Impact of Pillar Two on Transfer Pricing in the UAE

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Introduction

With the introduction of the DMTT in the UAE, businesses are now reassessing whether their TP policies, operational substance and intercompany arrangements remain fit for purpose under the new minimum tax framework. As these rules come into effect, MNEs must go beyond demonstrating arm’s length pricing and evaluate how their structures impact jurisdictional ETR outcomes, potential top‑up tax liabilities and the long‑term resilience of their overall tax position.

Pillar Two and the UAE DMTT: A New Tax Reality

The UAE has implemented the global minimum tax through the DMTT, which applies to large MNE groups with consolidated annual revenues of at least EUR 750 million. Effective for fiscal years beginning on or after 1 January 2025, the rules ensure that in‑scope groups reach a minimum 15% ETR on UAE‑generated profits.

The DMTT applies to UAE entities that form part of such MNE groups, including joint ventures and certain stateless or hybrid entities. These provisions broadly mirror the framework established under the OECD GloBE Model Rules and are designed to ensure that the UAE collects any required top‑up tax before another jurisdiction can assert its taxing rights.

Why Transfer Pricing Matters Even More Under Pillar Two

Pillar Two raises the importance of Transfer Pricing because TP drives how profit is booked in each country. These profit levels feed directly into minimum tax calculations, affecting a group’s exposure to top‑up tax in the UAE and globally.

TP affects how much profit each country reports

Pillar Two uses accounting profit as the starting point, and TP determines how income and expenses are split across jurisdictions.
If TP allocates too many costs or too little profit to the UAE, the UAE’s accounting income may drop.
Lower accounting income can increase the risk of a Pillar Two top-up tax for the UAE entity.

TP affects whether a country’s tax rate falls below 15%

TP influences a jurisdiction’s ETR because it determines the profit level on which tax is calculated.
With the UAE’s 9% corporate tax, very low margins created by TP policies can push the ETR below 15%.
Falling below 15% can trigger a Pillar Two or Domestic Minimum Top-Up Tax, making robust, supportable TP margins essential.

TP must reflect real substance in the UAE

Pillar Two offers reliefs linked to payroll and tangible assets, which reduce minimum tax exposure.
Accessing these reliefs requires TP to accurately represent the UAE entity’s real functions, assets, people, and risks.
If TP misstates the UAE’s role, the company may lose substance-based benefits and face higher top-up taxes.

Documentation and Compliance Requirements Under Pillar Two

Enhanced TP documentation: Groups should expect to supplement standard Master File and Local File documentation with analyses relevant to Pillar Two, including demonstrating how TP outcomes affect jurisdictional ETR calculations.
Alignment across financial reporting, tax accounting and TP: Pillar Two relies heavily on accounting results, making consistent treatment across financial accounts, tax filings and TP analyses critical for accurate minimum tax compliance.
New disclosures and administrative obligations: The DMTT introduces additional domestic reporting requirements and may necessitate the appointment of a designated filing entity. Businesses must prepare for enhanced data collection, monitoring and reconciliation across all UAE entities.

Strategic Considerations for UAE-Based MNE Groups

Updating TP models: MNEs should review and recalibrate TP policies to ensure sustainable levels of local profitability and minimise ongoing top-up tax exposure.
Running ETR forecasts and scenario modelling: Forward-looking modelling enables businesses to assess how pricing structures, functional reorganisations or operational changes impact minimum tax obligations.
Considering supply chain or functional realignments: Groups may re-evaluate the location of key functions or assets to balance operational efficiency with tax sustainability under Pillar Two.
Strengthening governance and real-time data capabilities: Effective Pillar Two compliance requires robust systems for collecting, validating and reporting financial and tax data across the group.

Conclusion

Pillar Two represents a major shift for MNEs operating in the UAE. While TP rules remain rooted in the arm’s length principle, their growing influence on minimum tax outcomes means they now play a central role in determining a group’s effective tax rate.

MNEs must ensure their TP policies, documentation and operational substance support both TP compliance and the requirements of the UAE’s DMTT. A proactive and integrated approach—combining TP, tax accounting, financial reporting and operational strategy—will be essential to navigate this evolving landscape successfully.