15 per cent tax on large multinational companies from January 1

The UAE’s domestic top-up tax has also qualified for the OECD Pillar 2 safe harbour status. EPA

The OECD, comprising 38 of the world's largest economies, has included the UAE's 15 per cent tax on large multinational companies in its “transitional qualified status” list.

The move is expected to provide more transparency for companies doing business in the Emirates, the UAE Ministry of Finance has said.

In effect since January 1, the domestic minimum top-up tax (DMTT), applies to multinational enterprises (MNEs) with consolidated global revenue of €750 million ($793 million) or more in at least two of the four financial years immediately preceding the financial year in which the tax applies.

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The OECD's Central Record of Legislation with Transitional Qualified Status sets out those jurisdictions whose minimum tax legislation has completed the agreed process and achieved transitional qualified status.

With the qualified status, the UAE’s DMTT “provides certainty to MNE groups that no foreign tax will be applied to UAE profits and acceptance of the UAE top-up tax liability by other countries”, the Ministry of Finance said in a statement on Monday.

“Other jurisdictions will recognise the top-up tax obligations due in the UAE on these entities, thus minimising risk of complex and costly multilateral audit challenges and disputes,” it added.

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The OECD's two-pillar reform programme set up a global minimum corporate tax to ensure large multinational enterprises pay a minimum 15 per cent tax on profits in each country where they operate.

The initiative is aimed at addressing tax challenges arising from the digitalisation and globalisation of the economy and putting a floor on tax competition, according to the OECD.

The proposed global minimum tax is expected to result in annual global revenue gains of around $220 billion, or 9 per cent of global corporate income tax revenue, the OECD said in 2023.

The UAE introduced the federal corporate tax with a standard statutory rate of 9 per cent starting from the financial year beginning on or after June 1, 2023.

It brought the income of companies exceeding Dh375,000 within the taxable bracket. Taxable profits below that level are subject to a tax of zero per cent.

The UAE’s DMTT has also qualified for the OECD Pillar 2 safe harbour, which reduces the administrative burden for both MNEs and the tax administration as top-up calculations are not required to be performed in other jurisdictions, the ministry said.

“Declaring the UAE a safe harbour means that multinational organisations operating in the UAE will not be subject to any additional top-up tax, effectively a penalty that is applied because of tax planning structures being used to gain unfair advantage vis-à-vis competing markets,” said David Daly, partner at Gulf Tax Accounting Group.

“The UAE has focused on satisfying supranational bodies that it is trading internationally fairly and not deploying market distorting tax policies. Today, the OECD has recognised that,” he added.