As part of changes to its corporate tax laws, the United Arab Emirates will impose a new tax on multinational corporations operating within the nation.

On Monday, December 9, 2024, the Ministry of Finance announced that large multinational enterprises (MNEs) will have to pay a minimum of 15% tax on their domestic profits, up from the existing corporate tax rate of 9%, commencing with the fiscal year beginning on or after January 1, 2025.

In at least two of the four fiscal years before the fiscal year in which the tax is imposed, multinational corporations with consolidated worldwide revenues of €750 million ($793 million) or more will be subject to the domestic minimum top-up tax (DMTT).

It stated that this “strategic step reflects the UAE’s commitment to implementing the two-pillar solution of the Organization for Economic Co-operation and Development (OECD), aimed at establishing a fair and transparent tax system aligned with global standards.”

A worldwide minimum corporate tax was established by the OECD’s two-pillar reform program to guarantee that big multinational corporations pay at least 15% of their income in each nation where they conduct business.

The OECD states that the project aims to set a floor on tax competitiveness and solve tax issues brought on by the economy’s globalization and digitization. 

According to the OECD last year, the proposed global minimum tax is expected to generate yearly global revenue gains of about $220 billion, or 9% of global corporate income tax collection.

Bahrain said in September that it would likewise implement DMTT on large multinational corporations on January 1st of the following year.

The ministry stated that “the UAE’s implementation of the DMTT will closely align with the OECD’s GloBE Model Rules.”

With a regular statutory rate of 9%, the UAE implemented federal company tax beginning with the financial year that started on or after June 1st of last year.

Businesses with incomes over Dh375,000 were dropped into the taxed level. Taxes on taxable profits below that threshold will be zero percent. In May of last year, the Ministry of Finance also said that only business or income from business-related activities would be liable to corporate tax, with business owners in the nation only being subject to it if their annual sales were above Dh1 million.

According to David Daly, a partner at Gulf Tax Accounting Group, the relevant UAE authorities have been evaluating the introduction of a distinct rate for multinational corporations for a long time.

MNEs were anticipating this. The fact that it will only be applicable until January 1, 2025, will provide them with some relief. According to David Daly, this is 19 months at a lower rate of 9% because the corporate tax was imposed in June 2023.

“There is also revenue tapering, which will enable entities that avoid paying entry-level revenue to sit outside of this DMTT.”

In an effort to diversify its economy and reduce its reliance on oil, the United Arab Emirates implemented a five percent value-added tax (VAT) on the majority of products and services in 2018. The majority of products and services that are purchased and sold are subject to the general consumption tax.

According to the Ministry of Finance data, the UAE government collected Dh272.6 billion in taxes over the first three quarters of this year.

New incentives

The ministry also said on Monday that it is looking at new corporate tax incentives to boost its economic competitiveness and make conducting business easier.

To promote R&D activities and foster innovation, a new tax incentive for R&D is being contemplated.

According to the ministry, it will be expenditure-based, provide a possible 30% to 50% tax credit, and be refundable, depending on the company’s revenue and workforce size in the United Arab Emirates.

The scope of eligible R&D activities will align with the guidelines in the OECD’s Frascati Manual and must be carried out domestically.

The proposed incentive is anticipated to go into effect for tax periods beginning on or after January 1, 2026.

A refundable tax credit for high-value employment activity is another incentive under consideration.

Employees involved in high-value employment activities, such as C-suite executives and other top people carrying out key business responsibilities that “add substantial value to the UAE economy,” would get it as a percentage of qualified salary expenses, according to the government.

This incentive is suggested to go into effect on January 1st of the following year. “This seeks to incentivize companies to participate in ventures that produce substantial financial gains, foster creativity, and enhance the UAE’s worldwide competitiveness,” the ministry said.

Strategic Benefits of Implementing DMTT

1. Alignment with Global Standards: The UAE supports worldwide initiatives to establish a more equal global tax system by signing the DMTT. This move increases its legitimacy and allure as a location for foreign investment.
2. Enhanced Revenue Generation: It is anticipated that implementing this tax will substantially increase government revenue. According to OECD estimates, an international minimum tax might bring in about $220 billion a year for all participating nations.
3. Encouragement of Fair Competition: Adjusting the playing field for companies operating in various jurisdictions is the goal of the DMTT. Smaller businesses are less likely to suffer in marketplaces with intense competition if big multinational corporations are required to pay a minimum rate.
4. Support for Economic Diversification: The United Arab Emirates has deliberately attempted to diversify its economy and move away from reliance on oil. This goal is supported by implementing a structured corporate tax system, which creates money that can be reinvested in various industries, including healthcare, education, and technology.

The UAE continues to support smaller businesses with favorable tax conditions while confirming its commitment to fair taxation by bringing its taxation policies into line with worldwide standards, especially those established by the OECD.

Businesses have to understand their responsibilities under the new framework and how to take advantage of the incentives available to them as they prepare for these changes. In addition to increased income production, the balance achieved by these measures promises a more equal economic environment where all enterprises can succeed.

To understand tax structures and importance of compliances, book a free consultation call today with the experts of JSB Incorporation.