Zero-Rated vs Exempt VAT in UAE: What’s the Difference?
February 24, 2025
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The global tax landscape is undergoing a major transformation, and the UAE is no exception. With the introduction of corporate tax in the UAE, businesses are already adjusting to a new financial reality. However, another global shift is on the horizon—the OECD’s Global Minimum Tax (GMT).
Designed to prevent tax avoidance and create a more level playing field, this tax rule could have significant implications for multinational companies operating in the UAE.
For decades, the UAE has been a low-tax jurisdiction, attracting international businesses with its favorable corporate environment. The new corporate tax system, set at 9% on net profits above AED 375,000, was a major shift.
Now, with the OECD’s 15% minimum tax rule, companies must evaluate whether their UAE operations will still provide tax advantages or if additional tax liabilities will arise.
Businesses with global operations, regional headquarters, or subsidiaries in the UAE need to assess how these new rules will impact their tax obligations.
Understanding the potential changes, compliance requirements, and strategic adjustments is essential for companies looking to maintain efficiency while staying compliant with international tax regulations.
The Global Minimum Tax (GMT) is an initiative led by the Organisation for Economic Co-operation and Development (OECD) as part of its Base Erosion and Profit Shifting (BEPS) project.
The primary goal of this tax framework is to prevent multinational corporations from shifting profits to low-tax jurisdictions in order to reduce their global tax liabilities.
By setting a minimum corporate tax rate of 15%, the OECD aims to ensure that large companies contribute a fair share of taxes regardless of where they operate.
This tax rule specifically applies to multinational enterprises (MNEs) with annual revenues exceeding EUR 750 million (approximately AED 3 billion).
If a company’s effective tax rate in any given country is below 15%, additional taxes may be imposed by other jurisdictions to bring the total tax paid up to this threshold.
The UAE, having historically attracted businesses due to its low or zero corporate tax policies, is now at a crossroads.
With its corporate tax set at 9%, there is a growing concern about how GMT could affect companies operating in the country, particularly those belonging to global corporate groups.
The key question is whether businesses will face top-up taxes in other jurisdictions if their UAE tax rate remains below the 15% minimum.
Governments worldwide have long been concerned about multinational corporations using tax havens and aggressive tax planning strategies to avoid paying taxes in higher-tax countries.
Many large companies have historically set up entities in low or zero-tax jurisdictions—including the UAE—to house their profits while conducting most of their operations in other countries.
This has resulted in profit shifting, where businesses legally minimize their tax burdens by taking advantage of differences in national tax systems.
The GMT addresses this issue by ensuring that all large multinational businesses pay at least 15% tax on their global profits.
If a company’s tax rate in a specific jurisdiction is lower, its home country or other relevant tax authorities may apply a top-up tax to bridge the gap.
This eliminates the incentive for companies to move profits to jurisdictions solely for tax benefits, encouraging them to base operations where there is real economic activity.
The GMT works through a multi-layered taxation mechanism, designed to ensure compliance across different tax jurisdictions. The key mechanisms include:
For businesses operating in the UAE, this means that free zone tax benefits, preferential corporate tax rates, and profit-shifting models may no longer provide the same financial advantages.
Companies must now analyze their effective tax rate (ETR) in each jurisdiction where they operate and determine whether they will face additional tax obligations elsewhere.
The introduction of GMT requires multinational businesses in the UAE to conduct a comprehensive tax impact assessment. Companies must evaluate:
Since UAE corporate tax is currently set at 9%, businesses must also consider whether the UAE government will introduce a Qualified Domestic Minimum Top-up Tax (QDMTT) to capture additional tax revenue locally rather than allowing foreign jurisdictions to impose tax on UAE-based profits.
Multinational companies must take a proactive approach to reviewing their tax structures, documenting their economic substance in the UAE, and ensuring they meet the required global tax compliance standards.
By staying ahead of regulatory changes and working with experienced tax advisors, businesses can optimize their tax positions while remaining fully compliant with the evolving global tax framework.
Since the UAE corporate tax rate is currently 9%, it falls below the OECD’s 15% minimum requirement.
This means that multinational corporations with subsidiaries in the UAE could become subject to top-up taxes in their home countries if their total tax paid in the UAE does not meet the minimum threshold.
For example, if a multinational company headquartered in a country that has adopted the GMT rules has a subsidiary in the UAE paying only 9% corporate tax, the parent company’s home country may require an additional 6% tax to bring the total effective tax rate up to 15%.
This could reduce the attractiveness of using the UAE as a regional headquarters or profit hub.
