UAE Top-Up Tax Explained: Excluded Entities, Investment Funds and Registration Rules Under Pillar Two

The UAE Top-Up Tax is now a live compliance obligation rather than a future policy question. Cabinet Decision No. 142 of 2024 introduced the UAE’s Domestic Minimum Top-Up Tax (DMTT) for fiscal years beginning on or after 1 January 2025, and Federal Tax Authority Decision No. 12 of 2026, issued on 16 July 2026, completed the procedural framework by fixing registration, deregistration, and notification deadlines.

Two FTA guides dated 26 August 2026, one on scope and registration, one on excluded entities and investment entities, then filled in the interpretive detail.

For most UAE groups, the first key deadline is 30 November 2026. This article explains who falls within the UAE Top-Up Tax rules, which entities may qualify as excluded entities, how investment funds and investment entities are treated, and why exemption from UAE Corporate Tax does not automatically mean exclusion from Top-Up Tax.

Understanding the UAE Top-Up Tax Under Pillar Two

The UAE Top-Up Tax is the UAE’s implementation of the OECD’s Pillar Two global minimum tax. It applies a 15% minimum effective tax rate to the UAE profits of large multinational groups. Where a group’s UAE effective tax rate falls below 15%, the DMTT collects the difference domestically rather than leaving it to be collected by another jurisdiction under an income inclusion rule.

Scope turns on a single threshold. An MNE group is caught where its annual consolidated revenue is EUR 750 million or more in at least two of the four fiscal years immediately preceding the tested fiscal year.

The group must also have at least one entity or permanent establishment located in the UAE and at least one located in a foreign jurisdiction, so a purely domestic UAE group is outside the regime, while a standalone UAE entity with a foreign PE can be caught.

The UAE has deliberately adopted a qualified domestic minimum top-up tax (QDMTT) rather than an income inclusion rule or an undertaxed profits rule.

The intention is that the UAE DMTT benefits from the QDMTT safe harbour, so that other jurisdictions accept the UAE tax and do not impose further top-up tax on UAE profits.

In-scope UAE entities include constituent entities, minority-owned constituent entities, permanent establishments, joint ventures, JV subsidiaries, and certain reverse hybrid entities created under UAE law.

An “entity” for these purposes means any juridical person with separate legal personality, plus any arrangement that prepares separate financial accounts, including partnerships and trusts. Natural persons and government administrations carrying out government functions fall outside the definition.

Excluded Entities Under the UAE Top-Up Tax

Article 1.5 of Cabinet Decision No. 142 of 2024 sets out the categories of entities that sit outside the charging provisions entirely. These are commonly described as primary excluded entities:

Primary Excluded Entities Under the UAE Top-Up Tax

• Governmental entities
• International organizations: intergovernmental or supranational bodies made up primarily of governments, whose governing arrangements prevent income from benefiting private persons
• Non-profit organizations: subject to conditions on purpose, ownership, tax-exempt income, and the treatment of assets on wind-up; the entity must be established and operated exclusively for religious, charitable, scientific, artistic, cultural, athletic, educational, professional, or social welfare purposes
• Pension funds: operating exclusively or almost exclusively to administer or provide regulated retirement and ancillary benefits, together with pension services entities that invest funds or carry out ancillary activities exclusively for a pension fund
• Investment funds that are ultimate parent entities
• Real estate investment vehicles that are ultimate parent entities

Note: Sovereign wealth funds that meet the governmental entity definition are treated as governmental entities and are not regarded as the ultimate parent entity of any group.

Secondary Excluded Entities: 95% and 85% Tests

The rules extend excluded status down the ownership chain, but only on strict conditions. An entity also qualifies as excluded where:

95% test. At least 95% of the value of the entity must be owned, directly or through a chain of excluded entities, by one or more primary excluded entities (other than a pension services entity). The entity must also operate exclusively or almost exclusively to hold assets or invest funds for the benefit of those excluded entities, or carry out only activities that are ancillary to theirs.

85% test. At least 85% of the value of the entity must be owned by one or more primary excluded entities (other than a pension services entity), and substantially all of the entity’s income must consist of excluded dividends or excluded equity gains or losses.

For both tests, value is measured by reference to the total value of ownership interests issued, disregarding unrealised revaluation and impairment movements.

Wholly owned subsidiaries of non-profit organisations can also qualify as excluded entities, subject to the following conditions:

• Ownership condition: The subsidiary must be 100% owned by one or more non-profit organisations
• Group revenue condition: Aggregate group revenue must be below EUR 750 million after excluding the non-profit parent entities and relevant secondary excluded entities
• Revenue percentage condition: The tested entity, together with other non-excluded entities, must generate less than 25% of the group’s consolidated revenue

Permanent establishments generally follow the status of their main entity. Where the main entity is a primary excluded entity, its permanent establishments are automatically treated as excluded.

For a secondary excluded entity, the activities of the permanent establishment are considered together with those of the main entity when applying the relevant activity and income tests.

