Article 7 - Tax Neutrality and Distribution Regimes

Article 7.1. Ultimate Parent Entity that is a Flow-through Entity

7.1.1 The Pillar Two Income for a Fiscal Year of a Flow-through Entity that is the Ultimate Parent Entity of an MNE Group shall be reduced by the amount of Pillar Two Income attributable to each Ownership Interest in that Ultimate Parent Entity if:

(a) the holder of the Ownership Interest is subject to tax on such income for a taxable period that ends within 12 months of the end of the Ultimate Parent Entity’s Fiscal Year and:

(i) the holder of the Ownership Interest is subject to tax on the full amount of such income at a nominal rate that equals or exceeds the Minimum Rate; or

(ii) it can be reasonably expected that the aggregate amount of Covered Taxes paid by the Ultimate Parent Entity and other Entities that are part of the Tax Transparent Structure and Taxes of the holder of the Ownership Interest on such income equals or exceeds the amount that results from multiplying the full amount of such income by the Minimum Rate; or

(b) the direct holder is a natural person that:

(i) is a tax resident in the UAE; and

(ii) holds Ownership Interests that, in the aggregate, are a right to 5% or less of the profits and assets of the Ultimate Parent Entity; or

(c) the holder is a Governmental Entity, an International Organisation, a Non-profit Organisation, or a Pension Fund that

(i) is resident in the UAE; and

(ii) holds Ownership Interests that, in the aggregate, are a right to 5% or less of the profits and assets of the Ultimate Parent Entity.

7.1.2 In computing its Pillar Two Loss for a Fiscal Year, a Flow-through Entity that is the Ultimate Parent Entity of an MNE Group shall reduce its Pillar Two Loss for such Fiscal Year by the amount of Pillar Two Loss attributable to each Ownership Interest, except to the extent that the holders of Ownership Interests are not allowed to use the loss in computing their separate taxable income.

7.1.3 A Flow-through Entity that reduces its Pillar Two Income pursuant to Article 7.1.1 shall reduce its Covered Taxes proportionally.

7.1.4Articles 7.1.1 through 7.1.3 shall apply to a Permanent Establishment:

(a) through which a Flow-Through Entity that is the Ultimate Parent Entity of an MNE Group wholly or partly carries out its business; or

(b) through which the business of a Tax Transparent Entity is wholly or partly carried out if the Ultimate Parent Entity’s Ownership Interest in that Tax Transparent Entity is held directly or through a Tax Transparent Structure.

Article 7.2. Ultimate Parent Entity subject to Deductible Dividend Regime

7.2.1 To the extent that a Deductible Dividend Regime is allowed under the Federal Decree-Law No. 47 of 2022, for purposes of computing its Pillar Two Income or Loss for a Fiscal year, an Ultimate Parent Entity that is subject to a Deductible Dividend Regime shall reduce (but not below zero) its Pillar Two Income for such Fiscal Year by the amount that is distributed as a Deductible Dividend within 12 months of the end of the Fiscal Year if:

(a) the dividend is subject to tax in the hands of the dividend recipient for a taxable period that ends within 12 months of the end of the Ultimate Parent Entity’s Fiscal Year, and:

(i) the dividend recipient is subject to tax on such dividend at a nominal rate that equals or exceeds the Minimum Rate;

(ii) it can be reasonably expected that the aggregate amount of Covered Taxes paid by the Ultimate Parent Entity and Taxes paid by the dividend recipient on the dividend income equals or exceeds the amount that results from multiplying the full amount of such income by the Minimum Rate; or

(iii) the dividend recipient is a natural person and the dividend is a patronage dividend from a supply Cooperative; or

(b) the dividend recipient is a natural person that:

(i) is a tax resident in the UAE; and

(ii) holds Ownership Interests that, in the aggregate, are a right to 5% or less of the profits and assets of the Ultimate Parent Entity.

(c) the dividend recipient is resident in the UPE Jurisdiction and is:

(i) a Governmental Entity,

(ii) an International Organisation,

(iii) a Non-profit Organisation or

(iv) a Pension Fund that is not a Pension Services Entity.

7.2.2 An Ultimate Parent Entity that reduces its Pillar Two Income pursuant to Article 7.2.1 shall reduce its Covered Taxes (other than the Taxes for which the dividend deduction was allowed, including taxes that are based on corporate equity or retained earnings) proportionally and shall reduce its Pillar Two Income by the same amount.

7.2.3 If the Ultimate Parent Entity holds an Ownership Interest in another Constituent Entity subject to the Deductible Dividend Regime (directly or through a chain of such Constituent Entities), Articles 7.2.1 and 7.2.2 shall apply to each other Constituent Entity in the UPE Jurisdiction that is subject to the Deductible Dividend Regime to the extent that its Pillar Two Income is further distributed by the Ultimate Parent Entity to recipients that meet the requirements of Article 7.2.1.

7.2.4 Patronage dividends received by a person who is not a natural person from a supply Cooperative are subject to tax to the extent they reduce an expense or cost that is deductible in the computation of the recipient’s taxable income.

