EVOLUTION OF PILLAR TWO IN THE GCC: DOMESTIC MINIMUM TOP-UP TAX (DMTT)

EVOLUTION OF PILLAR TWO IN THE GCC: DOMESTIC MINIMUM TOP-UP TAX (DMTT)

Alok Chugh, CEO and Managing Partner, Helios Consulting

As global tax reforms reshape the fiscal landscape, GCC nations are stepping up to protect their share of corporate tax revenue. At the heart of this transformation is Pillar Two of the OECD/G20 BEPS 2.0 framework, which enforces a 15% minimum effective tax rate on large multinational enterprises.

To prevent other countries from claiming top-up taxes on low-taxed profits, GCC jurisdictions are introducing the Domestic Minimum Top-Up Tax (DMTT), a powerful tool that ensures profits earned within their borders are taxed locally first.

Pillar Two Implementation: Preserving Taxing Rights in the GCC

GCC countries are adopting Pillar Two to safeguard their taxing rights on locally generated profits and prevent other jurisdictions from imposing top-up taxes. Two key mechanisms define this framework:

Domestic Minimum Top-Up Tax (DMTT): A qualified DMTT gives the local jurisdiction first claim to top-up tax on low-taxed profits, ensuring the effective tax rate reaches the 15% minimum.
Income Inclusion Rule (IIR): This rule allows the ultimate parent entity’s jurisdiction to collect top-up tax but only if the profits haven’t already been taxed under a qualified DMTT. Taxes paid under DMTT reduce IIR liability to zero.

Tax Collection Hierarchy: DMTT Over IIR

When both DMTT and IIR apply, DMTT takes precedence. It acts as a defensive tool, enabling jurisdictions to retain revenue from under-taxed profits and preventing other countries from claiming it under IIR.

Current Status of Implementation within the GCC Bahrain became the first GCC country to enact a Domestic Minimum Top-Up Tax (DMTT) law in 2024, supported by executive regulations and guidance. The law applies to MNEs with global revenues of €750 million or more in at least two of the last four fiscal years.

Key Compliance Features include:

Quarterly advance payments and a year-end DMTT return are required.
Entities qualifying for exclusions (e.g., Safe Harbour, De Minimis, or Initial Phase) are exempt from advance payments.
Payments can be estimated using either the Prior Year or Current Year method.
Each payment is due 60 days after quarter-end, with penalties for late submission.

Bahrain’s early adoption signals its commitment to global tax standards and its intent to retain taxing rights on locally earned profits.

Kuwait introduced its Domestic Minimum Top-Up Tax (DMTT), effective January 1, 2025, with supporting regulations issued in 2025. The law targets MNE groups with global revenues of €750 million or more.

Key Highlights:

In-scope entities must register by September 30, 2025.
The DMTT return is due within 15 months of the fiscal year-end.
The tax is based on the effective tax rate (ETR) and includes safe harbours and transitional rules.
Kuwait has not implemented the Income Inclusion Rule (IIR).

Oman issued Royal Decree effective December 31st, 2024, introducing a 15% minimum tax and a top-up tax mechanism via the Income Inclusion Rule (IIR). While detailed regulations are pending, the decree signals Oman’s alignment with global tax standards.

Scope & Applicability:

Applies to MNE groups with €750 million+ in global revenue in at least two of the last four fiscal years.
Covers both inbound and outbound investments.
Top-up tax is applied through the IIR, with no DMTT introduced yet.

Qatar has taken a comprehensive approach to Pillar Two by implementing both the Domestic Minimum Top-Up Tax (DMTT) and the Income Inclusion Rule (IIR) effective from January 1, 2025.

Key Highlights:

Applies to MNEs with €750 million+ in global revenue in at least two of the last four fiscal years.
Covers all entities, including those in free zones like the Qatar Financial Centre (QFC).
Qatari-headquartered MNEs must apply the IIR to foreign low-taxed subsidiaries.
Includes a penalty regime with transitional relief for fiscal years starting before December 31, 2026.

The United Arab Emirates (UAE) has enacted a Domestic Minimum Top-Up Tax (DMTT) effective January 1, 2025. This supplementary tax applies to MNE groups with €750 million+ in global revenue and aligns with the OECD’s GloBE Model Rules.

Key Features:

Includes safe harbours like the Transitional CbCR and De Minimis exclusions.
DMTT return due within 15 months of fiscal year-end (18 months for the first year).
No implementation of the Income Inclusion Rule (IIR) or Undertaxed Payments Rule (UTPR).

Summary of DMTT Implementation in the GCC

Global Gaps: The U.S. and Saudi Arabia Opt-Out

Saudi Arabia has not yet adopted Pillar Two regulations. With a 20% corporate tax rate on non-Saudi shareholders already above the 15% global minimum, foreign companies operating in the Kingdom are unlikely to face top-up taxes elsewhere.

In January 2025, President Trump issued an executive order withdrawing the United States from the Pillar Two framework. This move created a conflict between the OECD’s global standards with the U.S.’s existing GILTI regime.

To ease tensions, a G7 “side-by-side” deal was reached in June 2025, exempting U.S.-parented companies from the Income Inclusion Rule (IIR) and Undertaxed Payments Rule (UTPR). In exchange, the U.S. agreed to drop retaliatory measures from its domestic tax legislation.

How Should MNEs Chart Their Progress Amidst Fragmented Implementation

To navigate this complex and evolving environment, MNEs should take three key steps:

1. Impact Assessment

Analyse how Pillar Two affects your group’s effective tax rate and liability across GCC jurisdictions.
Focus on country-specific rules, thresholds, and safe harbour provisions.

2. Compliance & Reporting

Prepare for new data collection and filing requirements, including DMTT returns and registration deadlines.
Monitor executive regulations for transitional relief and penalty regimes.

3. Strategic Planning

Reassess corporate structures and intercompany arrangements to align with the new tax landscape.
Minimize compliance risks and ensure consistency with OECD standards.

In Conclusion

The GCC’s adoption of Pillar Two marks a significant shift in regional tax policy. While the framework introduces complexity, it also offers clarity and predictability for MNEs willing to adapt. Proactive planning and localized understanding will be key to thriving in this new era of global taxation.

Disclaimer

This article provides a high-level summary of current legislation based on publicly available information and is subject to change. It is intended for general informational purposes only and does not constitute legal or tax advice. Readers are encouraged to seek professional guidance tailored to their specific circumstances. Helios accepts no liability for any loss arising from reliance on the content herein.