Five-Year Election for Secondary Excluded Entities

A filing constituent entity, or the Domestic Designated Filing Entity, where one has been appointed, may elect not to treat a secondary excluded entity or a wholly owned non-profit subsidiary as excluded, bringing it in as a taxable constituent entity instead.

The election is made entity by entity and is irrevocable for the election year and the following four fiscal years. It is a genuine planning lever, not an administrative formality, and should be modelled before it is made.

UAE Top-Up Tax Rules for Investment Funds and Investment Entities

This is the area where the UAE’s approach departs most visibly from the OECD model rules, and where the terminology causes the most confusion.

Two different concepts are at work:

Investment funds as excluded entities. An investment fund or a real estate investment vehicle is a primary excluded entity only where it is the ultimate parent entity of the MNE group, that is, where it sits at the very top of the ownership structure and is not itself controlled by another entity. A fund sitting midway through a structure does not qualify on this basis.

Investment entities outside the charging provisions. Separately, investment entities located in the UAE are not subject to the UAE Top-Up Tax. Primary investment entities comprise investment funds, real estate investment vehicles, and insurance investment entities that are not ultimate parent entities.

An insurance investment entity must be established to back liabilities under insurance or annuity contracts and be wholly owned by regulated insurance companies within the same MNE group.

The practical effect is that a regulated fund is carved out whether it sits at the top of the structure (as an excluded entity) or below it (as an investment entity), but the route, the conditions, and the downstream consequences differ.

Secondary investment entities are recognised on tests that mirror the excluded entity rules: at least 95% ownership by one primary investment entity or a chain of them, coupled with the required asset-holding or investment activities; or at least 85% direct ownership by a primary investment entity where substantially all income consists of excluded dividends or excluded equity gains and losses.

See also: Corporate Tax Consultant

Three Important Limits to the Top-Up Tax Carve-Out

Three points are routinely missed.

First, excluded status does not remove revenue from the scope test. The revenue of excluded entities and investment entities still counts towards the EUR 750 million consolidated revenue threshold. A fund structure can be entirely carved out from the charge while being the very reason the group is in scope.

Second, elections can pull investment entity attributes back into the computation. Investment entity profits, losses, taxes, assets, and payroll are ordinarily excluded from the Top-Up Tax calculation, unless the constituent entity owners make a tax transparency election or a taxable distribution method election. The tax transparency election, for instance, is generally available only where the owner is taxed on a fair value or mark-to-market basis at a rate of at least 15%.

Third, structure still has to be disclosed. Excluded entities and investment entities generally have no UAE registration, Top-Up Tax return, or Pillar Two Information Return obligations of their own. But information about their existence and place in the corporate structure must be reported in the group’s Pillar Two Information Return filed by another constituent entity. Being carved out is not the same as being invisible.

FTA Decision No. 12 of 2026: Registration, Deregistration and Notifications

Decision No. 12 of 2026 sets the administrative timetable, effective for fiscal years beginning on or after 1 January 2025.

Top-Up Tax Registration UAE: Deadlines and Requirements

An in-scope entity must submit a Top-Up Tax registration application through EmaraTax within seven months of the end of the first fiscal year in which it falls within scope.

Transitional relief applies: where that fiscal year ends before 30 April 2026, registration is due by 30 November 2026.

Registration is required even where the expected Top-Up Tax liability is nil. The FTA has confirmed that entities relying on the Transitional CbCR Safe Harbour, the Simplified Calculations Safe Harbour, or the de-minimis exclusion must still register, because they remain subject to the charging provisions.

Late registration attracts an administrative penalty of AED 10,000 per entity.

Domestic Designated Filing Entity (DDFE): How It Works

Groups have a choice. Each UAE member can register in its own name under an entity-by-entity approach, or the group can appoint a Domestic Designated Filing Entity (DDFE) to handle registrations, deregistrations, and notifications centrally on behalf of a domestic main group, a minority-owned subgroup, a reverse hybrid entity, or a domestic JV group.

Centralising cuts duplication, but it concentrates responsibility and requires proper authorisation. Critically, it does not dilute exposure: where a DDFE has been appointed and misses a deadline, the AED 10,000 penalty applies for each entity the DDFE failed to register.

Top-Up Tax Deregistration

A deregistration application must be submitted within six months of the earlier of two events: the date the entity ceases to exist, or the end of the fiscal year in which it leaves the MNE group and is no longer within scope of the Top-Up Tax rules. Entities that ceased to exist before 30 June 2026 have until 31 December 2026.

Deregistration is conditional on full compliance. An entity cannot be deregistered until it has settled all Top-Up Tax and penalties due and filed all required Top-Up Tax Returns and Pillar Two Information Returns. Where an eligible entity fails to apply, the FTA may deregister it at its own discretion based on available information.

UAE Top-Up Tax Notifications and the Five-Year Out-of-Scope Period

The Decision also handles groups that move in and out of scope as revenue fluctuates around the EUR 750 million threshold.

An out-of-scope notification is due within six months of the end of the tested fiscal year. It remains valid for that fiscal year and the following four, a five-year out-of-scope period, unless the group re-enters scope sooner.

