GTL Summary:

Article 4 defines Adjusted Covered Taxes, essential for calculating the Effective Tax Rate. It details additions and reductions to current tax expenses, including adjustments for uncertain tax positions and qualified tax credits. The article introduces mechanisms for temporary differences through deferred tax adjustments and the Pillar Two Loss Election, which allows for the creation of deferred tax assets from losses. It also addresses the allocation of taxes between entities (e.g., CFC taxes and PE taxes) and provides rules for post-filing adjustments and the impact of domestic tax rate changes.

Document Type: CD - Cabinet Decision
Law: DMTT (FDL No 60 of 2023)
Decision Number: cabinet-decision-142-article-4
Year: 2024
Country: 🇦🇪 UAE
Official Name: Article 4 - Computation of Adjusted Covered Taxes
Last updated at: 2026-03-23 15:38:05 UTC

Article 4 - Computation of Adjusted Covered Taxes

Article 4.1. Adjusted Covered Taxes

4.1.1 The Adjusted Covered Taxes of a Constituent Entity for the Fiscal Year shall be equal to the current tax expense accrued in its Financial Accounting Net Income or Loss with respect to Covered Taxes for the Fiscal Year adjusted by:

(a) the net amount of its Additions to Covered Taxes for the Fiscal Year (as determined under Article 4.1.2) and Reductions to Covered Taxes for the Fiscal Year (as determined under Article 4.1.3);

(b) the Total Deferred Tax Adjustment Amount (as determined under Article 4.4); and

(c) any increase or decrease in Covered Taxes recorded in equity or Other Comprehensive Income relating to amounts included in the computation of Pillar Two Income or Loss that will be subject to tax under local tax rules.

4.1.2 The Additions to Covered Taxes of a Constituent Entity for the Fiscal Year is the sum of:

(a) any amount of Covered Taxes accrued as an expense in the profit before taxation in the financial accounts;

(b) any amount of Pillar Two Loss Deferred Tax Asset used under Article 4.5.3;

(c) any amount of Covered Taxes that is paid in the Fiscal Year and that relates to an uncertain tax position where that amount has been treated for a previous Fiscal Year as a Reduction to Covered Taxes under Article 4.1.3(d); and

(d) any amount of credit, refund or the transferable amount in respect of a Qualified Refundable Tax Credit or of a Marketable Transferable Tax Credit that is recorded as a reduction to the current tax expense.

4.1.3 The Reductions to Covered Taxes of a Constituent Entity for the Fiscal Year is the sum of:

(a) the amount of current tax expense with respect to income excluded from the computation of Pillar Two Income or Loss under Article 3;

(b) any amount of credit, refund or the transferable amount in respect of a tax credit that is not recorded as a reduction to the current tax expense and that is not derived from a Qualified Refundable Tax Credit or Marketable Transferable Tax Credit;

(c) any amount of Covered Taxes refunded or credited to a Constituent Entity, or the amount received by the Constituent Entity for the transfer of a tax credit, that was not treated as an adjustment to current tax expense in the financial accounts, except where they are derived from a Qualified Refundable Tax Credit or a Marketable Transferable Tax Credit;

(d) the amount of current tax expense which relates to an uncertain tax position; and

(e) any amount of current tax expense that is not expected to be paid within three years of the last day of the Fiscal Year.

4.1.4 No amount of Covered Taxes may be taken into account more than once.

4.1.5 In a Fiscal Year in which there is no Net Pillar Two Income in the UAE, if the Adjusted Covered Taxes for the UAE are less than zero and less than the Expected Adjusted Covered Taxes Amount, the Constituent Entities located in the UAE shall be treated as having Additional Current Top-up Tax in the UAE under Article 5.4 arising in the current Fiscal Year equal to the difference between these amounts. The Expected Adjusted Covered Taxes Amount is equal to the Pillar Two Income or Loss for the UAE multiplied by the Minimum Rate.

