Which UAE Entities Fall Outside the Top-up Tax Even Within an In-Scope MNE Group?
Belonging to a Multinational Enterprise Group with consolidated revenue of EUR 750 million or more does not automatically mean every UAE entity in that group owes Top-up Tax. The UAE’s QDMTT Legislation, introduced under Cabinet Decision No. 142 of 2024, carves out two distinct categories that fall outside the charging provision entirely: Excluded Entities and Investment Entities. A UAE entity in either category is not treated as a Constituent Entity for Top-up Tax purposes, even though the wider MNE Group it sits within clears the revenue threshold.
These two categories are not interchangeable, and mixing them up leads to real compliance mistakes. An Excluded Entity is removed from the computation entirely: its profits, losses, taxes accrued, tangible assets, and payroll expenses drop out of every calculation the QDMTT Legislation runs. An Investment Entity is also outside the charging provision, but its financial attributes can still resurface in the calculations of its Constituent Entity owners if those owners make specific elections. Getting the classification right at the entity level, rather than assuming the whole structure is covered by one exemption, is where most of the practical complexity in this part of the regime sits.
Also check: Corporate Tax Services in UAE
The Primary Excluded Entities Under the UAE QDMTT Legislation
Six categories qualify as what the legislation treats as a primary Excluded Entity: a Governmental Entity, an International Organisation, a Non-profit Organisation, a Pension Fund, an Investment Fund that is the Ultimate Parent Entity of its MNE Group, and a Real Estate Investment Vehicle that is the Ultimate Parent Entity of its MNE Group.
| Primary Excluded Entity | Core Qualifying Condition |
|---|---|
| International Organisation | Comprised primarily of governments, holds a headquarters or similar agreement in its jurisdiction, and its income cannot inure to private persons |
| Non-profit Organisation | Established for religious, charitable, scientific, educational or similar purposes, substantially tax-exempt, no private beneficial owners, restricted asset distribution and transfer, no unrelated trade or business |
| Pension Fund | Established exclusively or almost exclusively to administer or provide retirement benefits, either regulated as such or secured through a fiduciary arrangement |
| Investment Fund that is a UPE | Meets the seven-part Investment Fund definition (pooled assets, defined investment policy, regulated management, and more) and is the Ultimate Parent Entity of its MNE Group |
| Real Estate Investment Vehicle that is a UPE | Achieves a single level of taxation, holds predominantly immovable property, is widely held, and is the Ultimate Parent Entity of its MNE Group |
The distinction in the last two rows matters more than it looks. An Investment Fund or Real Estate Investment Vehicle only qualifies as a primary Excluded Entity when it sits at the very top of its own MNE Group as the Ultimate Parent Entity. A fund that is not the UPE, because another entity holds a Controlling Interest over it, does not qualify as an Excluded Entity at all. It falls instead into the separate Investment Entity category, which is covered later in this article and carries a different practical outcome.
A Pension Fund also includes a Pension Services Entity: an entity set up exclusively or almost exclusively to invest funds for a Pension Fund, or to carry out ancillary activities for one within the same Group. This matters because a Pension Services Entity is treated as a primary Excluded Entity in its own right, but any entity that it in turn owns cannot qualify as a secondary Excluded Entity, which is a narrower rule than applies under other primary Excluded Entity categories.
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Secondary Excluded Entities: The 95% and 85% Ownership Tests
Primary Excluded Entities frequently need to operate through subsidiaries for regulatory or commercial reasons, and the QDMTT Legislation extends Excluded Entity status to two categories of subsidiary, provided they meet strict ownership and activity or income conditions.
The first type applies where a primary Excluded Entity (other than a Pension Services Entity) owns at least 95% of the value of a subsidiary, directly or through a chain of Excluded Entities, and that subsidiary either operates exclusively or almost exclusively to hold assets or invest funds for the primary Excluded Entity’s benefit, or only carries out activities that are ancillary to the primary Excluded Entity’s own activities. The 95% threshold is measured against the total value of Ownership Interests issued by the tested entity, not simply the number of shares held, and unrealised fair value or impairment movements on those interests are disregarded until there is an actual change in ownership.
