Practical Implications of the UAE’s Decision to Introduce DMTT without IIR

Scenario 1. UAE UPE with Subsidiaries in a Low-Tax Jurisdiction Without DMTT

If an MNE headquartered in the UAE has subsidiaries in a low-tax country without a DMTT regime, no top-up tax will apply in the UAE unless the UAE entity itself has an ETR below 15%, in which case DMTT could be triggered at the UAE level.

In this scenario, the UAE DMTT applies to the Emirati UPE. If some other group entities are also in the UAE, the UAE’s DMTT applies at the entity level, meaning each UAE entity in the group with an ETR below 15% would be subject to the top-up tax. The UAE does not apply a jurisdictional blending approach, so each entity’s tax position is assessed separately.

Key takeaway is that undertaxed income of the foreign constituent entities of the group would not be subject to top-up tax in the UAE.

Scenario 2. Non-UAE UPE with a Subsidiary in the UAE

If an MNE’s UPE is in a jurisdiction that has implemented IIR, but its UAE subsidiary is paying tax at an effective rate below 15%, the UAE will impose DMTT to collect the top-up tax domestically rather than allowing a foreign IIR jurisdiction to claim it.

Scenario 3. UAE-Based Intermediate Holding Company for a Foreign MNE with UPE in a Non-Pillar Two Country

A UAE-based sub-holding company could be subject to UAE DMTT if its ETR falls below 15%. However, the UAE DMTT applies only to the taxable income of the UAE sub-holding itself and does not extend to undertaxed income of subsidiaries located in other jurisdictions.

Unless there is a jurisdiction in the chain of ownership that has introduced IIR, the undertaxed profits of the foreign subsidiaries of the Emirati sub-holding company will not be subject to a top-up tax: neither at the level of the non-Emirati UPE nor at the level of the Emirati sub-holding company.

Scenario 3A. A UPE in a Jurisdiction with an IIR

If the UPE is located in a jurisdiction that has implemented the IIR, UAE DMTT still applies. The UAE sub-holding company will still be subject to the UAE DMTT if its ETR is below 15%. The presence of an IIR in the UPE’s jurisdiction does not override the UAE’s ability to apply the DMTT, ensuring that income generated in the UAE is subject to a minimum effective tax rate of 15% before any IIR-based taxation occurs. However, IIR applies to foreign subsidiaries located in low-tax jurisdictions, where domestic top-up tax is not introduced. Their undertaxed profits will be subject to the IIR at the UPE level.

Scenario 4. UAE UPE with Controlled Foreign Corporations (CFCs) in Countries Without DMTT

A UAE-headquartered MNE with CFCs in countries that have not implemented DMTT will not face UAE DMTT exposure since the UAE haven’t introduced CFC rules.

Scenario 4. UAE-Based Investment Fund with a Foreign UPE

An investment fund structured in the UAE as a legal person without a UPE in another country will be subject to UAE DMTT if its ETR is below 15%. If this fund is obtained an exemption from the Emirati Corporate Tax, it is not exempt for the purpose of DMTT, since Article 1.5.1(e) of Cabinet Decision No. 142 of 2024 classifies Investment Funds as Excluded Entities only if they are the Ultimate Parent Entity. If the fund is structured as a legal person in the UAE but does not qualify as a UPE, then it does not benefit from the Excluded Entity status, making it subject to DMTT if its ETR falls below 15%.

Even if the investment fund obtains an exemption from UAE Corporate Tax, it does not automatically receive an exemption from UAE DMTT. DMTT rules apply separately from Corporate Tax rules, meaning that an entity exempt from Corporate Tax may still be subject to the DMTT if it is not classified as an Excluded Entity under Article 1.5.1 of the Emirati DMTT Rules.

Scenario 5. JV in a Low-Tax Jurisdiction with One of a Parent in the UAE.

Joint Venture (JV) is in a low-tax jurisdiction that has not implemented DMTT. 50% of the JV is owned by a company in a jurisdiction that applies IIR, and 50% is owned by a company in the UAE, which applies DMTT but not IIR. The JV’s effective tax rate (ETR) is below 15%.