4.1.6 A Filing Constituent Entity may make an Annual Election to substitute the Additional Current Top-up Tax referred to in Article 4.1.5 with an excess negative tax expense carry-forward in accordance with the following:

(a) the excess negative tax expense for a Fiscal Year shall be equal to the amount computed under Article 4.1.5 for that Fiscal Year;

(b) the excess negative tax expense carry-forward must be utilised in all relevant subsequent computations of the Jurisdictional Effective Tax Rate;

(c) in each subsequent Fiscal Year in which there are positive Pillar Two Income and Adjusted Covered Taxes in the UAE, the aggregate Adjusted Covered Taxes shall be reduced (but not below zero) by the remaining balance of the excess negative tax expense carry-forward and the balance of such carry- forward shall be reduced by the same amount;

(d) the excess negative tax expense attributable to an amount of a loss that is carried back and applied against income for prior taxable years for domestic tax purposes must be taken into account in the current Fiscal Year under Article 4.1.5 and cannot be included in the excess negative tax expense carry- forward;

(e) the negative amount of Adjusted Covered Taxes will not be less than the Expected Covered Taxes Amount under Article 4.1.5;

(f) the excess negative tax expense carry-forward shall remain an attribute of a transferor group where the MNE Group disposes of one or more Constituent Entities in the UAE;

(g) where the MNE Group disposes of all Constituent Entities located in the UAE and re-acquires or establishes Constituent Entities located in the UAE in a subsequent Fiscal Year, the balance of the excess negative tax expense carry- forward shall be taken into account in determining the Adjusted Covered Taxes for the UAE beginning with such Fiscal Year; and

(h) the MNE Group shall maintain a record of the outstanding balance of the excess negative tax expense carry-forward.

Article 4.2. Definition of Covered Taxes

4.2.1 Covered Taxes means:

(a) Taxes recorded in the financial accounts of a Constituent Entity with respect to its income or profits or its share of the income or profits of a Constituent Entity in which it owns an Ownership Interest;

(b) Taxes imposed in lieu of a generally applicable corporate income tax; and

(c) Taxes levied by reference to retained earnings and corporate equity, including a Tax on multiple components based on income and equity.

4.2.2 Covered Taxes does not include any amount of:

(a) Top-up Tax accrued by a Parent Entity under a Qualified IIR in another Jurisdiction;

(b) Top-up Tax accrued by a Constituent Entity under a Qualified Domestic Minimum Top-up Tax in another Jurisdiction;

(c) Taxes attributable to an adjustment made by a Constituent Entity as a result of the application of a Qualified UTPR in another Jurisdiction;

(d) A Disqualified Refundable Imputation Tax;

(e) Taxes paid by an insurance company in respect of returns to policyholders.

Article 4.3. Allocation of Covered Taxes from one Constituent Entity to another Constituent Entity

4.3.1Article 4.3.2 applies to the allocation of Covered Taxes in respect of Permanent Establishments, Tax Transparent Entities and Hybrid Entities as well as the allocation of CFC taxes and taxes on distributions from one Constituent Entity to another.

4.3.2 The following provisions apply with respect to Covered Taxes allocated from one Constituent Entity to another Constituent Entity:

(a) in relation to Covered Taxes on income attributable to a Permanent Establishment:

i. no amount of Covered Taxes included in the financial accounts of a Main Entity located outside the UAE and charged by another Jurisdiction shall be allocated to a Permanent Establishment located in the UAE; and

ii. no amount of Covered Taxes included in the financial accounts of a Main Entity located in the UAE allocable to a Permanent Establishment located outside the UAE in accordance with Article 4.3.2(a) of the Pillar Two Model Rules shall be allocated to the Main Entity;

(b) the amount of any Covered Taxes included in the financial accounts of a Tax Transparent Entity with respect to Pillar Two Income or Loss allocated to a Constituent Entity-owner pursuant to Article 3.5.1(b) is allocated to that Constituent Entity-owner;

(c) in the case of Covered Taxes that arise from a Controlled Foreign Company Tax Regime, no amount of Covered Taxes included in the financial accounts of a Constituent Entity-owner located outside the UAE shall be allocated to a Constituent Entity located in the UAE;

