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Pillar 2 Impact Assessment for UAE Entities

Pillar Two Impact Assessment & Transitional Safe Harbour for UAE Entities

The OECD’s Pillar 2 rules, also called the Global Minimum Tax, are designed to make sure that large multinational companies pay at least 15% tax on the profits they earn in every country where they operate. This stops companies from shifting profits to low-tax places and creates a fairer playing field across the globe. The rules mainly apply to groups with annual revenues above €750 million, and if their local tax rate falls below 15%, they’ll have to pay a “top-up tax” to reach that minimum.

From 1 January 2025, the UAE has started following these Pillar Two rules.

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To make the transition easier, there’s a temporary system called the Transitional Safe Harbour. This gives companies a few years to adjust before they have to do all the detailed calculations required under the full rules. The UAE has decided to apply this safe harbour period.

The safe harbour offers a temporary alternative. For a limited time, certain jurisdictions can be excluded from full GloBE calculations if they meet straightforward qualifying conditions.

The tests - the De Minimis Test, the Simplified ETR Test and the Routine Profits Test - are based on information the MNE already collects for its CbC Report and financial statements. That means no brand-new data systems are needed just to check eligibility.

Transitional CbCR Safe Harbour Rules

The idea behind the transitional safe harbour is simple- if it’s already clear that your UAE operations are not at risk of falling below the 15% rate, you don’t have to go through the full complex top-up tax calculation. This saves time, reduces costs and gives companies breathing room to get their systems and data ready.

The transitional period lasts three years - covering financial years that start on or before 31 December 2026 and end no later than 30 June 2028.

The Three Safe Harbour Tests

During this period, a UAE company in a large multinational group only needs to meet one of three tests to skip the top-up tax calculations for that year.

  • First, the De Minimis Test.
    If the UAE operations have revenue of EUR 10 million or less and profit (or loss) before tax of EUR 1 million or less, you’re exempt for that year.
  • Second, the Simplified ETR Test.
    If your effective tax rate calculated using a simplified method is at least:
    • 15% in 2024
    • 16% in 2025
    • 17% in 2026
    then no top-up tax applies.
  • Third, the Routine Profits Test.
    If your profit before tax is equal to or below the “substance-based income exclusion” amount (a formula based on your UAE payroll and tangible assets), you’re in the clear.

What Happens If You Pass a Test?

If you pass at least one of these tests, your UAE operations don’t need to do the full GloBE top-up tax calculation for that year. You just pay the regular UAE corporate tax - 0% on taxable income up to AED 375,000 and 9% on anything above that.

For loss-making companies, this relief often applies automatically. If your UAE profit is negative, you’ll almost always pass the Routine Profits Test because your profit is below the threshold. And if your revenue is also small, you might pass the De Minimis Test too.

What Happens If You Fail All Three Tests?

If you don’t meet any of the tests, the transitional safe harbour doesn’t apply. You’ll need to do the full GloBE effective tax rate calculation for your UAE operations. If the rate is below 15%, you’ll have to pay a top-up tax to bring it up to that level.

Under the normal OECD rules, if the UAE didn’t collect that top-up tax, the Income Inclusion Rule (IIR) would let the country where your group’s parent company is based collect it instead. That would mean the extra tax on your UAE profits could be paid overseas.

UAE’s Domestic Minimum Top-Up Tax (DMTT) – Keeping Top-Up Tax Local

To make sure this extra tax stays in the UAE, the government has introduced its own Domestic Minimum Top-Up Tax (DMTT) from 1 January 2025. If your effective tax rate here is below 15%, the UAE will charge the difference - for example, if your rate is 9%, they’ll collect the extra 6% locally.

The DMTT works alongside the standard 9% corporate tax. The 9% applies as normal, and then the DMTT tops it up to 15% if needed. This approach means foreign parent countries can’t use the IIR in that case.

How Can AKM Global Help?

At AKM Global, we support UAE-based entities in:

  • Conducting Pillar Two impact assessments
  • Evaluating eligibility under the Transitional Safe Harbour
  • Managing CbCR alignment and GloBE compliance
  • Preparing for DMTT implications and effective tax planning

For any questions or assistance, feel free to reach out to us at info@akmglobal.in or yeeshu.sehgal@akmglobal.in.

FAQs:

  • What exactly is Pillar 2?
    Ans: It’s a global tax rule that ensures large multinational companies pay a minimum of 15% tax wherever they do business.
  • Who does it apply to?
    Ans: Only to multinational groups that have global revenues above €750 million in at least two of the past four years.
  • What happens if a company pays less than 15% tax in a country?
    Ans: They’ll have to pay an additional “top-up tax” to bring their effective tax rate up to 15%.
  • Why did the OECD introduce Pillar 2?
    Ans: To stop companies from moving profits to tax havens and to make sure taxation is more balanced and fairer around the world.
  • How should companies prepare?
    Ans: By running a Pillar 2 impact assessment to see where they might owe extra tax and by making sure their systems and data are ready for new reporting requirements.