However, businesses operating purely within the UAE, without multinational ties, are unlikely to be affected by the OECD’s global tax framework.
The GMT primarily targets large multinational corporations rather than small or medium-sized enterprises (SMEs) operating domestically.
Many international companies have historically chosen to set up in UAE free zones, where they have enjoyed full corporate tax exemptions on certain types of income.
With the introduction of UAE corporate tax, some free zone businesses may still qualify for a 0% corporate tax rate if they meet the conditions of a Qualifying Free Zone Person (QFZP).
However, under the Global Minimum Tax rules, companies benefiting from these tax incentives may no longer have the same advantage.
If a multinational corporation operates in a UAE free zone but enjoys a 0% tax rate, its home country could impose a top-up tax to ensure the business pays at least 15% globally.
This may lead businesses to rethink whether free zone incentives will remain as beneficial as they were in the past.
As multinational companies assess the impact of the Global Minimum Tax (GMT) on their UAE operations, they must adopt strategic approaches to minimize risks while maintaining tax efficiency.
Businesses that rely on the UAE’s low-tax environment, free zones, and profit-shifting models need to rethink their structures to remain competitive under the new international tax framework.
One of the first steps businesses should take is to review their corporate structures to determine if they are exposed to top-up taxes in other jurisdictions.
Multinational corporations that have UAE subsidiaries or regional headquarters must assess whether their effective tax rate (ETR) falls below 15%, and if so, how it will be treated under GMT rules.
Companies that operate as holding entities in the UAE must evaluate whether their passive income, such as dividends and royalties, will be subject to tax in other jurisdictions.
If the parent company’s home country applies GMT, businesses may need to restructure ownership models to ensure tax efficiency while remaining compliant.
One approach is to realign profit allocation strategies to ensure that revenue-generating activities occur in higher-tax jurisdictions where substantial business operations exist.
This helps justify why profits are reported in those locations, reducing exposure to GMT-related tax adjustments.
For companies operating in UAE free zones, the key question is whether their 0% corporate tax status will trigger top-up tax obligations in their home country.
If a company currently enjoys full tax exemptions, it must determine whether GMT rules will force it to pay an additional tax in another jurisdiction.
Businesses should explore whether restructuring operations into Qualifying Free Zone Person (QFZP) entities can provide greater clarity under the UAE’s corporate tax framework.
A firm that maintains substantial economic substance in the UAE, such as through real business operations and employment of skilled professionals, may strengthen its position in demonstrating compliance with international tax principles.
Alternatively, multinational corporations may consider partial tax elections, where they opt into the 9% UAE corporate tax regime to avoid being viewed as completely tax-exempt.
By paying some level of tax in the UAE, businesses may mitigate the risk of foreign tax authorities imposing additional GMT top-ups.
Another strategy for businesses is to maximize allowable tax deductions and credits within the UAE’s tax framework.
Since corporate tax applies to net profits, companies should ensure they are properly deducting operational expenses, capital investments, and R&D costs to lower their taxable income.
For firms with global operations, leveraging tax credits under double taxation agreements (DTAs) can be beneficial. The UAE has signed over 130 DTAs, which can help businesses offset foreign tax obligations against their UAE tax liabilities.
Companies should work with tax professionals to assess whether they can claim credits for foreign taxes paid, potentially reducing their exposure to GMT top-ups.
Multinational businesses with a regional headquarters or subsidiaries in the UAE should conduct a thorough tax impact analysis to determine their exposure to GMT.
Since the OECD rules apply only to companies with revenues exceeding EUR 750 million (AED 3 billion), businesses must first determine whether they fall within the scope of the new regulations.
For those affected, a key step is to evaluate whether the UAE operations generate real economic substance. Companies that have historically used the UAE as a passive profit center—without significant business activities—may need to realign their operational structures.
Strengthening local business functions, increasing headcount, and ensuring substantial economic activity can justify maintaining profits in the UAE without triggering excessive top-up tax obligations abroad.
Businesses should also reassess whether their UAE subsidiaries should transition from tax-exempt free zone entities to corporate tax-paying entities.
While free zones may still offer a 0% tax rate for certain qualifying activities, the risk of additional taxation under GMT rules could reduce the benefit of maintaining a fully tax-free presence.
In some cases, opting into the 9% UAE corporate tax rate may be preferable to avoid foreign tax authorities imposing top-up taxes at a higher rate.
Companies operating in multiple jurisdictions must ensure that their legal and financial structures align with GMT rules while remaining tax-efficient.