The second type applies at a lower 85% ownership threshold, but adds an income condition in place of the activity test: substantially all of the subsidiary’s income must be Excluded Dividends or Excluded Equity Gains or Losses, meaning income of a kind that is already carved out of the Pillar Two income computation. A subsidiary that holds long-term shareholdings of 10% or more and earns its income mainly from dividends and disposal gains on those holdings, with only an insignificant amount of other income such as bank interest, can meet this test even though it fails the stricter activities requirement used for the 95% category.
| Test | Ownership Threshold | Additional Condition |
|---|---|---|
| First type of secondary Excluded Entity | 95% of value, held by one or more primary Excluded Entities | Holds assets or invests funds for, and/or carries out activities ancillary to, the primary Excluded Entity |
| Second type of secondary Excluded Entity | 85% of value, held by one or more primary Excluded Entities | Substantially all income is Excluded Dividends or Excluded Equity Gains or Losses |
Indirect ownership through a chain of Excluded Entities is measured by multiplying the ownership percentages down the chain, which means the 95% test can fail even where every entity in the chain individually clears 95%. Two consecutive 95% holdings only produce 90.25% indirect ownership at the bottom of the chain, which falls short of the threshold and takes the bottom entity out of secondary Excluded Entity status even though its immediate parent qualifies.
Entities Held Through Investment Funds and Real Estate Investment Vehicles
A separate rule prevents the ownership test from failing purely because the immediate parent is an Investment Fund or Real Estate Investment Vehicle that is not itself part of the same accounting Group. Where a Group Entity is held by an Investment Fund or Real Estate Investment Vehicle that does not consolidate it on a line-by-line basis, and is therefore not a Group Entity in relation to it, the ownership condition for a secondary Excluded Entity is still treated as met. This allows portfolio companies held through a fund structure to reach secondary Excluded Entity status even though the fund above them is not their UPE and does not prepare Consolidated Financial Statements including them.
Investment Funds, REITs and Insurance Investment Entities That Are Not the UPE
An Investment Fund or Real Estate Investment Vehicle that fails to qualify as a primary Excluded Entity, because it is not the Ultimate Parent Entity of its MNE Group, does not simply fall back into the ordinary Constituent Entity charging provision. Instead, it is classified as an Investment Entity, a distinct category that is also outside the QDMTT charging provision, just through a different legal route.
An Investment Entity under the UAE rules covers three situations: an Investment Fund, Real Estate Investment Vehicle, or Insurance Investment Entity in its own right; an entity that is at least 95% owned by one of those and operates almost exclusively to hold assets or invest funds for its benefit; and an entity that is at least 85% owned by one of those, where substantially all of its income is Excluded Dividends or Excluded Equity Gains or Losses. This structure mirrors the Excluded Entity ownership tests closely, but the ownership chain for the 95% category must run entirely through Investment Funds, Real Estate Investment Vehicles or Insurance Investment Entities themselves, and cannot pass through a secondary Investment Entity along the way.
An Insurance Investment Entity is a specific variation built for the insurance sector. It is an entity that would otherwise meet the Investment Fund or Real Estate Investment Vehicle definition, except that it exists to manage assets backing liabilities under an insurance or annuity contract, and it is wholly owned by one or more entities in the same MNE Group that are regulated as insurance companies in their location. Because the entity exists to serve a single insurer or group of insurers rather than pooling money from unconnected outside investors, the ordinary Investment Fund requirement to pool assets from multiple unconnected investors, and the Real Estate Investment Vehicle requirement to be widely held, are both overridden for this category.
Related: Corporate Tax Consultant
Entities Held by a Non-Profit Organisation: A Three-Part Test
A Non-profit Organisation is itself a primary Excluded Entity, but its wholly-owned subsidiaries are not automatically excluded the way a Pension Fund’s or International Organisation’s subsidiaries can be. Instead, a separate three-part test applies, and all three conditions must be satisfied together before a subsidiary of a Non-profit Organisation is treated as an Excluded Entity.
| Condition | What It Requires |
|---|---|
| Ownership condition | 100% of the subsidiary’s value must be owned, directly or indirectly, by one or more Non-profit Organisations |
| Non-Excluded Entities revenue condition | The MNE Group’s consolidated revenue, after stripping out the revenue of the Non-profit Organisation and its own secondary Excluded Entities, must remain under EUR 750 million |
| Percentage of non-Excluded Entity revenue condition | That same stripped-out revenue figure must represent less than 25% of the Group’s total consolidated revenue |
Notably, there is no activity test in this particular exception. A wholly-owned subsidiary of a Non-profit Organisation can be running an ordinary commercial business entirely unrelated to the parent’s charitable purpose and still qualify, provided the ownership condition and the two revenue conditions are all met. This makes the revenue conditions the real gatekeeper: a commercial subsidiary that grows large relative to the rest of the Group, whether in absolute EUR 750 million terms or as a share of total Group revenue, loses the benefit of this rule even while remaining 100% owned by the Non-profit Organisation.
