The UAE's Domestic Minimum Top-up Tax (DMTT) brings the OECD's Pillar Two global minimum tax into UAE law. Introduced by legislation released in December 2024 and effective for fiscal years from 1 January 2025, it requires large multinational enterprise (MNE) groups to pay an effective tax rate of at least 15% on their UAE profits. Where the rate falls short, a top-up tax collects the difference at home.
Key takeaways
- The UAE DMTT applies to fiscal years beginning on or after 1 January 2025 and targets a 15% minimum effective tax rate (ETR) on UAE profits.
- It catches MNE groups with consolidated revenue of at least EUR 750 million in at least two of the four fiscal years before the tested year.
- Top-up tax is charged only where the UAE ETR is below 15%, and only after a substance-based income exclusion (SBIE) removes a routine return on local payroll and tangible assets.
- Transitional safe harbours can reduce the UAE top-up tax to zero for a year where a group passes a country-by-country-reporting (CbCR) de minimis, ETR or routine-profits test.
- Every in-scope entity must file a Top-up Tax Return with the Federal Tax Authority (FTA) within 15 months of the fiscal year-end — 18 months for the first transition year.
Who falls within scope?
Pillar Two is aimed at large groups, not ordinary businesses. An MNE group is a set of entities connected by ownership or control, consolidated by an ultimate parent entity (UPE), with operations in more than one jurisdiction. A group is in scope when its consolidated revenue reaches EUR 750 million in at least two of the four fiscal years immediately preceding the year being tested. For a financial year shorter or longer than 12 months, the threshold is scaled to match the period, so a short accounting year does not create an artificial exemption.
Some entities sit outside the rules entirely. Government bodies, international organisations, non-profits, pension funds, and investment or real estate funds that are UPEs are treated as excluded entities, along with certain holding vehicles that are 95% or 85% owned by those excluded entities. Each remaining company or permanent establishment in the group is a "constituent entity" — the building block on which the tax is measured.
How the top-up tax is calculated
The UAE rules follow the OECD's six-step logic. The group first confirms which entities are within scope, then computes Pillar Two income or loss for each — starting from the financial-accounting net income under an acceptable standard such as IFRS, then adjusting for items like excluded dividends, capital gains and net tax expense. From that income it subtracts the SBIE (explained below) to reach the excess profit.
Separately, the group calculates its adjusted covered taxes — broadly the corporate income taxes recorded in the accounts, refined for deferred tax and other adjustments. The effective tax rate is then adjusted covered taxes divided by net Pillar Two income for the jurisdiction. If that ETR is below 15%, the top-up percentage is simply 15% minus the ETR, and the top-up tax is that percentage applied to the excess profit (plus any additional top-up tax for a prior period).
A worked example makes the mechanics concrete. Take a UAE company with Pillar Two income of 20 million and covered taxes of 1.2 million, giving an ETR of 6%. The top-up percentage is 9% (15% − 6%). After a substance carve-out, the excess profit is 19.7 million, producing a top-up tax of 1.77 million. That shortfall is now payable to the FTA rather than to a foreign tax authority.
A jurisdictional ETR below 15% triggers top-up tax either way — but by enacting a domestic minimum tax, the UAE collects the shortfall itself rather than surrendering it to a foreign parent's income inclusion rule. For UAE groups the tax is due at home; the only real question is whether it has been measured correctly.
Substance-based income exclusion and transitional relief
The SBIE rewards real economic activity by removing a routine return from the top-up base. It equals 5% of eligible payroll costs plus 5% of the carrying value of eligible tangible assets located in the UAE. During the phase-in, those percentages are higher and taper over time.
| Period | Payroll carve-out | Tangible-asset carve-out |
|---|---|---|
| 2025 | 6% | 7.6% |
| By 2032 | 5.8% | 5.4% |
Two further reliefs apply during the transition period — which runs for fiscal years from the start of any year before 1 January 2027 to the end of any year before 1 July 2028. Deferred tax attributes are recognised at the lower of the 15% minimum rate or the domestic rate, and a group in the initial phase of international activity can reduce its top-up tax to zero for up to five years, provided it operates in no more than six jurisdictions and holds no more than EUR 50 million of tangible assets outside its reference jurisdiction.
The transitional safe harbours
The transitional safe harbours are three CbCR-based tests that, if any one is met, deem the UAE jurisdictional top-up tax zero for that year — letting a group skip a full GloBE computation. Many groups rely on them in the early years rather than running the complete calculation immediately.
| Safe-harbour test | Condition met |
|---|---|
| De minimis | Total revenue under EUR 10 million and profit before tax under EUR 1 million |
| ETR test | UAE ETR at least equal to the transition rate — 16% for 2025, 17% for 2026 |
| Routine profits | UAE profit before tax no greater than the substance-based income exclusion |
Relief is not unconditional. The FTA may, within 36 months of a Top-up Tax Return being filed, ask a liable entity to show that specific facts did not affect its safe-harbour eligibility, and the entity has six months to respond. In practice, SBC advisers see groups lean on a safe harbour one year and lose it the next as revenue grows, so keeping a live view of each test beats treating it as a one-off; disciplined corporate tax compliance and international tax support pays off here.
Filing obligations and deadlines
Every constituent entity, joint venture and JV subsidiary in the UAE must file a Top-up Tax Return with the FTA. A group may appoint a domestic designated filing entity to file on behalf of the others. The return is due within 15 months of the end of the reporting fiscal year, extended to 18 months for a newly covered entity's first transition year. Because Pillar Two interacts closely with transfer pricing — aggressive intragroup pricing that leaves profit lightly taxed can itself trigger top-up tax — the return should be prepared alongside the group's wider tax position, not in isolation.
Frequently asked questions
Which companies are subject to the UAE DMTT?
The DMTT applies to constituent entities of MNE groups whose consolidated revenue reaches EUR 750 million in at least two of the four fiscal years before the year being tested. Purely domestic groups, and groups below the threshold, are outside scope, as are excluded entities such as government bodies, pension funds and qualifying investment funds.
What is the minimum tax rate under UAE Pillar Two?
The minimum effective tax rate is 15%. If a group's UAE effective tax rate — adjusted covered taxes over Pillar Two income — falls below 15%, a top-up tax equal to the shortfall applies to the excess profit remaining after the substance-based income exclusion.
When is the UAE top-up tax return due?
The Top-up Tax Return must be filed with the FTA within 15 months of the end of the reporting fiscal year. For an entity newly brought into scope, the deadline for its first transition year is extended to 18 months after the year-end.
What is the substance-based income exclusion?
The SBIE removes a routine return on real activity from the top-up tax base. It is generally 5% of eligible UAE payroll costs plus 5% of the carrying value of eligible UAE tangible assets, with higher rates during the transition years. Groups with genuine local substance therefore face a smaller excess profit and a lower top-up tax.
How SBC Tax Consulting can help
SBC helps UAE and regional groups turn Pillar Two from a compliance risk into a managed process. We assess whether your group is in scope, model your jurisdictional ETR and substance carve-outs, test each transitional safe harbour, and prepare the Top-up Tax Return and supporting documentation the FTA expects. Our corporate tax and transfer pricing teams work together so your DMTT position is consistent with the rest of your filings. Contact SBC to scope your Pillar Two exposure before your first return falls due.
This publication is for general information only and does not constitute professional advice. Please consult your SBC advisor before acting on any matter covered here.