One strategy is to centralize high-value operations within the UAE rather than using it solely as a profit hub. Businesses that base intellectual property (IP), research and development (R&D), and executive decision-making functions in the UAE can better demonstrate that taxable profits are linked to real business activity rather than tax advantages.
For companies that rely on intercompany transactions, royalties, and transfer pricing, ensuring compliance with OECD transfer pricing guidelines is essential.
Tax authorities worldwide are increasing scrutiny on profit allocation between related entities, making it critical to document all transactions at arm’s length pricing.
Proper documentation and alignment with economic substance requirements can help prevent additional taxation under GMT rules.
Some businesses may also explore restructuring their holding companies or investment vehicles. While offshore holding structures have traditionally been used to manage international investments, GMT rules could make them less viable if they do not meet minimum tax requirements.
Businesses should assess whether relocating holding entities to the UAE—where tax rates remain relatively low but compliant with GMT principles—provides greater long-term tax efficiency.
Since GMT applies to net taxable income, businesses must proactively manage their tax liabilities through deductions, incentives, and credits.
Companies should ensure they are fully utilizing allowable deductions under UAE corporate tax laws, including business expenses, depreciation on assets, R&D costs, and operational expenditures.
For multinational businesses subject to double taxation agreements (DTAs), leveraging foreign tax credits (FTCs) can help offset tax obligations in home countries.
The UAE has an extensive network of 130+ DTAs, which may allow businesses to claim tax relief on profits earned in the UAE, preventing unnecessary double taxation.
Another important factor is investing in UAE free zone activities that align with QFZP (Qualifying Free Zone Person) status.
Certain industries, such as manufacturing, logistics, and high-tech innovation, may still qualify for 0% tax rates, but businesses must meet strict economic substance requirements to maintain their benefits.
Understanding which free zone activities remain tax-efficient will be crucial in planning corporate tax strategies.
The introduction of the Global Minimum Tax (GMT) is expected to reshape how multinational corporations operate in the UAE.
As global tax policies evolve, the UAE’s position as a low-tax jurisdiction may change, requiring both businesses and policymakers to rethink strategies for maintaining the country’s appeal as a leading business hub.
While the UAE has already introduced a 9% corporate tax, it may need to consider further adjustments to align with the OECD’s 15% minimum tax requirement.
The government could introduce targeted tax reforms to ensure that businesses remain competitive while still complying with international tax frameworks.
One potential adjustment could be the introduction of sector-specific tax rates for industries that are more exposed to GMT regulations.
For example, large multinational corporations in the technology, finance, and energy sectors could see tax rate changes designed to prevent profit shifting concerns.
The UAE may also explore tax incentives tied to economic substance, job creation, and innovation, ensuring that businesses benefiting from tax advantages have a real presence in the country.
The UAE’s free zones have historically been a key driver of foreign investment, offering businesses full tax exemptions on qualifying income.
However, GMT rules could diminish the attractiveness of free zone incentives for large multinational corporations, as these companies may still be required to pay top-up taxes in their home countries.
To adapt, UAE free zones may need to redesign tax structures, ensuring that businesses operating within them meet international tax compliance standards while still benefiting from operational advantages.
This could include introducing alternative incentives such as reduced VAT, streamlined regulatory frameworks, or enhanced business support services that go beyond tax benefits alone.
Large multinational businesses that previously structured their operations in the UAE to take advantage of low corporate tax rates may now need to reevaluate their regional tax strategies.
Companies that once used the UAE as a profit hub may shift toward more substance-based operations, investing in local employment, infrastructure, and R&D to align with global tax principles.
Businesses that cannot justify their presence in the UAE beyond tax benefits may face pressure to restructure.
This could lead to a wave of corporate reorganizations, mergers, and acquisitions, as companies seek to optimize their tax positions while remaining competitive in the Middle East and beyond.
The UAE’s corporate tax system is still evolving, and the introduction of the Global Minimum Tax (GMT) will accelerate further changes.
While the country remains an attractive destination for business, multinational corporations must rethink their tax planning strategies to ensure compliance with both local regulations and global tax frameworks.
Businesses operating in the UAE should take proactive steps to assess their exposure to GMT, restructure operations where necessary, and optimize tax efficiency through careful planning.
Companies that fail to adapt may face unexpected tax liabilities in their home countries, reducing the financial advantages of operating in the UAE.
By working closely with tax advisors and financial consultants, businesses can navigate these changes effectively, ensuring they remain compliant while continuing to benefit from the UAE’s pro-business environment.
The key to success in this new tax landscape is early preparation, strategic planning, and continuous monitoring of global tax developments.
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