The UAE’s free zones have long been synonymous with 0% corporate tax, flexible ownership, and streamlined global access. But from 1 January 2025, the world’s largest companies face a new reality: the OECD’s Pillar Two global minimum tax. No matter how efficient the structure, qualifying multinational groups will pay at least 15% on their UAE profits.
For CFOs, tax directors, and founders, this marks a fundamental reset. The question is no longer “how do we pay zero?” but “where and how do we pay 15% while maximising value?” We break down how the rules apply in the UAE, what free zone companies can still achieve, and the strategies global businesses must adopt now.
What is the OECD Pillar Two Global Minimum Tax and how does it work?
The OECD’s Pillar Two introduces a 15% minimum effective tax rate (ETR) for multinational groups with global revenues of €750 million or more. It operates through three interlocking rules:
- Qualified Domestic Minimum Top-up Tax (QDMTT) – if the UAE applies a top-up itself, it takes priority.
- Income Inclusion Rule (IIR) – the parent company’s jurisdiction taxes low-taxed subsidiaries.
- Undertaxed Profits Rule (UTPR) – if neither applies, other countries can collect the difference.
In practice, this means either the UAE collects the top-up to 15%, or another country will.
How does the UAE’s Domestic Minimum Top-up Tax apply in 2025?
The UAE confirmed that from 1 January 2025, it will apply a Domestic Minimum Top-up Tax (DMTT) aligned with OECD rules. Any UAE entity within a qualifying multinational group must calculate its ETR. If it falls below 15%, the UAE Federal Tax Authority will collect the difference.
This approach ensures the UAE keeps the tax revenue locally, rather than ceding it to foreign tax authorities.
Do UAE free-zone companies still benefit from 0% tax after Pillar Two?
Yes and no. Under domestic UAE Corporate Tax law, Qualifying Free Zone Persons (QFZPs) continue to enjoy a 0% rate on qualifying income. However, if the company is part of a large multinational group above the Pillar Two threshold, the 0% rate does not shield it from the global minimum tax.
In that case, the UAE DMTT ensures that free zone profits are topped up to 15%. For SMEs or groups below the threshold, the 0% advantage still applies in full.
Who qualifies as a “Qualifying Free Zone Person” and what income is covered?
A QFZP is a company properly registered in a UAE free zone that meets conditions on substance, permitted business activities, and transfer pricing compliance. Qualifying income includes transactions with other free zone companies and foreign parties. Income from mainland UAE customers is generally taxed at 9%.
For Pillar Two purposes, however, all QFZPs are in scope if their parent group meets the €750m threshold—regardless of their domestic exemption.
How is the UAE Effective Tax Rate calculated under Pillar Two rules?
The Effective Tax Rate (ETR) = Covered Taxes ÷ GloBE Income.
Example:
- Mainland entity profit 10m, taxed at 9% = 0.9m tax.
- Free zone entity profit 10m, taxed at 0% = 0 tax.
- Combined UAE profit = 20m, combined tax = 0.9m.
- ETR = 4.5%.
Top-up = 15% – 4.5% = 10.5% × 20m = 2.1m due.
This shows how free-zone profits pull down the UAE-wide ETR and trigger a top-up.
What is the substance-based carve-out and how can it reduce top-up tax?
Pillar Two allows a deduction for 10% of payroll costs and 8% of tangible assets (falling to 5% each over time). This means companies that employ staff and hold assets in the UAE can exclude part of their profit from the top-up calculation.
Example: If a free-zone company with 40m profit has 10m payroll, 1m of profit can be carved out. The top-up tax applies only to 39m, not 40m.
While modest, this carve-out rewards businesses that build real substance in the UAE.
What reporting and filings must UAE companies prepare for Pillar Two?
Large groups must file a Pillar Two return (separate from UAE CT) with the FTA:
- Due 15 months after year-end (18 months for the first year).
- Requires 240+ data points per entity, including income adjustments, taxes paid, and carve-out details.
- Must reconcile with existing Country-by-Country Reports (CbCR) to avoid mismatches.
This new compliance burden demands upgraded systems, trained teams, and strong internal controls.
What strategies help multinationals manage Pillar Two exposure in UAE free zones?
- Elect to pay 15% in the UAE via DMTT to avoid foreign top-ups under IIR/UTPR.
- Increase UAE substance – hire senior staff, add real assets, and expand local operations to use carve-outs.
