Background

On 6 February 2025, the Ministry of Finance of the UAE (MoF) announced the introduction of the Domestic Minimum Top-Up Tax (DMTT) on Multinational Enterprises (MNEs), effective from 1 January 2025, through the issuance of Cabinet Decision 142 of 2024. This decision outlines detailed provisions for the application of DMTT in the UAE, following the MoF announcement on 9 December 2024 and Federal Decree Law No. 60 of 2023, which amended certain provisions of Federal Decree Law No. 47 of 2022 (the UAE CT Law) to incorporate enabling provisions within the existing corporate tax framework (Official Announcement by MoF).

The UAE DMTT aligns with the GloBE Model Rules under the Pillar 2 framework of the OECD/G20 BEPS 2.0 initiative and includes necessary exclusions, safe harbours and transitional benefits. The DMTT will apply to MNEs with consolidated global revenues of €750 million or more in at least two of the four financial years immediately preceding the fiscal year in which the DMTT applies (BDO Insights on the DMTT Regulations)

The implementation of Pillar 2 in the UAE through the introduction of DMTT regulations marks a significant transformation in the UAE's corporate tax framework. This initiative aims to ensure that MNEs pay a minimum effective tax rate of 15% on their profits, thereby reducing tax avoidance and promoting fair competition globally. This new tax policy aligns with international standards and reflects the UAE's commitment to enhancing tax transparency and compliance.

As the UAE gears up for the first year of DMTT implementation in FY 2025, it is crucial to understand the key action steps required to ensure strategic readiness, compliance and rationalize tax positions in line with the new regulations (You can download our brief flyer here).


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Key Factors to Consider

1. Understanding the UAE DMTT Regulations

Understanding the UAE DMTT regulations is essential for businesses operating in the UAE. This knowledge enables them to grasp their obligations under the new rules and develop effective strategies to ensure compliance. However, this is no simple task. The UAE DMTT rules comprise a series of interlinked segments that must be considered collectively to identify the comprehensive impact on the constituent entities of MNE Groups operating in the UAE. Businesses need to adopt a pragmatic, layered approach to ensure all aspects are effectively addressed and no areas are overlooked. Some key areas of consideration include:

• Identifying the In-Scope Entities:

Businesses must identify which entities within their group are subject to the DMTT regulations. This includes subsidiaries, joint ventures, and permanent establishments, among others. Specific rules apply to joint ventures, minority-owned constituent entities, stateless entities, non-material constituent entities, sovereign wealth funds, and flow-through entities. Additionally, certain categories of entities are excluded from these regulations, such as non-profit organizations, investment funds, real estate investment vehicles, and pension funds. Therefore, it is crucial to have a clear understanding of which entities will be impacted by these regulations.

• Evaluating the Implications of Safe Harbour and Transitional Provisions:

The DMTT regulations include several safe harbour and transitional provisions designed to simplify compliance and reduce the administrative burden during the initial implementation phase. These provisions include the Permanent De-Minimis Exclusion Safe Harbor, Permanent Simplified Calculations Safe Harbor, Transitional CbCR Safe Harbor, and Transitional Relief for the Initial Phase of International Activity, among others. Some of these provisions may also result in certain constituent entities falling outside the scope of the DMTT regulations. Therefore, businesses need to evaluate these provisions to understand how they can benefit from them and reduce the administrative burden.

• Understanding the Nuances of determining Pillar 2 Income/Loss & Covered Taxes:

Accurate computation of Pillar 2 income or loss and covered taxes is essential for determining the DMTT liability. Businesses must familiarize themselves with the specific rules for computing these aspects, as numerous listed and optional adjustments must be made to determine these figures. Additionally, the regulations incorporate a variety of off-book treatments (different from treatment provided under the UAE CT Law & the Financial Accounting Standards) and recapture provisions, which may further complicate the calculations.

• Determining Effective Tax Rates and Top-Up Tax Liabilities:

Businesses need to calculate effective tax rates on a jurisdictional blending basis at the UAE level to determine whether they are taxed below the minimum rate. Additionally, top-up tax liabilities must be determined after considering substance-based income exclusions, which may effectively nullify the top-up tax liability. There may also be scenarios where additional current top-up tax obligations arise even in the presence of a Pillar 2 loss. Therefore, a holistic understanding of these provisions is imperative to gauge the actual impact accurately.
Being well-versed in these requirements will allow businesses to strategically plan their tax positions, avoid penalties, and rationalize their financial outcomes.

