UTPR roll-out and the “initial phase of international activity” exclusion

Facts

The UPE is a company incorporated and tax resident in the United Arab Emirates. The group has Constituent Entities only in three jurisdictions: the UAE, India, and Saudi Arabia. Neither India nor Saudi Arabia has implemented Pillar Two charging rules (in particular, neither has introduced an IIR nor a UTPR), and that the group has no Constituent Entities in any other jurisdictions.

The group’s consolidated revenues exceeded EUR 750 million by the end of 2023, such that the group is already “in scope” under the GloBE scoping test as of 31 December 2023. The group therefore does not represent a newly internationalizing group that first crosses the threshold in, say, 2025 or 2026; rather, it is an in-scope group that predates the first wave of UTPR implementation.

The UAE has implemented a domestic Pillar Two framework (Domestic Top-up Tax on MNEs) effective from 1 January 2025. However, the UAE has not introduce a UTPR. Instead, for the purpose of this case study, the UAE will introduce UTPR only with effect from fiscal years beginning after 1 January 2027.

Finally, it is assumed (for the limited purpose of isolating the timing issue) that the group would otherwise satisfy the substantive eligibility conditions for the “initial phase of international activity” exclusion: it operates in a small number of jurisdictions and the relevant tangible-asset and ownership conditions are met.

Question

The only question is the temporal one: when the five-year period begins and, critically, whether a late-starting UTPR implies a late-starting five-year exclusion.

Summary

Upon examination of the applicable GloBE legislation and Commentary, we concluded that:

• A literal reading of the UAE Top-up Tax rules suggests a straightforward answer: where an MNE Group already meets the EUR 750 million threshold as of 31 December 2023, the five-year period is stated to start when a Qualified UTPR comes into effect. On that reading, a UAE UTPR effective from 2027 would seem to start the five-year clock in 2027.
• However, the OECD Consolidated Commentary to Article 9.3.4 articulates a limiting principle: an MNE Group that meets the scoping requirements for a fiscal year beginning before 1 January 2024 “would not qualify” for the exclusion in any fiscal year beginning after 31 December 2028, irrespective of whether any jurisdictions actually had an effective UTPR as of the beginning of 2024.
• Accordingly, even if UAE UTPR becomes effective only from 2027, the better-supported interpretation (in light of the Commentary) is that the exclusion cannot be stretched into a fresh five-year window running from 2027 to 2031. In a calendar-year fact pattern, the exclusion would be expected to be available, at most, for fiscal years beginning in 2025 and 2028, and not for fiscal years beginning after 31 December 2028.

Analysis

1. The starting point is the architecture of Article 9.3 of Cabinet Decision No. 142 of 31 December 2024 (UAE DMTT Rules). In Globe Model Rules, Article 9.3 operates as a transitional UTPR mechanism: it reduces the UTPR Top-up Tax Amount to zero for an MNE Group that is in the initial phase of its international activity, while leaving open the possibility that the IIR may still apply where a relevant Parent Entity is located in an IIR-implementing jurisdiction.

The OECD Consolidated Commentary confirms this characterization but explains how jurisdictions may transpose this UTPR-originated construct into a domestic minimum tax. Paragraph 118.51 notes that jurisdictions have three options in their QDMTT legislation

• not adopting Article 9.3, (
• adopting it but limited to cases where none of the ownership interests in local Constituent Entities are held by a Parent Entity subject to a Qualified IIR, or
• adopting it without that limitation.

Against this background, the UAE rule is best understood as an implementation of the Commentary’s option two: it reduces to zero the Top-up Tax computed under the UAE regime during the initial phase, but only where none of the ownership interests in UAE Constituent Entities are held by a Parent Entity subject to a Qualified IIR.

In policy terms, the mechanism remains transitional and time-limited rather than a permanent safe harbour. This is why Article 9.3.4 frames the relief as subject to a five-year limitation and the Commentary 26 to this Article emphasizes that “in any case, the five-year period provided under Article 9.3.4 shall not be suspended by any circumstance”.[1]

2. Against that policy backdrop, the UAE Top-up Tax text contains a rule specifically targeting groups that already meet the threshold as of 31 December 2023. It states that the “initial phase” article does not apply later than five years after the first day of the first fiscal year when the group originally meets the threshold. Article 9.3.4 then adds a special rule: for groups that meet the threshold as of 31 December 2023, the five-year period starts when a Qualified UTPR comes into effect.

3. If one stops here and reads the UAE text in isolation, the conclusion appears to follow: no Qualified UTPR exists in the UAE until 2027. Therefore, the “start” of the five-year period is deferred until 2027. Hence, the group enjoys a 2027–2031 window (assuming calendar fiscal years). Under this logic, if UTPR comes in the UAE in, for example, 2040, the exemption runs until 2045.

4. The difficulty is that Article 9.3.4 does not sit in a vacuum. The OECD Consolidated Commentary[2] explains the rationale of the 31 December 2023 special rule and then imposes what functions as an outer bound for pre-2024 in-scope groups. The Commentary’s logic is explicit: “Under this scenario the MNE Group will be in scope of the UTPR rules as from the first year when those rules come into effect. The legislative processes in different Inclusive Framework jurisdictions may progress at different rates such that some jurisdictions are able to legislate the GloBE Rules more expeditiously than others. Nevertheless, Inclusive Framework Members have agreed that the earliest the UTPR will come into effect. Accordingly, an MNE Group that meets the requirements provided in Article 1.1 for a Fiscal Year that begins before 1 January 2024 would not qualify for the exclusion provided under Article 9.3.1 in any Fiscal Year that begins after 31 December 2028. This is the case irrespective of whether any of the jurisdictions in which the Constituent Entities are located have adopted a UTPR that is effective as of the beginning of 2024”.

