UAE’s corporate tax rules pose a complex challenge  

• Corporate tax changes in January
• 15% of profit for multinationals
• Many businesses underprepared

Companies operating in multiple countries with differing tax regulations face a complex challenge to comply with the UAE’s higher corporate earnings bracket announced this month.

The UAE has said it will increase corporate tax on multinationals to 15 percent of profit from January 1, 2025. The higher rate will apply to companies operating in more than one jurisdiction with consolidated annual revenue of €750 million ($793 million) or more in at least two of the four preceding financial years.

The so-called domestic minimum top-up tax (DMTT) amendment comes a year after the UAE introduced a 9 percent corporate tax. The federal government has yet to publish detailed legislation on the top-up plan, so exact details of how this will function remain unknown, says Vishal Sharma, UAE tax practice leader at Alvarez & Marsal in Dubai.

Nevertheless, he expects the legislation will be similar to OECD guidelines, whose purpose is to ensure that multinational companies pay 15 percent corporate tax on net profit across all their operations.

“How straightforward it will be … will depend on the complexity of each company, their structure and their existing tax practices,” says Sharma.

Alvarez & Marsal

The task facing a company operating in several jurisdictions with differing taxation regulations “could be quite intricate”, he says. “Gathering jurisdiction-level financial and tax data for the calculations is quite complex.”

The top-up tax will most affect the technology, financial services and hospitality sectors, consultants NR Doshi & Partners wrote in a note.

A November 2023 federal decree revealed the UAE’s plans to amend the corporate tax law to include the top-up tax. In March 2024 the UAE finance ministry launched a public consultation on implementation.

This month’s announcement was long anticipated although “there’s still a lot of work to be done”, says Sharma.

Larger multinationals that already have sophisticated tax and financial systems will find the process manageable, he adds.

“Although it will be resource intensive, particularly in the initial stages,” Sharma says.

“It’s those multinationals with less mature tax compliance processes or decentralised financial reporting structures that may face significant challenges and will require advisory support.

“They’ll need to make significant investments in technology and their processes to meet the requirements.”

Most companies liable for the new tax will fall into this category, according to Sharma. “A lot of businesses are still waiting until the last minute,” he says.

Wholly government-owned entities, public pension funds and investment funds will be exempt from the top-up tax, says Sharma. As such, it may serve as a disincentive for state-owned companies to float minority stakes as many have done in recent years. This has been part of a wider drive to diversify and expand the Dubai and Abu Dhabi stock markets.

The top-up tax is likely to include income inclusion or undertaxed profits rules. Under these principles, which many countries already enforce, the UAE could collect additional revenue from a company’s foreign operations if those are taxed at less than 15 percent.

Also, raising UAE corporate tax to the OECD threshold of 15 percent will prevent other jurisdictions from levying revenue on companies’ UAE-based profits.

Multinational companies operating in the UAE will be assessed for their effective tax rate. For example, a company could have parts of its business which operate in free zones and currently pays zero corporate. Under the new rules these will be factored into its effective tax rate. If this is less than 15 percent then it will have to pay the top-up tax to reach this threshold, Sharma explains.

This may make free zones’ exemptions less attractive, he says. Free zone companies that do not meet the revenue threshold are due to remain exempt from corporate tax.

“There are still uncertainties around potential future tax rate increases, for example, for withholding taxes or whether there will be any changes to any free zone exemptions,” Sharma says.

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The UAE may also introduce incentives that could lessen companies’ corporate taxes, according to a note from professional services firm Dezan Shira & Associates. These include a refundable tax credit on research and development spending and concessions for companies that base senior executives in the country, the note says.

As the eligibility threshold is based on revenue, not profit, the top-up tax will penalise companies that are high-revenue, low-margin businesses, such as supermarkets or commodity traders.

The introduction of corporate tax and the subsequent top-up tax has moved the UAE away from its historic tax-free model. “But if the rules are implemented effectively, it can position the UAE as a globally aligned, compliant and sustainable hub for foreign multinational enterprises”, says Sharma.

“The overall impact will also depend on how well the UAE balances its tax policy with other incentives. The UAE’s strategic location, business-friendly policies and world-class infrastructure … can offset concerns about taxation,” he adds.