Starting 1 January 2025, a global tax reform — more than five years in the making — is becoming operational.
Known as OECD Pillar Two or the Global Anti-Base-Erosion (GloBE) Rules, this framework sets a new global standard: multinational groups with consolidated revenue above € 750 million must ensure that in every country where they operate, their effective tax rate (ETR) is at least 15 %.
If this is not the case, a so-called “top-up tax” will apply — either paid by the parent company (under the Income Inclusion Rule, or IIR) or collected through other entities in the group (under the Under-Taxed Profits Rule, or UTPR).
In other words: the days of 0 % jurisdictions for large international groups are effectively over.
Why was Pillar Two introduced?
The aim is clear — to reduce the use of low- or no-tax jurisdictions and limit aggressive tax planning by large corporate groups. The OECD designed this system to ensure a fairer global tax environment, where profits cannot simply be shifted to avoid taxation.
More than 60 countries — including the entire EU, the UK, Canada, Australia, and Japan — have already adopted these new rules.
In the Gulf region, the UAE is leading the way, introducing a 9 % corporate tax and a Domestic Minimum Top-up Tax (DMTT) that aligns with the OECD’s global standard. Other GCC countries are still in consultation, but this does not protect regional groups from having top-up taxes applied elsewhere if their ETR remains below 15 %.
What will this mean for international businesses?
This is not just another rate increase — it fundamentally changes how corporate profits are taxed globally.
Top-up taxes will now apply wherever effective tax rates fall below 15 % — even in free zones or in jurisdictions previously considered “tax neutral.”
For typical holding structures in the region, early modelling shows an additional tax burden of 3 to 6 percentage pointscompared to the pre-Pillar Two world.
In response, many corporate groups are already taking action:
— relocating intellectual property (IP) and financing entities from zero-tax hubs to the UAE mainland, where a 9 % rate narrows the gap before top-ups apply;
— looking at how the UAE’s new DMTT can help reduce exposure to foreign UTPR charges;
— reassessing mixed-use structures that combine free zone and mainland income, which now need much more detailed tax calculations.
Some transitional carve-outs (such as deductions linked to payroll and depreciation) can soften the impact — but these reliefs will phase out by 2030.
The key concepts to understand
At the heart of Pillar Two is the Effective Tax Rate (ETR) — calculated for each country, based on financial (not tax) accounts.
If the ETR for a jurisdiction is below 15 %, then top-up tax is due.
Countries like the UAE that introduce their own Domestic Minimum Top-up Tax (DMTT) — if it meets OECD standards — can “neutralise” foreign UTPR exposure.
There are also some temporary safe harbours (for the first three years), which offer relief if companies can show high ETRs or low profits. But after 2026, those disappear — and the full rules apply.
What should boards and CFOs be asking?
First and foremost — which entities within the group will now trigger a top-up, and in which jurisdictions? Having a clear entity map, overlaid with local ETRs, is essential.
Second — can existing finance and tax systems generate GloBE-compliant data? Most ERP systems were never built for this level of jurisdiction-by-jurisdiction reporting. Many groups are discovering major gaps and the need for rapid upgrades.
Third — how will intra-group financing and treasury structures be affected? Arrangements that used to lower tax could now attract penalties under UTPR. Treasury models need to be re-tested.
Fourth — where is IP located, and is it still optimally placed? A zero-tax IP hub might now create a significant tax cost under Pillar Two — moving IP into a 9 % UAE structure could be a more sustainable choice.
And finally — what will the 15 % minimum mean for cash flows, dividend policies, leverage ratios, and executive compensation? Many corporate metrics will be impacted — boards need to run scenario planning now, not later.
Why is expert advice essential?
Pillar Two is not “just another tax law” — it requires a whole new layer of tax and financial modelling, and most companies are discovering they are not fully prepared.
Unlike traditional tax returns, this regime is based on consolidated financial data and formula-driven adjustments. Errors in classifying deferred taxes, missing carve-out opportunities, or getting filing wrong can easily result in permanent tax leakage — or even enforcement from multiple jurisdictions.
The compliance burden is also very high — and most finance systems will need upgrades to handle the new reporting. There is not much time: many groups with calendar fiscal years are already under the new rules as of January 2025.
How ERG can help
The International Tax & Structuring team at ERG supports clients with all aspects of the Pillar Two transition:
— running detailed simulations to identify where top-up taxes are likely to arise;
— reviewing IP, treasury, and holding structures to optimise outcomes under the new 15 % floor;
— advising on how the UAE’s DMTT can be used to manage exposure to foreign tax rules;
— integrating new data points into finance systems and compliance processes;
— preparing board-level reports and roadmaps to manage the transition smoothly.
Why acting now is critical
The new global minimum tax is already in force for many groups — and the longer businesses delay, the greater the risk of both tax costs and compliance penalties.
Early preparation is the key to managing both financial impact and operational burden.
For a clear readiness assessment and practical transition plan — contact the ERG team today.