2. Understanding the Pillar 2 Implementation status in Parent Entity Jurisdiction:

Businesses also need to understand the implementation status of Pillar 2 rules in the Ultimate Parent Entity (UPE) or Intermediate Parent Entity (IPE) jurisdiction, as this could have significant ramifications for the Group as a whole with respect to their UAE operations. (Businesses can track the global implementation of Pillar 2 using BDO Global’s Pillar Two tracker).

In a scenario where the Pillar 2 rules are already implemented at the UPE/IPE level before their implementation in the UAE (for instance, jurisdictions such as the UK, Canada, Germany, France, Netherlands, etc.), particularly for FY 2024, the group may be subjected to top-up tax concerning the UAE operations in the UPE/IPE jurisdiction. In this context, the local UAE management and finance teams will be obligated to provide necessary information and inputs to the global teams to facilitate their Pillar 2 calculations, which are most likely to be undertaken during FY 2025.

Conversely, where the Pillar 2 rules are not implemented at the UPE/IPE level (for instance, jurisdictions such as the US, China, India, KSA etc.) but are implemented in the UAE, particularly for FY 2025, the group will be subject to DMTT obligations with respect to the UAE operations. However, no additional taxes will be recovered by the UAE in respect of the group entities based in overseas jurisdictions without an effective Pillar 2, as UAE DMTT regulations do not provide for an IIR/UTPR. Nevertheless, it remains to be seen whether the details of these entities will need to be provided to the FTA during the UAE DMTT filings. A brief synopsis of the above implications is as under:  
 

Status of Pillar 2.0 implementation		Potential Impact
UPE / IPE	UAE
Implemented	Not implemented	No action is required in the UAE, but top-up tax* and associated compliance obligations may apply in the UPE/IPE jurisdictions. Consequently, input from UAE teams may be necessary.
Not implemented	Implemented	DMTT obligations may arise in the UAE concerning UAE operations, along with associated compliance requirements. However, IIR/UTPR recovery will not occur in the UAE; it may arise in other jurisdictions.

*UTPR Implications may arise in non-parent entity jurisdictions

3. Understanding the Data Requirements

Understanding the data requirements for DMTT purposes is crucial to ensure compliance with the regulations. The DMTT calculation relies on various data points collated from multiple sources, such as financial statements, Country-by-Country Records, and internal records. Businesses must ensure that these data points are accurately captured and integrated into their compliance processes.

Detailed functional and nature-oriented breakdowns will be required for specific aspects due to their differential treatment under DMTT requirements compared to financial statements and federal corporate tax requirements. This is particularly relevant for elections and options provided under the DMTT regulations, as well as inclusions and exclusions from Pillar 2 income and covered taxes. For example, the treatment of asset gains, unrealized gains and losses, dividend and capital gains taxation, asymmetric foreign currency gains/losses, and transfer pricing implications must be carefully considered. Some of the key areas to be managed include:

• Data Collation & Integration:

Businesses will have to implement robust technological solutions to ensure seamless collation and assimilation of data from various sources. This will help in maintaining accuracy and consistency in DMTT calculations and assist in managing the compliance tasks (particularly, the periodic provisioning) seamlessly.

• Staff Training:

Businesses need to invest in training staff to enhance their understanding of DMTT requirements and their ability to handle complex data collation and reporting tasks. This will ensure that the team is well-equipped to assimilate the impact of dynamic regulatory changes and manage compliance effectively.

• Technology Solutions:

Businesses will have to explore advanced technology solutions, such as data analytics platforms & automation oriented specific Pillar 2 tools, to streamline the data collection and reporting process. This will reduce the risk of errors and improve efficiency.

• Regular Reviews:

Businesses will have to implement robust review mechanisms to identify any discrepancies or gaps and effectively address them in a timely manner. This proactive approach will help manage issues promptly and maintain compliance with DMTT regulations.