(d) in the case of a Constituent Entity that is a Hybrid Entity located in the UAE, no amount of Covered Taxes included in the financial accounts of a Constituent Entity-owner located outside the UAE on income of such Hybrid Entity shall be allocated to the Hybrid Entity located in the UAE; and

(e) no amount of Covered Taxes payable outside the UAE on distributions and deemed distributions made by a Constituent Entity located in the UAE to a Constituent Entity-owner located outside the UAE shall be allocated to the distributing Constituent Entity located in the UAE. For purposes of this paragraph, a deemed distributions refers to situations where the underlying interest is treated as an equity interest for tax purposes in the Jurisdiction imposing the tax and for financial accounting purposes.

4.3.3 In relation to Articles 4.3.2(c) and (d) of the Pillar Two Model Rules, an amount of Covered Taxes on Passive Income may be allocated to the Constituent Entity-owner located in the UAE in accordance with the following provisions:

(a) an amount of Covered Taxes, reflected in the financial statements of the direct or indirect Constituent Entity-owner, on their share of the income of the Constituent Entity located outside the UAE that is a controlled foreign company or a Hybrid Entity shall be determined as if it was allocated to the last-mentioned Entity;

(b) in respect of Passive Income, the amount referred in paragraph (a) shall be equal to the lesser of:

i. the amount of Covered Taxes referred in paragraph (a); or

ii. the Top-up Tax Percentage for the Constituent Entity’s Jurisdiction, determined without regard to the amount referred in paragraph (a), multiplied by the amount of the Constituent Entity’s Passive Income includible under a Controlled Foreign Company Tax Regime or fiscal transparency rule in the UAE;

(c) the amount of Covered Taxes that may be allocated to the direct or indirect Constituent Entity-owner located in the UAE is equal to the amount determined in accordance with paragraph (a) after subtracting that same amount after considering the limitation in paragraph (b).

4.3.4 Where the Pillar Two Income of a Permanent Establishment is treated as Pillar Two Income of the Main Entity pursuant to Article 3.4.5, any Covered Taxes arising in the location of the Permanent Establishment and associated with such income are treated as Covered Taxes of the Main Entity up to an amount not exceeding such income multiplied by the highest corporate tax rate on ordinary income in the Jurisdiction where the Main Entity is located.

Article 4.4. Mechanism to address temporary differences

4.4.1 The Total Deferred Tax Adjustment Amount for a Constituent Entity for the Fiscal Year is equal to the deferred tax expense accrued in its Financial Accounting Net Income or Loss if the applicable tax rate is below the Minimum Rate or, in any other case, such deferred tax expense recast at the Minimum Rate, with respect to Covered Taxes for the Fiscal Year subject to the adjustments set forth in Articles 4.4.2 and 4.4.3 and the following exclusions:

(a) The amount of deferred tax expense with respect to items excluded from the computation of Pillar Two Income or Loss under Article 3;

(b) The amount of deferred tax expense with respect to Disallowed Accruals and Unclaimed Accruals;

(c) The impact of a valuation adjustment or accounting recognition adjustment with respect to a deferred tax asset;

(d) The amount of deferred tax expense arising from a re-measurement with respect to a change in the applicable domestic tax rate; and

(e) The amount of deferred tax expense with respect to the generation and use of tax credits.

4.4.2 The Total Deferred Tax Adjustment Amount is adjusted as follows:

(a) Increased by the amount of any Unclaimed Accrual paid during the Fiscal Year;

(b) Increased by the amount of any Recaptured Deferred Tax Liability determined in a preceding Fiscal Year which has been paid during the Fiscal Year; and

(c) Reduced by the amount that would be a reduction to the Total Deferred Tax Adjustment Amount due to recognition of a loss deferred tax asset for a current year tax loss, where a loss deferred tax asset has not been recognised because the recognition criteria are not met.

