The 2 Pillar System of the UAE Corporate Tax

The UAE has very recently announced that it will be introducing a corporate tax system in mid 2023. The Ministry of Finance (MoF) announced that there will be a separate system of tax filing for multinational companies. This system is a combination of the two-pillar system and the general CIT rules.

What is the two-pillar system?

The two-pillar system was introduced by the Organisation for Economic Cooperation and Development (OECD). It tackles some of the challenges arising from the digitalization of the economy as well as the globalization of companies which makes tax avoidance quite easy.

Pillar two states that multinational companies (those making more than 750 million euros a year) will have to pay at least 15% tax in each jurisdiction that they operate in. This will be the case regardless of where they have their headquarters. Read about taxes for multinationals here.

In line with the global standards

The second pillar was introduced with the primary goal to adhere to the global minimum standard of a 15% tax. For many multinationals, avoiding taxes was becoming common practice due to digitalization and Base Erosion and Profit Shifting (BEPS).

When will pillar two be in operation?

Pillar-two will be applicable to multinationals starting in 2023. All multinationals will have to pay the rate of the two-pillar system. In 2024, multinationals may also be subject to the general CIT rules, meaning that they will have to adhere to both legislations.

Why the two-pillar system?

The two-pillar system was initially put in place to ensure that all multinational companies would be taxed at least 15%. While there is bound to be a higher administrative burden on these companies, it will ensure that the global minimal standard is met.

It is still unclear exactly how the two-pillar system will interact with the general CIT laws. It is clear however that some companies will be subject to both. Read more about this here.

Who will be exempt?

Finally, there are some companies that will continue to be exempt from the two-pillar system. These are government entities, non-profit organisations, international organisations, and pension or investment funds.

The UAE is yet to release more details about the two-pillar system. Is it presumed that this information will be available by June 2022. IF you would like to learn more about multinational companies in the new tax regime, continue reading “UAE Taxes for Multinationals part 2

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