The UAE is recognized as a major global business hub, one of the reasons being its attractive freezone regimes that provide preferential tax incentives. However, the introduction of the Domestic Minimum Top-up Tax (DMTT), aligned with the UAE’s implementation of the OECD’s Pillar Two framework, is changing this landscape. The DMTT aims to ensure that multinational enterprises pay a minimum global tax rate of 15%. Free-zones in the UAE benefit from preferential tax regimes (e.g., 0% or lower effective tax) under certain conditions- so there’s a key question: how does this interact with the DMTT and what does it mean for free-zone entities?
This article talks about the implications of the DMTT on UAE freezones and how businesses can adapt to stay compliant while optimising their tax position. Gaining a clear understanding of these developments is essential for any company seeking to benefit from freezone incentives amid the evolving international tax environment.
What Is the UAE’s Domestic Minimum Top-Up Tax (DMTT)?
The Domestic Minimum Top-Up Tax (DMTT) is a new tax mechanism introduced in the UAE as part of the country’s implementation of the OECD Pillar Two framework. Its main purpose is to ensure that multinational enterprises (MNEs) with global revenues above €750 million pay a minimum effective tax rate of 15% on their profits in each jurisdiction where they operate.
The DMTT “tops up” corporate tax where a constituent entity’s local tax falls below the 15% threshold. This ensures that MNEs cannot entirely avoid paying a minimum level of tax by using low- or zero-tax jurisdictions, including certain UAE free zones.
Why Does DMTT Matter for Free-Zone Companies?
Free zones are specially designated areas in the UAE that provide businesses with preferential regulatory and tax regimes. This includes branches of a Non-resident person or of already existing freezone entities. Companies incorporated in a free zone often benefit from eased foreign ownership rules, simplified administrative processes, advanced and well-equipped infrastructure, established business communities, and a wider range of legal entity types and commercial activities.
QFZE are those freezone entities which meets specific conditions under the UAE Corporate Tax Law, allowing it to have 0% corporate tax rate while still being compliant with international tax rules.
Corporate tax paid by a regular constituent entity is counted toward the Effective Tax Rate (ETR) for DMTT and helps determine whether the 15% global minimum tax threshold is met.
So, what can be said for MNE constituent entities that are QFZE?
QFZE will be required to pay a full 15% tax on profits of their jurisdiction under DMTT to the FTA if the consolidated revenue of the group is above Eur 750 million for at least 2 years of the preceding 4 years. The status of QFZE only applies to Corporate Tax as of now (2025).
Under DMTT, instead of QFZE status which allows 0% on tax, Constituent Entities can consider if they qualify for Safe Harbour status and exclusions.
Should Constituent Entities (CE) of MNE groups continue as a QFZE?
Although the DMTT legislations seem to override the benefits of QFZEs, here are a few things to keep in mind:
- Non-tax benefits of QFZE can still be applied.
- DMTT only applies to MNEs above a consolidated revenue of EUR 750 million Which means that the smaller groups with lesser consolidated revenues can still enjoy the 0% Corporate Tax benefit.
- Consider if the company can apply for safe harbour provisions or exclusions.
What can QFZE of MNEs do now?
- Assess whether they fall within the DMTT scope.
- Evaluate their UAE effective tax rate (ETR).
- Review substance and Safe Harbour eligibility.
- Continue leveraging the non-tax advantages of QFZE status.
Final thoughts:
The UAE’s introduction of the Domestic Minimum Top-Up Tax (DMTT) marks a major evolution in corporate taxation, especially for free-zone companies. While large multinational enterprises (MNEs) must pay additional taxes to meet the 15% minimum, maintaining Qualifying Free Zone Entity (QFZE) status still delivers commercial, operational, and strategic advantages.
Free-zone entities should proactively plan by reviewing their corporate structures, calculating their effective tax rates (ETRs), and leveraging Safe Harbour provisions to stay compliant while optimizing their global tax position
FAQs:
Does the UAE DMTT remove free-zone tax exemptions?
No. Free-zone incentives remain, but MNE constituent entities must pay a top-up tax if their ETR falls below 15%.
When does the UAE DMTT take effect?
The DMTT applies to financial years starting on or after 1 January 2025.
Are small free-zone businesses affected?
No. Only multinational groups with global consolidated revenues of €750 million or more in at least two of the previous four years are in scope.
Can DMTT make UAE free zones less attractive?
Not necessarily. While some tax benefits may be neutralized for large MNEs, the UAE’s DMTT framework aligns with OECD rules, reducing double taxation risks and preserving free-zone competitiveness. Large MNEs can also enjoy non -tax benefits of the QFZE status.