4.4.3 If the taxpayer can demonstrate that a deferred tax asset recorded at a rate lower than the Minimum Rate is attributable to a Pillar Two Loss, such deferred tax asset may be recast at the Minimum Rate in the Fiscal Year in which the Pillar Two Loss was incurred. The Total Deferred Tax Adjustment Amount is reduced by the amount that a deferred tax asset is increased due to being recast under this Article.

4.4.4 To the extent a deferred tax liability, that is not a Recapture Exception Accrual, is taken into account under this Article and such amount is not paid within the five subsequent Fiscal Years, the amount must be recaptured pursuant to this Article. The amount of the Recaptured Deferred Tax Liability determined for the current Fiscal Year shall be treated as a reduction to Covered Taxes in the fifth preceding Fiscal Year and the Effective Tax Rate and Top-up Tax of such Fiscal Year shall be recalculated under the rules of Article 5.4.1. The Recaptured Deferred Tax Liability for the current Fiscal Year is the amount of the increase in a category of deferred tax liability that was included in the Total Deferred Tax Adjustment Amount in the fifth preceding Fiscal Year that has not reversed by the end of the last day of the current Fiscal Year, unless such amount relates to a Recapture Exception Accrual as set forth in Article 4.4.5.

4.4.5 Recapture Exception Accrual means the tax expense accrued attributable to changes in associated deferred tax liabilities, in respect of:

(a) Cost recovery allowances on tangible assets

(b) The cost of a licence or similar arrangement from the government for the use of immovable property or exploitation of natural resources that entails significant investment in tangible assets;

(c) Research and development expenses;

(d) De-commissioning and remediation expenses;

(e) Fair value accounting on unrealised net gains;

(f) Foreign currency exchange net gains;

(g) Insurance reserves and insurance policy deferred acquisition costs;

(h) Gains from the sale of tangible property located in the UAE that are reinvested in tangible property in the UAE; and

(i) Additional amounts accrued as a result of accounting principle changes with respect to categories (a) through (h).

4.4.6 Disallowed Accrual means:

(a) Any movement in deferred tax expense accrued in the financial accounts of a Constituent Entity which relates to an uncertain tax position; and

(b) Any movement in deferred tax expense accrued in the financial accounts of a Constituent Entity which relates to distributions from a Constituent Entity.

4.4.7 Unclaimed Accrual means any increase in a deferred tax liability recorded in the financial accounts of a Constituent Entity for a Fiscal Year that is not expected to be paid within the time period set forth in Article 4.4.4 and for which the Filing Constituent Entity makes an Annual Election not to include in Total Deferred Tax Adjustment Amount for such Fiscal Year.

4.4.8Article 4.4.1(e) shall not apply to foreign tax credits that give rise to Substitute Loss Carry-forward Deferred Tax Assets to the extent that such foreign tax credits are used to offset tax liability on income included in the Constituent Entity’s Pillar Two Income or Loss. The amount of a Substitute Loss Carry- forward Deferred Tax Asset is equal to the lesser of:

(a) the amount of the foreign tax credit in respect of the foreign source income inclusion that the domestic tax regime allows to be carried forward from the year in which the Constituent Entity had a tax loss (before taking into account any foreign source income) to a subsequent year; and

(b) the amount of the Constituent Entity’s tax loss for the tax year (before taking into account any foreign source income) multiplied by the applicable domestic tax rate.

Article 4.5. The Pillar Two Loss Election

4.5.1 In lieu of applying the rules set forth in Article 4.4, a Filing Constituent Entity may make a Pillar Two Loss Election for the UAE. When a Pillar Two Loss Election is made for the UAE, a Pillar Two Loss Deferred Tax Asset is established in each Fiscal Year in which there is a Net Pillar Two Loss for the UAE. The Pillar Two Loss Deferred Tax Asset is equal to the Net Pillar Two Loss in a Fiscal Year for the UAE multiplied by the Minimum Rate.

4.5.2 The balance of the Pillar Two Loss Deferred Tax Asset is carried forward to subsequent Fiscal Years, reduced by the amount of Pillar Two Loss Deferred Tax Asset used in a Fiscal Year.

