Top-up Tax for Multinational Enterprises – OECD’s Pillar Two

International Taxation – UAE’s introduction of the Top-up Tax for Multinational Enterprises – OECD’s Pillar Two.

At A glance:

The awaited UAE’s Pillar Two implementation, in line with the other Gulf Cooperation countries, is finally issued under Cabinet Decision No. (142) of 2024, which” outlines the regulatory framework for implementing a Top-up Tax on Multinational Enterprises (MNEs) operating within the United Arab Emirates (UAE).

The Cabinet Decision is titled “Cases, Provisions, Conditions, Rules, Controls, and Procedures on the Imposition of Top-up Tax on Multinational Enterprises Attached to. This comprehensive set of rules is designed to ensure that MNEs with significant global revenues are subject to a minimum level of taxation, thereby addressing issues of base erosion and profit shifting.

The Cabinet Decision details the scope of the application, key definitions, tax computation methods, filing requirements, and transitional provisions, aligning with the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting’s Pillar Two Model Rules. It aims to create a fair and transparent tax environment, ensuring that MNEs contribute their fair share of taxes in the jurisdictions where they operate.

MNEs operating in the UAE that meet the Pillar Two threshold—consolidated global revenues of EUR 750 million or more in at least two of the past four financial years—will be subject to a Top-up Tax of 15%. The Top-up Tax will take effect for financial years beginning on or after 1 January 2025, aligning the UAE with the OECD/G20’s global minimum tax framework under Pillar Two.

In Details:

The purpose of the Top-up Tax is to ensure that Multinational Enterprises (MNEs) pay a minimum level of tax on their income, regardless of where they operate. This tax is designed to address issues of tax base erosion and profit shifting by MNEs, ensuring that they contribute a fair share of taxes in the UAE, where they have significant economic activities. The Top-up Tax aims to:

1. Prevent Tax Avoidance: By imposing a minimum tax rate, it reduces the incentive for MNEs to shift profits to low-tax jurisdictions that are below 15% effective tax rate.
2. Promote Fair Taxation: Ensures that MNEs pay a consistent level of tax across different jurisdictions, promoting a level playing field.

For the UAE, this helps Increase Tax Revenue and helps collect additional tax revenue from MNEs that might otherwise pay very low taxes and might have to pay these taxes in other jurisdictions on the UAE’s taxed income at 9% that is below the 15% effective tax rate threshold.

Entities subject to the Top-up Tax include:

1. Constituent Entities: Members of an MNE Group with annual revenue of EUR 750 million or more in at least two of the four fiscal years immediately preceding the tested fiscal year.
2. Joint Ventures and JV Subsidiaries: Located in the UAE during the fiscal year.
3. 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 as allocated and computed in accordance with the Decision.

Additionally, the decision specifies that an Investment Entity located in the UAE is not subject to the Top-up Tax.

The key points of the Decision regarding the imposition of Top-up Tax on MNEs are:

• Scope: Applies to MNE Groups with annual revenue of EUR 750 million or more.
• Entities: Defines Constituent Entities, Ultimate Parent Entities, Excluded Entities, and Investment Entities.
• Tax Calculation: Details on computing Pillar Two Income or Loss, Adjusted Covered Taxes, and Effective Tax Rate.
• Filing Requirements: MNEs must file a Top-up Tax Return and a Pillar Two Information Return with the Federal Tax Authority.

Safe Harbours: Transitional and simplified calculation safe harbours are available under certain conditions.

The responsibilities of a Domestic Designated Filing Entity include:

1. Filing the Top-up Tax Return: The Domestic Designated Filing Entity is responsible for filing the Top-up Tax Return on behalf of the members of their Domestic Groups, which can include the Domestic Main Group, Domestic Minority-owned Subgroup, or Domestic JV Group.
2. Paying the Top-up Tax: The Domestic Designated Filing Entity must pay the Top-up Tax on behalf of the members of their Domestic Groups.
3. Registration: The Domestic Designated Filing Entity must register with the Federal Tax Authority (FTA) in the form and manner and within the timeline prescribed by it.
4. Compliance: Ensuring compliance with the provisions of the Decision, including maintaining records and providing necessary information to the Federal Tax Authority.

The criteria for appointing a Domestic Designated Filing Entity are as follows:

1. Constituent Entities of the Domestic Main Group and Domestic Minority-owned Subgroup: These entities may appoint a Domestic Designated Filing Entity to pay the Top-up Tax on behalf of the members of their Domestic Groups.
2. Joint Ventures and JV Subsidiaries of a Domestic JV Group: These entities may appoint a Domestic Designated Filing Entity to pay the Top-up Tax on behalf of the members of their Domestic JV Group.
3. Reverse Hybrid Entities: These entities may appoint a Domestic Designated Filing Entity that is a member of the Domestic Main Group or Domestic Minority-owned Subgroup to pay its Top-up Tax.

The responsibilities of a Filing Constituent Entity include:

1. Filing the Top-up Tax Return: The Filing Constituent Entity is responsible for filing the Top-up Tax Return with the Federal Tax Authority. This return must be filed no later than 15 months after the last day of the Reporting Fiscal Year or 18 months after the last day of the Reporting Fiscal Year, which is the first Transition Year of any Constituent Entity of the MNE Group.
2. Making Elections: The Filing Constituent Entity may make various elections under the provisions of the Decision, such as the Five-Year Election for stock-based compensation, the Annual Election for certain adjustments, and other elections related to the computation of Pillar Two Income or Loss.
3. Providing Information: The Filing Constituent Entity must provide the necessary information in the Top-up Tax Return, which includes details required by the Federal Tax Authority and the equivalent information and reporting requirements set out in the Pillar Two Information Return.
4. Maintaining Records: The Filing Constituent Entity must maintain records and documentation to support the information provided in the Top-up Tax Return and any elections made.
5. Compliance with Adjustments: The Filing Constituent Entity must ensure that any adjustments required under the Decision, such as adjustments to the Financial Accounting Net Income or Loss, are accurately reflected in the computation of Pillar Two Income or Loss.
6. Safe Harbour Elections: The Filing Constituent Entity may elect to apply safe harbour provisions, such as the Transitional CBCR Safe Harbour or Simplified Calculations Safe Harbour, if the criteria are met.

Coordination with Other Entities: The Filing Constituent Entity may coordinate with other Constituent Entities within the MNE Group to ensure accurate and consistent reporting and compliance with the Decision.

The deadline for filing the Top-up Tax Return is:

• No later than 15 months after the last day of the Reporting Fiscal Year.

For the first Transition Year of any Constituent Entity of the MNE Group, the deadline is 18 months after the last day of the Reporting Fiscal Year.

Whilst the Decision does not explicitly detail the specific consequences of failing to file the Top-up Tax Returnit does reference the applicability of certain provisions from the Federal Decree-Law No. 47 of 2022, which includes:

1. Article 60 – Assessment of Corporate Tax and Penalties: This suggests that penalties and sanctions may be applied for non-compliance, including failing to file the Top-up Tax Return.
2. Article 14.3: During the Fiscal Year beginning on or before 31 December 2026 but not including a Fiscal Year that ends after 30 June 2028, no penalties or sanctions shall apply in connection with the filing of a Top-up Tax Return or the Pillar Two Information Return where the Federal Tax Authority considers that an MNE Group has taken reasonable measures to ensure the correct application of the provisions of this Decision.