If the entity becomes subject to Top-Up Tax again while an out-of-scope notification is still valid, it must submit an in-scope notification within seven months of the end of the tested fiscal year.

If the entity remains out of scope for five consecutive fiscal years, deregistration becomes mandatory within six months.

Note that this five-year period is a separate mechanism from the five-year election available for secondary excluded entities, the two are easily confused and serve different purposes.

Also check: Corporate Tax Services in UAE

UAE Corporate Tax vs Top-Up Tax: Different Rules, Different Tests

This is the single most common misconception, and it has real cost attached.

Federal Decree-Law No. 47 of 2022 exempts a defined list of persons from UAE Corporate Tax: government entities, government-controlled entities, extractive and non-extractive natural resource businesses, qualifying public benefit entities, qualifying investment funds, public and private pension and social security funds, and certain wholly owned subsidiaries. Those categories were drafted for domestic Corporate Tax purposes.

The Top-Up Tax uses an entirely different set of definitions drawn from the OECD GloBE rules. A qualifying investment fund under the Corporate Tax Law is not automatically an investment fund or investment entity for Pillar Two purposes, the Pillar Two tests turn on regulation, ownership structure, investor diversification, and the entity’s position in the group.

A qualifying public benefit entity is not automatically a non-profit organisation under Article 1.5. Each status has to be tested separately, on its own terms.

The relationship also runs in the opposite direction. A Qualifying Free Zone Person taxed at 0% on qualifying income is fully within the DMTT if its group meets the threshold.

Far from providing protection, a 0% Corporate Tax rate drives the UAE effective tax rate down and makes a top-up charge more likely. UAE Corporate Tax paid is a covered tax in the Pillar Two calculation, so the less Corporate Tax a group pays, the larger the potential Top-Up Tax.

The practical conclusion: run the Corporate Tax analysis and the Top-Up Tax analysis as two separate exercises, and do not let the outcome of one drive assumptions about the other.

Related: International Tax Advisor in Dubai, UAE

UAE Top-Up Tax Compliance Checklist for 2026

Registration is the visible deadline. The work behind it is the harder part:

• Test the threshold properly: four preceding fiscal years, consolidated revenue, including the revenue of excluded entities and investment entities
• Map every UAE entity, PE, JV, and JV subsidiary, and classify each one: in scope, excluded entity, or investment entity. Document the reasoning, including the 95% and 85% ownership tests where relevant
• Decide on entity-by-entity registration versus a DDFE, factoring in entity count, ownership structure, and how compliance is actually run
• Reconcile the UAE position with the group’s global Pillar Two analysis, so that the UAE QDMTT figures and the group’s GloBE numbers do not diverge
• Model the elections: the five-year election for secondary excluded entities, and the tax transparency and taxable distribution method elections for investment entities
• Build a notification calendar covering registration, deregistration, in-scope and out-of-scope notifications, and restructuring events

The classification questions in particular tend to be finely balanced, and getting them wrong is expensive in both directions, an unnecessary registration is a manageable cost, but an incorrect exclusion carries penalties plus the underlying tax. Entities with structures that sit near the boundaries should take specific professional advice on their own facts rather than relying on general guidance.

Conclusion

The UAE Top-Up Tax framework requires groups to look beyond their UAE Corporate Tax position and assess themselves separately under the Pillar Two rules.

The EUR 750 million consolidated revenue threshold determines whether an MNE Group falls within scope, while the rules on primary and secondary excluded entities, investment funds, and investment entities determine how each UAE entity is treated inside that framework.

For groups in scope, compliance extends well past calculating a liability. Registration, in-scope and out-of-scope notifications, the five-year election, the choice between entity-by-entity filing and a Domestic Designated Filing Entity, and the correct classification of every UAE entity all carry their own deadlines under FTA Decision No. 12 of 2026.

Registration is required even where the expected Top-Up Tax is nil under a safe harbour or the de-minimis exclusion, and late registration carries an administrative penalty of AED 10,000 per entity.

With 30 November 2026 approaching for most groups with a December year-end, businesses should be mapping ownership structures, testing eligibility for exclusions and safe harbours, and confirming who is responsible for registration and reporting.

The central point remains simple: Corporate Tax exemption does not automatically mean Top-Up Tax exclusion. A Qualifying Free Zone Person taxed at 0% is not outside the regime, and a fund exempt under the Corporate Tax Law is not automatically an investment fund or investment entity for Pillar Two purposes.

Each entity and structure must be assessed against the specific Pillar Two definitions, with the reasoning, elections, and compliance obligations documented before the applicable deadlines.

How Farahat & Co. Can Help

Farahat & Co. has advised UAE businesses on audit, tax, and regulatory compliance since 1985. Our international tax team can assess your group against the EUR 750 million threshold, classify your UAE entities as in-scope, excluded, or investment entities, advise on the Domestic Designated Filing Entity decision, model the available elections and safe harbours, and manage your Top-Up Tax registration and notification calendar end to end.

Contact Farahat & Co. today to confirm your group’s position and avoid unnecessary penalties before the 30 November 2026 deadline.

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