- Rebalance structures – consider shifting some activities to mainland entities (9% CT) to lift blended ETR.
- Align transfer pricing – stop overallocating profit to free zones just for tax savings.
The new mindset is clear: manage to 15% smartly, not to 0% artificially.
How do UAE’s new R&D and employment credits affect Pillar Two outcomes?
From 2025–2026, the UAE will roll out refundable credits:
- R&D credit of up to 50% of qualifying spend.
- High-value employee credit linked to senior staff salaries.
These are treated as income under GloBE rules—so they don’t raise ETR, but they reduce the cash cost of tax. This aligns with OECD guidance and keeps the UAE competitive by rewarding innovation and talent attraction.
What are the filing deadlines and safe harbour rules for UAE Pillar Two compliance?
- First filing: For financial years ending 31 December 2025, due by March 2027 (with possible extension to June 2027).
- Transitional safe harbour: Temporary relief based on CbCR data may allow simplified filings for 2025–2026 if certain thresholds are met.
Companies should not rely solely on safe harbours, as they expire quickly and rarely apply where ETR is clearly low.
How does the UAE compare to Singapore, Ireland, Hong Kong, and GCC peers under Pillar Two?
| Jurisdiction | Domestic Top-up Tax? | Incentives Post-Pillar Two | Non-Tax Advantages |
|---|---|---|---|
| UAE | Yes (DMTT 2025) | R&D + talent credits | Strategic hub, logistics, free zones |
| Singapore | Yes (2025) | IP & finance incentives | Talent, APAC access |
| Ireland | Yes (2024) | R&D + Knowledge Box | EU market access |
| Hong Kong | Yes (2025) | Regional HQ support | China gateway |
| Saudi Arabia | Expected (2025) | Free zone incentives | Large domestic market |
The playing field is levelling at 15%, so non-tax factors now dominate. UAE free zones remain compelling for ecosystem, infrastructure, and speed of setup.
What should CFOs and founders do in the next 12 months?
- Confirm if your group exceeds the €750m threshold.
- Run a UAE jurisdictional ETR calculation.
- Decide where top-up should be paid (UAE vs parent jurisdiction).
- Align transfer pricing with substance.
- Upgrade systems for Pillar Two reporting.
- Plan for new UAE credits and incentives.
How DUQE helps businesses stay compliant and competitive under Pillar Two
Setting up or restructuring in a free zone is no longer just about 0% tax. DUQE provides:
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Licensing, visas, and compliance support built around
new corporate tax requirements.
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Workspace and substance solutions to help companies
activate carve-outs.
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Banking and investor connections to scale quickly.
- A unique QE2-based community environment, ideal for attracting senior talent and building credibility.
By starting with DUQE, businesses can meet regulatory obligations while staying strategically positioned in Dubai’s most dynamic ecosystem.
Why 15% is not the end of UAE free-zone advantages
Pillar Two changes the game, but it doesn’t close the UAE’s doors. Yes, large multinationals must now factor in a 15% minimum tax, but the UAE’s appeal has never been built on tax alone. World-class infrastructure, global connectivity, fast setup, and now targeted incentives mean free zones remain a powerful base for global growth.
The smart move isn’t to chase zero, but to design a structure where every dirham of the 15% buys you access, speed, and scale.
👉 Ready to align your business with the new rules? Talk to DUQE today about building a compliant, founder-friendly structure in Dubai’s most ambitious free zone.
FAQs
Can free-zone SMEs ignore Pillar Two?
Yes. If your group earns under €750m globally, Pillar Two does not apply. You can still enjoy 0% corporate tax as a QFZP.
Does Pillar Two eliminate all UAE tax advantages?
No. It neutralises the 0% arbitrage for large groups, but free zones still offer ecosystem, customs, visa, and regulatory benefits.
Should groups voluntarily pay 9% UAE CT to raise their ETR?
In some cases, yes. Paying 9% on mainland profits can lift the blended UAE ETR and reduce the top-up required.
Will safe harbours apply to free-zone companies in the UAE?
Possibly for the first years if CbCR thresholds are met, but most low-tax free-zone entities won’t qualify.
Is the UAE still attractive compared to other hubs after Pillar Two?
Yes. With a 15% cap, the UAE is competitive globally, and its non-tax advantages often outweigh marginal differences elsewhere.