4.5.3 The Pillar Two Loss Deferred Tax Asset must be used in any subsequent Fiscal Year in which there is Net Pillar Two Income in the UAE in an amount equal to the lower of the Net Pillar Two Income multiplied by the Minimum Rate or the amount of available Pillar Two Loss Deferred Tax Asset.

4.5.4 If the Pillar Two Loss Election is subsequently revoked, any remaining Pillar Two Loss Deferred Tax Asset is reduced to zero, effective as of the first day of the first Fiscal Year in which the Pillar Two Loss Election is no longer applicable. Subsequently, the deferred tax assets and liabilities for each Constituent Entity in the UAE, if any, will be taken into account as if they had been calculated under Articles 4.4 and 9.1 for the prior Fiscal Year.

4.5.5 The Pillar Two Loss Election must be filed with the first Pillar Two Information Return of the MNE Group or with the first Top-up Tax Return of the MNE Group, whichever is filed earlier, or with both if they are required to be submitted for the first Fiscal Year in which the MNE Group has a Constituent Entity located in the Jurisdiction.

4.5.6 A Flow-through Entity that is a UPE of an MNE Group may make a Pillar Two Loss Election under this Article. When such an election is made, the Pillar Two Loss Deferred Tax Asset shall be calculated in accordance with Articles 4.5.1 to 4.5.5, however, the Pillar Two Loss Deferred Tax Asset shall be calculated with reference to the Pillar Two Loss of the Flow-through Entity after reduction in accordance with Article 7.1.2.

Article 4.6. Post-filing Adjustments and Tax Rate Changes

4.6.1 An adjustment to a Constituent Entity’s liability for Covered Taxes for a previous Fiscal Year, including one that derives from a loss carried-back, recorded in the financial accounts shall be treated as an adjustment to Covered Taxes in the Fiscal Year in which the adjustment is made, unless the adjustment relates to a Fiscal Year in which there is a decrease in Covered Taxes for the UAE. In the case of a decrease in Covered Taxes included in the Constituent Entity’s Adjusted Covered Taxes for a previous Fiscal Year, the Effective Tax Rate and Top-up Tax for such Fiscal Year must be recalculated under Article 5.4.1. In the Article 5.4.1 recalculations, the Adjusted Covered Taxes determined for the Fiscal Year shall be reduced by the amount of the decrease in Covered Taxes and Pillar Two Income determined for the Fiscal Year and any intervening Fiscal Years shall be adjusted as necessary and appropriate. A Filing Constituent Entity may make an Annual Election to treat an immaterial decrease in Covered Taxes as an adjustment to Covered Taxes in the Fiscal Year in which the adjustment is made. An immaterial decrease in Covered Taxes is an aggregate decrease of less than EUR 1 million in the Adjusted Covered Taxes determined for the UAE for a Fiscal Year.

4.6.2 The amount of deferred tax expense resulting from a reduction to the applicable domestic tax rate shall be treated as an adjustment under Article 4.6.1 to a Constituent Entity’s liability for Covered Taxes claimed under Article 4.1 for a previous Fiscal Year when such reduction results in the application of a rate that is less than the Minimum Rate.

4.6.3 The amount of deferred tax expense, when paid, that has resulted from an increase to the applicable domestic tax rate shall be treated as an adjustment under Article 4.6.1 to a Constituent Entity’s liability for Covered Taxes claimed under Article 4.1 for a previous Fiscal Year when such amount was originally recorded at a rate less than the Minimum Rate. This adjustment is limited to an amount that is equal to an increase of deferred tax expense up to such deferred tax expense recast at the Minimum Rate.

4.6.4 If more than EUR 1 million of the amount accrued by a Constituent Entity as current tax expense and included in Adjusted Covered Taxes for a Fiscal Year is not paid within three years of the last day of such year, the Effective Tax Rate and Top-up Tax for the Fiscal Year in which the unpaid amount was claimed as a Covered Tax must be recalculated in accordance with Article 5.4.1 by excluding such unpaid amount from Adjusted Covered Taxes.

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