The UAE has implemented the OECD’s Pillar Two global minimum tax framework and new corporate tax rules, significantly impacting multinational enterprises (MNEs) and businesses operating within its free zones. This move aligns the UAE with international tax standards, aiming to broaden its tax base and diversify revenue sources beyond oil.
UAE Embraces Global Tax Reform
The UAE has introduced a 9% corporate tax rate and a Domestic Minimum Top-Up Tax (DMTT) as part of the OECD’s Pillar Two initiative. This framework mandates a 15% global minimum effective tax rate for MNEs with global revenues exceeding EUR750 million in at least two of the last four years. The DMTT ensures that any shortfall below this 15% threshold is collected by the UAE, rather than by other jurisdictions.
- The Income Inclusion Rule (IIR) requires parent companies to cover tax shortfalls of subsidiaries in low-tax countries.
- The Undertaxed Profits Rule (UTPR) allows other jurisdictions to claim the tax if the parent company’s home country doesn’t enforce the IIR.
- The Qualified Domestic Minimum Top-Up Tax (QDMTT) allows countries to apply the tax themselves, retaining the revenue.
Impact on Free Zone Businesses
Historically, UAE free zones offered a 0% corporate tax rate, attracting numerous businesses. However, under Pillar Two, a 0% nominal rate no longer guarantees zero tax liability for MNEs. If a free zone company’s effective tax rate falls below 15%, it will be subject to a top-up tax.
- Qualifying Free Zone Persons (QFZPs): To maintain a 0% corporate tax rate, free zone businesses must meet stringent criteria, including maintaining adequate substance within the free zone and deriving qualifying income.
- Distribution Activities: For distribution income to qualify for the 0% tax rate, activities must be conducted in or from a designated zone, and goods entering the UAE must pass through that zone.
- De Minimis Rule: Free zone entities with non-qualifying revenues less than AED 5 million or 5% of total revenue (whichever is lower) may still be considered qualifying.
Navigating Compliance and Strategic Adjustments
The new tax landscape necessitates a comprehensive reassessment of business structures, tax strategies, and reporting systems. The Federal Tax Authority (FTA) has urged businesses to register for corporate tax and file returns within deadlines to avoid penalties, offering a limited-time fine waiver.
- Increased Reporting Burden: Companies face more detailed tax filings, including the GloBE information return requiring over 240 data points per entity, and alignment with Country-by-Country Reporting (CbCR).
- Transfer Pricing Scrutiny: Intercompany transactions will undergo closer inspection to ensure pricing reflects market value and is not used to lower tax obligations.
- Technological Adoption: The UAE is advancing digitalization in tax services, including e-invoicing systems and smart applications like ‘Maskan’ for VAT recovery, to streamline compliance.
Businesses are advised to determine if they are affected, assess their effective tax rate, strengthen reporting and compliance systems, and seek expert guidance to navigate these complex changes effectively.
Sources
- What it means for multinational businesses in the UAE, Gulf Business.
- Mastering the Tax Game: Proven Strategies for Businesses in the UAE and GCC, Entrepreneur.
- How UAE free zone businesses can secure 0% tax, Gulf News.
- UAE offers Corporate Tax fine waiver — but deadline looms, Arabian Business.
- Are UAE Free Zone Companies Tax-Free?, Nomad Capitalist.
