United Arab Emirates

Base erosion and profit shifting (BEPS)

The UAE joined the G20 / OECD Inclusive Framework on BEPS (the 'Inclusive Framework') in 2018. Through joining the Inclusive Framework, the United Arab Emirates has committed to implement, in the immediate to short term, the following 4 BEPS minimum standards Actions:

• Action 5: Countering harmful tax practices.
• Action 6: Countering tax treaty abuse.
• Action 13: Transfer pricing documentation and CbC reporting.
• Action 14: Improving dispute resolution mechanisms.

The UAE has also committed to implement the other 11 BEPS Actions in the medium to long term.

The UAE has signed and ratified the BEPS Multilateral Instrument (MLI). The key positions that the UAE decided to adopt include:

• The UAE has chosen to include additional wording in the preamble of its Double Tax Treaties (DTT)s stating that the DTTs should not be used for treaty abuse (BEPS Action 6 minimum standard).
• The UAE has chosen to include a principal purpose test with the ability to refer to a competent authority for final assessment of the availability of treaty benefits (BEPS Action 6 minimum standard).
• The UAE has chosen to include additional wording in its DTTs to improve the dispute resolution process through Mutual Agreement Procedures (BEPS Action 14 minimum standard).
• The UAE has chosen to retain the existing 'permanent establishment' definition in its DTTs, and has not elected to adopt the expanded 'permanent establishment' definition.
• The UAE has chosen to retain its existing position on the taxation of capital gains realised on real estate rich entities, and has not elected to adopt the proposed 'real estate rich' provisions in its existing DTTs.

In respect of the remaining measures included under the UAE MLI position, the UAE has opted to agree specific changes to its DTTs through bilateral negotiation.

BEPS 2.0 Pillar Two and DMTT in the UAE

On 9 December 2024, the UAE Ministry of Finance announced updates in relation to UAE CT Law. These include:

Domestic Minimum Top-up Tax (DMTT)

Following the issuance of Federal Decree Law No. 60 of 2023, a Domestic Minimum Top-up Tax (DMTT) is effective in the UAE for financial years starting on or after 1 January 2025. This strategic step reflects the UAE’s commitment to implementing the Organisation for Economic Co-operation and Development’s (OECD) Two-Pillar Solution, aimed at establishing a fair and transparent tax system aligned with global standards.

The Pillar Two rules require large multinational enterprises (MNEs) to pay a minimum effective tax rate of 15% on profits in every country where they operate. The DMTT will apply to multinational enterprises operating in the UAE with consolidated global revenues of EUR750 million or more in at least two out of the four financial years immediately preceding the financial year in which the DMTT applies. The UAE’s implementation of the DMTT will closely align with the OECD’s GloBE Model Rules.

Further, Cabinet Decision No. 142 of 31 December 2024 introduced the detailed legislation on the UAE DMTT including cases, provisions, conditions, rules, controls, and procedures. It is broadly aligned with the OECD’s Inclusive Framework (IF).

Tax Incentives to Support Growth and Innovation

The UAE continues to enhance its business-friendly environment, reflecting its commitment to national strategic objectives such as strengthening economic competitiveness and improving ease of doing business. To promote sustainable growth, innovation, and investment, the Ministry of Finance is currently considering the introduction of the following Corporate Tax Incentives under Federal Decree-Law No. 47 of 2022.

To encourage Research and Development (R&D) activities, foster innovation and economic growth within the UAE, an R&D Tax Incentive is being considered. Based on feedback received during public consultations conducted in April 2024, the proposed incentive is expected to take effect for tax periods starting on or after 1 January 2026. The R&D tax incentive will be expenditure-based, offering a potential 30-50% tax credit and will be refundable depending on the revenue and number of employees of the business in the UAE. The scope of Qualifying R&D activities will be aligned to the OECD’s Frascati Manual guidelines and will be required to be conducted within the UAE.

Another incentive being considered is a refundable tax credit for high-value employment activities. This aims to encourage businesses to engage in activities that deliver significant economic benefits, stimulate innovation, and enhance the UAE’s global competitiveness. This incentive is proposed to take effect from 1 January 2025 and will be granted as a percentage of eligible salary costs for employees engaged in high-value employment activities. This includes C-suite executives and other senior personnel performing core business functions that add substantial value to the UAE economy.