Two features of that passage matter for the question in this case study.

• The Commentary is not merely describing a hypothetical. It is constraining the temporal reach of the exclusion for a defined population: groups that were already in scope before 2024. The sentence is drafted categorically (“would not qualify… in any Fiscal Year that begins after 31 December 2028”).
• The Commentary anticipates precisely the “late legislative adoption” scenario and rejects its relevance for extending the exclusion. The limitation applies “irrespective” of whether any jurisdictions have adopted a UTPR effective as of the beginning of 2024. In other words, the Commentary treats “slower adoption” as a fact of life but not as a basis for elongating the initial-phase relief.

5. An immediate corollary is that the same system-consistent interpretation effectively compresses the UAE domestic “initial phase” relief for pre-2024 in-scope groups. Even though Article 9.3.4 is framed as a five-year limitation, the architecture of the rule is, in origin and design, calibrated to the GloBE UTPR transition: for groups that already met the revenue threshold before 1 January 2024, the OECD Commentary treats the transitional period as commencing by reference to the earliest moment when UTPR could come into effect (2024), and it rejects any notion that the period may be suspended or restarted by implementation lags.

On that full-GloBE view, the “first” year of the five-year window is therefore conceptually accounted for in 2024 as a year in which the group is, in principle, protected against UTPR outcomes that could otherwise arise once the backstop becomes operative, even if factually the group has no exposure because it lacks entities in an early-adopting UTPR jurisdiction.

The UAE domestic Top-up Tax regime, however, only applies for fiscal years beginning on or after 1 January 2025. The combined effect is that, in a calendar-year fact pattern, only the last four years of the five-year transitional window (2025–2028) can translate into actual UAE domestic relief. The missing “fifth year” is not recoverable through a later-starting UAE UTPR trigger because, under the Commentary’s approach, the five-year period is not treated as suspendable or restartable.

6. If one applies that reasoning to the UAE-UPE / India / KSA scenario, the answer becomes structurally clear.

The group crossed the EUR 750 million threshold already by the end of 2023. It therefore falls squarely within the population addressed by the Commentary’s pre-2024 limitation. The UAE’s decision to introduce a Qualified UTPR only from 2027 may determine when the group first becomes exposed to UTPR in the UAE, but it does not, on the Commentary’s approach, create a fresh five-year exclusion window that can run beyond the 31 December 2028 cutoff.

7. For a calendar-year group, the mechanics are then as follows. UAE UTPR begins to apply for fiscal years beginning 1 January 2027. In 2027 and 2028, the group might seek to rely on the initial-phase exclusion (assuming the substantive eligibility conditions are met). But the group “would not qualify” for the exclusion for any fiscal year beginning after 31 December 2028, which means fiscal year 2029 and later are outside the exclusion by design.

8. That conclusion does not require India or Saudi Arabia to have adopted Pillar Two rules. Indeed, the Commentary passage explicitly makes the point that the exclusion’s expiry is not contingent on the implementation status of other jurisdictions.

9. What, then, should one do with the apparent breadth of the UAE text (“the period… will start at the time a Qualified UTPR comes into effect”)? From a technical-legal standpoint, that sentence can be read in two ways:

• A purely literalist reading treats it as a free-standing domestic rule capable of generating a late-starting five-year period with no further constraint.
• A system-consistent reading treats it as an implementation of the Model Rules concept, which must be construed in harmony with the OECD Commentary’s intended limitation for pre-2024 groups.

In the UAE context, the second reading is not merely policy-preferable but materially reinforced as a matter of positive law, because Ministerial Decision No. 88 of 28 March 2025 provides that the OECD Consolidated Commentary “shall be adopted for the purposes of Cabinet Decision No. (142) of 2024”. Accordingly, given the coordinated nature of the GloBE architecture and the UAE’s formal adoption of the common interpretive materials, it is difficult to justify an interpretation that would effectively “restart” the transitional period in a manner the Commentary is designed to preclude.

10. On balance, it does not follow that the initial-phase exclusion lasts five years from 2027 (i.e., to 2031). Rather, consistent with the OECD Commentary, a group that was already in scope by a fiscal year beginning before 1 January 2024 should not be able to benefit from the exclusion for fiscal years beginning after 31 December 2028, even if UAE UTPR starts only in 2027.

[1] The Commentary illustrates it with the following example: “… if the MNE Group meets the requirements provided in Article 1.1 for a Fiscal Year and its revenues decline in subsequent years such that and the MNE Group is not in scope of the GloBE Rules for any subsequent year, the five-year period continues to run”.

[2] OECD (2025), Tax Challenges Arising from the Digitalisation of the Economy – Consolidated Commentary to the Global Anti-Base Erosion Model Rules (2025): Inclusive Framework on BEPS, OECD/G20 Base Erosion and Profit Shifting Project, OECD Publishing, Paris; Chapter 9, paragraph 25.

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 we have tried my best to avoid. If you find any inaccuracies or errors, please let us know so that we can make corrections.