4. Understanding the Compliance & Reporting Requirements

The UAE DMTT regulations impose additional compliance obligations on in-scope MNE entities. These include the requirement to obtain registration, file a 'Top-up Tax Return,' and, in certain cases, file a 'Pillar 2 Information Return.' These obligations are in addition to those under the existing Federal Corporate Tax Framework within the UAE.

Furthermore, businesses must provide necessary disclosures in their financial statements for FY 2025 (interim or otherwise) to effectively disclose and quantify the impact of DMTT regulations on their tax obligations in the UAE. Additionally, disclosures regarding the substantive enactment of UAE DMTT regulations will need to be provided in the financial statements for FY 2024 as and when they are finalized during FY 2025.

Understanding these compliance and reporting obligations is crucial for businesses to adopt tangible action steps to ensure adherence with the requirements.

5. Formulating a Comprehensive Strategy

Last but not the least, given the complexity and breadth of the new DMTT regulations, it is essential for businesses to formulate a comprehensive implementation strategy. This strategy should encompass key action steps to navigate complexities around understanding the regulations, data requirements, and compliance obligations. By doing so, businesses can ensure they are well-prepared to meet the new tax requirements, mitigate risks, and align their tax positions. A proactive approach will enable businesses to navigate the regulatory landscape effectively, avoid potential penalties, and achieve the desired outcomes.

How BDO can Support?

1. Impact Assessment

BDO can assist businesses in conducting an initial impact assessment to analyze the implications of new regulations on their operations. This assessment will include review of existing tax structures to identify in-scope MNE entities, evaluating safe harbour and transitional provisions to leverage potential benefits, highlighting specific considerations regarding the computation of Pillar 2 income/loss, adjusted covered taxes, jurisdictional ETR, and top-up tax liabilities.

Additionally, BDO can also assist in formulating numerical simulations and models for key Pillar 2 financial metrics to understand potential impacts. Furthermore, BDO can also support the identification of potential gaps and provide actionable steps for resolution, including assistance in obtaining clarifications from the tax authorities on specific matters.

2. Implementation Status in Overseas Jurisdiction

BDO can assist businesses in managing information requests from their global head office, particularly in gathering the necessary financial and tax data to support their Pillar 2 obligations and compliance. Additionally, BDO UAE, in collaboration with BDO Global Teams, can extend support to businesses in managing multi-jurisdictional assessments and compliances under the Pillar 2 regulations.

3. Data Requirements

BDO can assist businesses in conducting an initial Data Assessment & Readiness Evaluation to identify and address the data requirements of the new regulations. This includes assessing the existing organizational structure to understand the internal data responsibility matrix, assisting in the identification of specific data points required for compliance with UAE DMTT requirements, and providing guidance on the collation of these data points. Additionally, BDO can identify discrepancies between current data capabilities and provide actionable steps to address these gaps. Furthermore, BDO can also assist in identifying and implementing relevant technology and automation solutions to meet the data requirements.

4. Compliance & Reporting Requirements

BDO can assist businesses in addressing the compliance and reporting requirements under the DMTT regulations. This includes assessing potential compliance requirements, supporting the process of obtaining Pillar 2 registration once the mechanism is prescribed, and assisting in reviewing the form and manner of undertaking compliance filings. Additionally, BDO can help formulate an internal framework for managing these filings, identify and address tax accounting considerations along with potential disclosure requirements, and assist in collating the data and requirements for group-level reporting and compliance.

5. Strategy Formulation & On-Going Support

BDO can also assist businesses in formulating an overall strategy for managing and navigating the complexities of the DMTT regulations, as well as keeping up with the ever-changing regulatory landscape as new requirements are introduced. This includes supporting the formulation of an internal policy framework for Pillar 2, covering technology, data, compliance, and reporting requirements. Additionally, BDO can undertake periodic training and development sessions for key stakeholders and provide follow-on advisory support to keep the business informed of the evolving regulatory landscape. This helps monitor the impact of updates on their overall Pillar 2 strategy and associated tax positions.

Conclusion

The first year of Pillar 2 implementation in the UAE requires meticulous planning and strategic action to ensure compliance and optimize tax positions. By understanding the rules, conducting thorough analyses, and engaging with stakeholders, businesses can navigate the complexities of Pillar 2 and achieve successful implementation in the UAE in FY 2025.