Legal Overview on UAE Corporate Tax Reforms 2025

UAE Corporate Tax Reforms 2025

In 2025, the United Arab Emirates (UAE) is introducing landmark tax reforms aimed at meeting global standards and bolstering its fiscal system. Among these are the introduction of a Domestic Minimum Top-up Tax (DMTT), revisions to laws on corporate taxes, and implementation of eInvoicing technologies. This article gives an all-around analysis of these developments and their impact on businesses operating in the UAE.

Applicable from January 1, 2025, the UAE will charge a 15% DMTT on large multinational corporations (MNEs) with consolidated group revenues of €750 million or more. The move is in line with the Organisation for Economic Co-operation and Development's (OECD) global tax deal, which seeks to avoid tax base erosion and profit shifting by ensuring that large MNEs pay a minimum amount of tax on the profits arising in each country where they have operations.

The DMTT is applicable to MNEs with the stipulated revenue threshold in a minimum of two of the four preceding financial years immediately before the financial year for which the tax is being imposed. The measure ensures that big businesses pay their fair share to the UAE economy, ensuring a balanced and transparent tax regime.

Changes to Corporate Tax Legislation

Together with the DMTT, the UAE introduced some amendments to the corporate tax regime, to apply for fiscal years beginning on or after January 1, 2025. The changes have been enacted with the sole aim of enriching compliance processes, offering relief administratively, and strengthening the position of the UAE as an international business destination. Some key enhancements include:

I.     Tax Group Rules

Ministerial Decision No. 301 of 2024 prescribes rules for the establishment and functioning of corporate tax groups, permitting related parties to be taxed as one unit. This enables efficient tax reporting and possible tax advantage to eligible groups.

II.    Participation and Permanent Establishment Exemptions

Decision No. 302 of 2024 sets the guidelines regarding foreign-sourced income exemptions as well as foreign permanent establishment exemptions, in the spirit of discouraging double taxation and promoting business operations across nations.

Implementation of eInvoicing

The UAE Ministry of Finance has taken a major step towards digitalizing its tax system with the proposed launch of electronic invoicing (eInvoicing). A public consultation paper has been released, and comments are being accepted until February 27, 2025. The consultation is intended to receive inputs from businesses, tax professionals, and stakeholders to facilitate a smooth and efficient implementation.

The use of eInvoicing is likely to improve transparency, enhance tax compliance, and curtail tax evasion through the monitoring of real-time transactions. The system will enable businesses to automate their invoices, eliminating the possibility of human errors and VAT compliance issues. Tax authorities will also be in a position to view invoice data in real time, accelerating tax collection and minimizing administrative loads.

Some of the anticipated advantages of the eInvoicing system are:

i.      Reduced operational expenses for companies through less paperwork and manual intervention.

ii.    Quicker and more effective tax audits, since authorities can verify invoices in real time.

iii.   Smooth integration with current enterprise resource planning (ERP) systems for companies.

iv.   Less risk of fraud and tax evasion through tighter digital monitoring of transactions.

With the UAE going more digital and tax compliant, eInvoicing will put the nation in line with best practices on a global level, as has already been done in Saudi Arabia, the EU, and Latin America. Upon enactment, companies will most likely be given a transition period to modify their invoicing system and implement necessary technological adjustments.

Fiscal Year 2025 Federal Budget

The UAE Cabinet has approved the federal general budget for the fiscal year 2025, allocating AED 71.5 billion in revenues and expenditures. This marks a nearly 12% increase in government spending compared to 2024, reflecting the UAE's commitment to economic growth, infrastructure development, and social welfare. 

The budget prioritizes key sectors, with significant allocations towards:

i.      Social Welfare and Development:  Spending on public services, social security, and pension funds.

ii.    Education: Upgrades to school infrastructure, online education schemes, and education spending on institutions of higher education.

iii.   Healthcare: Improving medical facilities, e-health facilities, and medical research in health care.

iv.   Infrastructure & Public Services : Development of transport networks, road construction, and smart cities.

This budget is in consonance with the UAE's overall vision of economic diversification and sustainable development, keeping growth balanced while retaining fiscal prudence. The rise in expenditure is for improving public services, increasing quality of life, and sustaining long-term national projects.

On the other hand, the government of the UAE remains committed to fiscal discipline, making sure that the escalation of spending is well-matched with revenue inflows from taxation and non-oil sources of revenues. The emergence of eInvoicing and corporate tax reforms will also become important in driving revenue efficiency as well as facilitating sustainable economic growth in the years ahead.

Implications for Businesses

The launch of the DMTT and the amendments to the corporate tax legislation mark the UAE's commitment to keeping pace with international tax standards and promoting an equitable business environment. Companies doing business in the UAE, especially large MNEs, need to review their structures and operations to comply with the new rules. The following are the main considerations:

i.              Reviewing Company Structures

Organisations need to review their organizational structures to identify eligibility for tax grouping and understand the effect of the DMTT on tax burdens.

ii.            Reviewing International Operations

Foreign business operations need to comprehend the effect of participation and foreign permanent establishment exemptions to enhance tax efficiency and prevent double taxation.

iii.           Preparation for eInvoicing

Companies need to start moving to electronic invoicing systems ahead of the forthcoming requirements, having their financial systems in line with the new standards.

Conclusion

The UAE 2025 tax reforms are a key move towards increased fiscal disclosure and conformity with global tax attitudes. With the introduction of the DMTT, updating corporate tax legislation, and the implementation of eInvoicing, the UAE seeks to establish a strong and fair tax regime. It supports economic development while enticing foreign investment into the economy. Companies operating in the UAE are urged to actively transition their practices as per these reforms, comply with them, and maximize their operations in the new fiscal environment.