The final form and implementation of the above mentioned proposed incentives are subject to legislative approvals.

Economic substance regulations

In scope entities

The Economic Substance Regulations (ESR) apply to all UAE Licensees that undertook  one or more of the "Relevant Activities" during the ESR Period, i.e. only for financial years commencing on or after 1 January 2019 and ending on or before 31 December 2022.

The "Relevant Activities" are listed below: 

• Banking Business 
• Insurance Business 
• Investment Fund Management Business 
• Lease-Finance Business 
• Headquarters Business 
• Shipping Business 
• Holding Company Business 
• Intellectual Property (IP) Business 
• Distribution and Service Centre Business 

Only the licensees that undertake a "Relevant Activity" and earn income from such "Relevant Activity" during the ESR Period are required to satisfy the applicable economic substance test. The ESR does not apply to non-UAE tax resident entities, investment funds and their underlying holding entities (except for self-managed investment funds), wholly UAE resident owned UAE entities with domestic transactions only (that are not part of a multinational group), and UAE branches of foreign companies that are subject to the corporate tax on all their “Relevant Income” in a foreign jurisdiction.

Compliance requirements

There are two filing requirements, being:

• Notification (applicable only to entities that perform 'relevant activities', regardless of 'relevant income' from those 'relevant activities').
• Substance report (applicable only to entities that perform 'relevant activities' and generate 'relevant income' from those 'relevant activities').

The notification and substance report should be submitted electronically via the MoF online portal within 6 and 12 months of the financial year end of the UAE Licensee, respectively. These filings must be made on an annual basis, if applicable.

Consequences of non-compliance

In addition to exchanging information with foreign authorities and the ultimate parent and beneficial owners of the UAE Licensee, failure to demonstrate adequate substance would result in administrative penalties (AED 50,000 in the first year of failure, increased to an amount of AED 400,000 for a consecutive year of failure). Additional penalties, such as suspending, revoking, or not renewing the UAE Licensee’s trade or commercial licence, could also apply.

Other administrative penalties include: (i) AED 20,000 for failure to submit the notification; (ii) AED 50,000 for failure to submit the annual substance report, as well as deemed failure to meet the economic substance test; and (iii) AED 50,000 for providing inaccurate information, as well as deemed failure of the economic substance test.

United States (US) Foreign Account Tax Compliance Act (FATCA)

In 2015, the United Arab Emirates signed the Model 1B Intergovernmental Agreement (IGA) with the United States, which came into force in 2016 (US-UAE Model 1 IGA), with the US Internal Revenue Services (IRS) regarding the exchange of information related to US individuals and certain type of US-owned entities, with an effective date of 1 July 2014. 

The domestic legislative provisions to implement FATCA in the United Arab Emirates are set in Cabinet Resolution No. 63 of 2022 (UAE FATCA Regulations).

The exchange of information is conducted on an annual basis, occurring in September of each year, between the UAE competent authority and the US IRS. UAE reporting financial institutions for FATCA purposes need to submit their FATCA returns to their relevant financial regulator (or the UAE MoF for unregulated entities) by 30 June of each year (unless otherwise informed). Filing of nil reports is required under FATCA.

Common Reporting Standard (CRS)

In 2017, the UAE signed the Multilateral Competent Authority Agreement (MCAA) on Automatic Exchange of Financial Account Information, and the Convention on Mutual Administrative Assistance in Tax Matters (MAC) was signed in 2017.

The exchange of information is conducted on an annual basis, occurring in September of each year, between the UAE competent authority and competent authorities of jurisdictions which have agreed to exchange information with the UAE. 

The domestic legislative provisions to implement the CRS in the United Arab Emirates are set in Cabinet Resolution No. 93 of 2021 (UAE CRS Regulations).

UAE reporting financial institutions for CRS purposes need to submit their CRS returns to their relevant financial regulators (or the UAE MoF for unregulated entities) by 30 June of each year (unless otherwise informed). Filing of nil reports is required under the CRS.