n a world of transparency in taxation, the UAE has implemented the Domestic Minimum Top-Up Taxes (DMTT) as part of the OECD/G20 Pillar Two framework. As of the financial years beginning on or after January 1, 2025, the UAE Domestic Minimum Top-up Tax prevents large MNEs from eroding profits in the UAE to reduce profit participation payment exposure. In this article, we examine the DMTT rules in the UAE and how to calculate accurately your DMTT liability as well as crucial compliance considerations, such as registering for UAE DMTT.
Understanding the UAE Domestic Minimum Top-up Tax (DMTT)
The UAE DMTT Law, enacted by Federal Decree-Law No. 60 of 2023 as supported by Cabinet Decision No. 142 of 2024, introduces a Domestic Minimum Top-up Tax for MNEs. It applies to groups with combined worldwide revenues of no less than €750 million in at least two of the four most recent accounting years.
The DMTT Regulations broadly align with the OECD GloBE Model Rules, rendering the UAE’s regime a Qualified Domestic Minimum Top-up Tax (QDMTT). This protects the tax base of UAE by collecting the top-up tax locally and not in other jurisdictions.
Domestic firms and smaller MNEs will not be included. Previously, businesses in free zones used to be taxed at 0% and were no longer eligible for the DMTT only if their ETR is less than 15%.
Who Must Pay DMTT Liability?
DMTT is triggered for UAE in-scope of constituent entities (resident companies or permanent establishments) of a MNE group when the applicable effective tax rate (ETR) at jurisdictional level in the UAE falls below 15%. This includes:
- Mainland and free zone entities.
- Joint ventures and minority-owned individuals (with other formulas in some cases).
- Exclusions for certain investment conduits and start-up international operation groups.
Early determination of scope is key, as even those entities who would be exempt under regular UAE corporate tax could have liability for DMTT.
Key Principles
The UAE DMTT Regulations promote jurisdictional mixing by combining the income, tax and ETR of all UAE entities into one aggregate number for the UAE. Safe Harbors, like Transitional CbCR Safe Harbors (until 2027-2028), can consider top-up as zero if certain conditions are complied.
The rules are on top of the 9% existing corporate tax (0% to AED 375,000), another layer to get up to 15% when necessary.
How to Calculate DMTT Liability Accurately
DMTT liability needs to be computed correctly using methodology aligned to the GloBE. Here’s a breakdown of how to compute DMTT:
- Establish scope: Verify that the MNE group exceeds the threshold for revenue of €750 million in at least 2 of the previous four years.
- Calculate GloBE Income or Loss UAE: Start with financial accounting net income/loss, adjust (e.g. exclude certain dividends or gains), and ensure that the allocation of income is appropriate.
- Calculate Adjusted Covered Taxes:Take the current corporate tax expense paid, add or subtract deferred taxes and other covered taxes.
- Calculate the Effective Tax Rate (ETR): Divide adjusted covered taxes by GloBE income for the UAE entity. ETR = (Adjusted Covered Taxes) ÷ (GloBE Income)
- Calculate Top-up Tax %: Where ETR is less than 15%, top-up percentage = 15%-ETR.
- Apply Substance Based Income Exclusion (SBIE): Deduct the top-up if relevant (e.g. for physical assets and payroll).
- Calculate DMTT Liability: Top-up Tax = (Top-up Percentage x Excess Profit) – Adjustments Where Excess Profit = GloBE Income – SBIE.
The overall DMTT liability will then be divided across UAE entities on the basis of their GloBE income share.
Special software and expert consultations are necessary to maintain precision, since the calculations of complex ratios would need to be balanced.
UAE DMTT Registration and Compliance
Entities in-scope will need to complete UAE DMTT registration with the Federal Tax Authority (FTA). One of the companies in the group can be a Domestic Designated Filing Entity.
Key obligations include:
- Submitting a Top-up Tax Return (and perhaps a Pillar Two Information Return).
- Paying any DMTT liability.
- Maintaining robust records for audits.
The deadlines match corporate tax filings, which generally occur nine months after the end of the year.
Best Practices to Improve Accuracy
In order to reduce exposure and the mistakes in DMTT Liability calculation, companies in UAE need to:
- Leverage specialized tax software or advisors with Pillar Two expertise.
- Early in the year, reconcile book and taxable income.
- Keep up with guidance and law changes from the UAE DMTT.
Conclusion
An accurate computation of DMTT liability under the UAE Domestic Minimum Top-Up Tax regime will require careful attention and compliance with the UAE DMTT Law, as well as precise determination of effective tax (rates) and top-up amounts. And through the good registration process of DMTT in UAE, this clear documentation and step-by-step approach to calculation gives companies the opportunity to not only manage compliance but also plan their tax liabilities under a new legal regime.