The Five-Year Election to Opt Out of Excluded Entity Status
A Filing Constituent Entity is not obliged to accept Excluded Entity treatment for every entity that qualifies for it. An election is available to treat a secondary Excluded Entity, or an entity that would otherwise qualify under the Non-profit Organisation subsidiary rule, as a normal Constituent Entity instead. Once made, this is a Five-Year Election: it cannot be revoked for the election year or the four Fiscal Years that follow, and if it is later revoked, a fresh election cannot be made for the following four Fiscal Years either.
The election applies entity by entity rather than as a blanket choice across the whole Domestic Group, so a group with two qualifying secondary Excluded Entities can elect to bring one into the charge while leaving the other excluded. Groups typically consider this where treating an entity as excluded would otherwise strip out favourable attributes, such as tangible asset or payroll figures that support a Substance-based Income Exclusion, that the group would rather keep inside its UAE computation.
What Excluded Entity or Investment Entity Status Actually Changes in Practice
Three practical consequences follow once a UAE entity is confirmed as an Excluded Entity or an Investment Entity, and they are worth separating clearly from each other.
First, neither category is subject to the QDMTT charging provision, so no Top-up Tax is calculated or paid at that entity’s level. Second, for an Excluded Entity specifically, its profits, losses, covered taxes, tangible assets and payroll are stripped out of the computations run for the rest of the Group; an Investment Entity’s attributes are not stripped out in the same automatic way, and can still feed into calculations made at the level of its Constituent Entity owners where those owners elect into the Investment Entity Tax Transparency treatment or the Taxable Distribution Method. Third, and easy to overlook, the revenue of both an Excluded Entity and an Investment Entity still counts toward the EUR 750 million consolidated revenue threshold used to decide whether the wider MNE Group is in scope at all, since that threshold is tested using the Ultimate Parent Entity’s Consolidated Financial Statements before any entity-level exclusion is applied.
Neither category carries ongoing administrative obligations under the QDMTT Legislation in its own right. An Excluded Entity or Investment Entity does not need to register separately with the FTA for Top-up Tax purposes, does not file its own Top-up Tax Return, and does not file its own Pillar Two Information Return. A Pillar Two Information Return still needs to be filed for the MNE Group as a whole by another Constituent Entity, and that return must include the overall corporate structure showing every Excluded Entity and Investment Entity in the Group, even though the income, tax, and asset detail of the Excluded Entities themselves is not reported within it.
See also: International Tax Advisor in Dubai, UAE
Why Getting This Classification Right Matters for UAE Group Structures
Misclassifying an entity in either direction carries a real cost. Treating an entity as excluded when it does not actually meet every condition of the relevant test leaves a Top-up Tax liability unassessed and unpaid, which surfaces as an underpayment once reviewed. Treating an entity as an ordinary Constituent Entity when it in fact qualifies as excluded means stripping out favourable attributes unnecessarily and can overstate the Group’s UAE Top-up Tax exposure. Because the ownership and income tests rely on precise, date-specific calculations, such as the value of Ownership Interests measured at the most recent change in holding rather than at year-end fair value, the analysis needs to be revisited whenever a group’s ownership structure changes rather than performed once and left unreviewed.
The Federal Tax Authority’s published guidance sets out the full technical detail behind these tests, including worked examples for the ownership and income calculations, and the Ministry of Finance’s Top-up Tax page provides the underlying policy context for how the UAE’s Domestic Minimum Top-up Tax aligns with the OECD’s GloBE Model Rules. Businesses reviewing their own structures should also refer to the OECD’s own Pillar Two commentary, since the UAE’s Excluded Entity and Investment Entity definitions are built directly on the GloBE Model Rules and the accompanying Commentary.
Frequently Asked Questions (FAQs)
What is the difference between an Excluded Entity and an Investment Entity under UAE Top-up Tax?
Which entities automatically qualify as a primary Excluded Entity?
Can a subsidiary of a primary Excluded Entity also be excluded?
Does an Investment Fund automatically qualify as an Excluded Entity?
Can a wholly-owned subsidiary of a UAE non-profit run a normal commercial business and still be excluded?
Can a UAE group choose not to treat a qualifying entity as an Excluded Entity?
Do Excluded Entities and Investment Entities need to register for Top-up Tax with the FTA?
Need Expert Advice?
Contact the team at Farahat & Co. for professional support and expert insights for businesses operating in the UAE.
How Farahat & Co. Can Help
Farahat & Co. helps UAE entities of multinational groups classify pension funds, non-profit subsidiaries, investment vehicles, and holding structures against the QDMTT Excluded Entity and Investment Entity tests, and works through the Five-Year Election where opting out makes commercial sense.
Contact Farahat & Co. today to discuss your UAE Top-up Tax entity classification requirements.
