Image: Getty Images/ For illustrative purposes
For years, the UAE has been a preferred base for multinational businesses, offering a tax-friendly environment that’s attracted companies from around the world. Now, a new global tax framework is reshaping how large companies handle their tax obligations.
From January, MNEs operating in the UAE need to comply with Pillar Two, a global minimum tax framework introduced by the OECD and G20. The idea is simple: if a company’s effective tax rate in any country falls below 15 per cent, it will be required to pay a top-up tax to bring it up to that level.
To stay ahead of this, the UAE introduced a Domestic Minimum Top-Up Tax (DMTT). This ensures the UAE collects the tax rather than letting other jurisdictions claim it.
For businesses that have structured themselves around tax incentives, this raises serious questions. Will free zone benefits still hold up? What adjustments need to be made? And how will compliance and reporting obligations change?
The reality is that business as usual is no longer an option. Companies need to reassess their structures, tax strategies, and reporting systems now.
What is OECD Pillar Two?
Pillar Two is the OECD’s attempt to close tax loopholes used by large multinationals. The rules apply to businesses with global revenues of EUR750m or more in at least two of the last four years.
The principle is straightforward: if a multinational’s effective tax rate (ETR) in a particular country falls below 15 per cent, it must pay a top-up tax to bring it to that level.
How it works
To enforce this, Pillar Two introduces three key rules:
- Income inclusion rule (IIR): If a subsidiary in a low-tax country pays less than 15 per cent, the parent company must cover the shortfall.
- Undertaxed profits rule (UTPR): If the parent company’s home country doesn’t enforce the IIR, other jurisdictions where the company operates can claim the tax.
- Qualified domestic minimum top-up tax (QDMTT): Countries can apply the tax themselves, ensuring they keep the revenue rather than losing it to foreign tax authorities.
The UAE has confirmed it will apply a DMTT, meaning multinationals operating here will pay any shortfall in the UAE rather than elsewhere.
Companies that have structured their operations around low or zero-tax incentives will need to reassess their tax strategies to stay compliant.
How will this affect businesses?
This is bigger than just paying more tax — it impacts business models, tax planning, and compliance processes.
Free zone incentives will need a fresh look
Many companies have chosen UAE free zones for their 0 per cent corporate tax rates, but under Pillar Two, a lower tax rate won’t necessarily mean lower taxes.
Even if a company qualifies for a lower rate in a free zone, if its ETR falls below 15 per cent, it will still need to pay the difference as a top-up tax.
Multinationals relying on free zone benefits need to reassess whether these incentives still serve their purpose or if a structural change is needed.
Transfer pricing will face more scrutiny
Intercompany transactions — such as intellectual property fees, intra-group loans, and cost-sharing agreements — will get closer inspection.
Tax authorities will be looking at whether pricing reflects real market value or is being used to lower tax obligations.
Businesses that don’t document these transactions properly could face audits, adjustments, or even financial penalties.
Beyond documentation, companies will also need to ensure consistency in their approach across different jurisdictions. Any misalignment in reported figures across tax filings could raise flags and trigger investigations, adding compliance risks on a global scale.
The reporting burden will increase
Tax compliance is about to get a lot more complicated. Companies will have to provide more detailed tax filings, with new disclosures and stricter tracking requirements. One major addition is the GloBE information return, requiring over 240 data points per entity.
On top of that, businesses will need to align their country-by-country reporting (CbCR) with the new rules, ensuring tax filings across jurisdictions match up without inconsistencies.
This means upgrading financial systems, tightening internal controls, and ensuring tax filings are accurate across multiple jurisdictions. The move to more detailed disclosures will require careful planning, as errors or inconsistencies could lead to audits or financial penalties.
What should businesses do now?
With the UAE’s DMTT taking effect earlier this year, businesses need to act now. Here’s where to start:
Determine if you’re affected
Start by confirming whether your company falls under Pillar Two. If your global revenue has reached EUR750m in at least two of the last four years, you need to start preparing immediately.
If you’re approaching this threshold, it’s time to monitor revenue closely — crossing the line means major tax and compliance changes.
Assess your effective tax rate (ETR)
Work out your company’s current ETR in every country where you operate.
If your UAE operations — or any other jurisdictions you’re in — have an ETR below 15 per cent, you’ll need to determine where the top-up tax will apply.
Free zone businesses, in particular, should review their structures to ensure they’re not exposed to unexpected tax liabilities.
Strengthen tax reporting and compliance
Pillar Two brings stricter compliance requirements, so businesses need to get their systems in order.
Key areas to focus on:
- Update financial reporting systems to track the necessary tax data.
- Ensure all tax filings align across different jurisdictions to avoid red flags.
- Review transfer pricing policies to ensure intercompany transactions meet compliance standards.
Having clear documentation and well-organised financial records will be crucial in avoiding unnecessary scrutiny and ensuring compliance with the new regulations.
Work with experts to develop a strategy
With tax rules becoming increasingly complex, expert guidance is essential.
Businesses need to rethink their tax structures, ensure compliance, and minimise unnecessary exposure.
The right approach will depend on each company’s setup, so planning early is far better than reacting under pressure later.
The bottom line
Pillar Two isn’t just a tax update — it’s a global change in how multinational businesses are taxed.
The UAE’s introduction of DMTT in 2025 means that companies need to reassess their tax planning, compliance, and reporting processes now.
This isn’t something to put off. Companies that prepare early will have a smoother transition, while those that wait risk compliance issues and unexpected tax liabilities.
The time to act is now.
The writer is the group CEO of Knightsbridge Group.