Under Article 6.4.1 of the Emirati DMTT Rules, the JV is treated as a separate MNE Group. However,  according to Article 2.1(b), only JVs located in the UAE are subject to UAE DMTT. Since the JV is located outside the UAE, the UAE cannot impose DMTT on its foreign profits. Consequently:

• The parent located in IIR jurisdiction applies IIR being responsible for 50% of the top-up tax under IIR.
• The UAE partner’s 50% stake is not subject to DMTT in the UAE, since the JV is located outside the UAE, and the UAE haven’t introduced IIR. Hence, the UAE partner’s share of JV profits remains undertaxed, exposing it to UTPR risk: if no country fully taxes the JV’s profits, other UTPR jurisdictions could impose additional tax on the UAE partner’s 50% share.

Scenario 5A: JV in the UAE, Owned by Parents with Different IIR Status

The JV is located in the UAE. 50% of the JV is owned by a company in a jurisdiction that has implemented IIR. 50% of the JV is owned by a company in a jurisdiction that has NOT implemented IIR. The JV’s UAE ETR is below 15%.

Article 6.4.1 and Article 2.1(b) of the Emirati DMTT Rules confirm that JVs in the UAE are treated as separate MNE Groups and are subject to UAE DMTT. UAE applies DMTT to 100% of the JV’s profits, regardless of the ownership structure (per the UAE’s chosen GloBE option). This means that the JV itself is responsible for the entire top-up tax liability, NOT the partners. As an outcome:

• The full top-up tax obligation is borne by the Emirati JV. Ownership percentages do not matter as UAE DMTT applies to the full amount.
• The IIR jurisdiction does NOT apply IIR to its 50% share, since UAE DMTT applies first and covers 100% of the JV’s income, the IIR jurisdiction does not impose additional tax.

The non-IIR jurisdiction does NOT apply IIR or a top-up tax: since this jurisdiction has no IIR, it does not impose any additional tax on its 50% share.

Conclusions

The UAE’s decision not to implement the IIR or the UTPR has significant implications for multinational enterprises (MNEs) with UAE entities and for the UAE’s positioning in the global tax landscape under the OECD’s Pillar Two framework. Unlike many jurisdictions that have implemented IIR, the UAE does not impose a top-up tax on low-taxed foreign subsidiaries owned by UAE-based ultimate parent entities. This means that a UAE-based UPE is not required to apply a 15% top-up tax on its foreign subsidiaries, even if their effective tax rate is below 15%. As a result, MNE groups with a UAE-based UPE may benefit from tax deferral on low-taxed foreign income, provided no other country applies UTPR.

By not implementing IIR, the UAE remains attractive as a holding jurisdiction for multinational groups, particularly those with low-taxed foreign subsidiaries. This could make the UAE a preferred jurisdiction for UPEs, since low-taxed foreign earnings would not be immediately subject to a top-up tax in the UAE. However, this advantage is contingent on the extent to which other jurisdictions apply UTPR, which could still result in tax leakage.

Since the UAE does not currently apply IIR, foreign subsidiaries of UAE-based MNEs may be subject to taxation under UTPR rules in other jurisdictions. If no jurisdiction applies IIR to a low-taxed foreign subsidiary, countries that have implemented UTPR may impose a top-up tax to ensure that the MNE Group’s overall ETR reaches 15%. This means that UAE-based MNEs with low-taxed foreign subsidiaries could still face a top-up tax outside the UAE, even though the UAE itself does not impose IIR.

The UAE’s Cabinet Decision does not currently address IIR or UTPR, creating uncertainty about whether these rules might be introduced later. The current Emirati legislative framework allows for further provisions to be added in line with the OECD’s Inclusive Framework, which suggests that the UAE may introduce IIR and UTPR in the future. This lack of clarity means that MNEs should monitor potential changes in UAE tax policy, as future adjustments could impact global structuring decisions.

The disclaimer

Pursuant to the MoF’s press-release issued on 19 May 2023 “a number of posts circulating on social media and other platforms that are issued by private parties, contain inaccurate and unreliable interpretations and analyses of Corporate Tax”.

The Ministry issued a reminder that official sources of information on Federal Taxes in the UAE are the MoF and FTA only. Therefore, analyses that are not based on official publications by the MoF and FTA, or have not been commissioned by them, are unreliable and may contain misleading interpretations of the law. See the full press release here.

You should factor this in when dealing with this article as well. It is not commissioned by the MoF or FTA. The interpretation, conclusions, proposals, surmises, guesswork, etc., it comprises have the status of the author’s opinion only. Furthermore, it is not legal or tax advice. Like any human job, it may contain inaccuracies and mistakes that I have tried my best to avoid. If you find any inaccuracies or errors, please let me know so that I can make corrections.