Article 7.3. Investment Entity Tax Transparency Election

7.3.1 A Filing Constituent Entity may elect to treat a Constituent Entity that is an Investment Entity as a Tax Transparent Entity if the Constituent Entity-owner located in the UAE is subject to tax under a mark-to-market or similar regime based on the annual changes in the fair value of its Ownership Interest in the Entity and the tax rate applicable to the Constituent Entity-owner with respect to such income equals or exceeds the Minimum Rate. For this purpose, a Constituent Entity that indirectly owns an Ownership Interest in an Investment Entity through a direct Ownership Interest in another Investment Entity is considered to be subject to tax under a mark-to-market or similar regime with respect to the indirect Ownership Interest in the first-mentioned Entity if it is subject to a mark-to-market or similar regime with respect to the direct Ownership Interest in the second-mentioned Entity.

7.3.2 The election under this Article is a Five-Year Election. If the election is revoked, gain or loss from the disposition of an asset or liability held by the Investment Entity shall be determined based on the fair value of the assets or liabilities on the first day of the revocation year.

7.3.3 For purpose of this provision, a Constituent Entity-owner that is a policyholder- owned, regulated mutual insurance company and that owns an Ownership Interest in an Investment Entity is considered to be subject to tax under a mark-to-market or similar regime based on the annual changes in the fair value of its Ownership Interest in the Investment Entity at a rate that equals or exceeds the Minimum Rate.

Article 7.4. Taxable Distribution Method Election

7.4.1 At the election of the Filing Constituent Entity, a Constituent Entity-owner located in the UAE that is not an Investment Entity may apply the Taxable Distribution Method with respect to its Ownership Interest in a Constituent Entity that is an Investment Entity if the Constituent Entity-owner can be reasonably expected to be subject to tax on distributions from the Investment Entity at a tax rate that equals or exceeds the Minimum Rate.

7.4.2 Under the Taxable Distribution Method:

(a) distributions and deemed distributions of the Investment Entity’s Pillar Two Income are included in the Pillar Two Income of the Constituent Entity- owner located in the UAE (other than an Investment Entity) that received the distribution;

(b) the Local Creditable Tax Gross-up is included in the Pillar Two Income and Adjusted Covered Taxes of the Constituent Entity-owner located in the UAE (other than an Investment Entity) that received the distribution; and

(c) the Constituent Entity-owner’s proportionate share of the Investment Entity’s Undistributed Net Pillar Two Income for the Tested Year is treated as Pillar Two Income of the Investment Entity for the Reporting Fiscal Year.

7.4.3 The Undistributed Net Pillar Two Income for a Fiscal Year is the amount of the Investment Entity’s Pillar Two Income, if any, for the Tested Year reduced (but not below zero) by:

(a) any Covered Taxes of the Investment Entity;

(b) distributions and deemed distributions to shareholders other than Constituent Entities that are Investment Entities in the Testing Period;

(c) Pillar Two Losses arising in the Testing Period; and

(d) Investment Loss Carry-forwards.

7.4.4 Undistributed Net Pillar Two Income for the Tested Year cannot be reduced by distributions or deemed distributions to the extent that such distributions were treated as a reduction to Undistributed Net Pillar Two Income of a previous Tested Year. For purposes of computing Undistributed Net Pillar Two Income, a Pillar Two Loss is reduced to the extent it reduced Undistributed Net Pillar Two Income at the end of a previous Fiscal Year. If a Pillar Two Loss for a Fiscal Year is not reduced to zero before the end of the last Tested Period that includes such Fiscal Year, the remainder becomes an Investment Loss Carry- forward and is reduced in the same manner as a Pillar Two Loss in subsequent Fiscal Years.

7.4.5 For purposes of Article 7.4,

(a) the Tested Year is the third year preceding the Reporting Fiscal Year;

(b) the Testing Period is the period beginning with the first day of the Tested Year and ending with the last day of the Reporting Fiscal Year that the Ownership Interest was held by a Group Entity;

(c) a deemed distribution arises when a direct or indirect Ownership Interest in the Investment Entity is transferred to a non-Group Entity and is equal to the proportionate share of the Undistributed Net Pillar Two Income attributable to such Ownership Interest on the date of such transfer (determined without regard to the deemed distribution); and

(d) the Local Creditable Tax Gross-up is the amount of Covered Taxes incurred by the Investment Entity that is allowed as a credit against the Constituent Entity-owner’s tax liability arising in connection with a distribution from the Investment Entity.

7.4.6 The election under this Article is a Five-Year Election. If the election is revoked, Constituent Entity-owner’s proportionate share of the Investment Entity’s Undistributed Net Pillar Two Income for the Tested Year at the end of the Fiscal Year preceding the revocation year is treated as Pillar Two Income of the Investment Entity for the revocation year.

7.4.7 The Investment Entity is not subject to this Decision on the Undistributed Net Pillar Two Income treated as Pillar Two Income.

Article 7.5. Equity Investment Inclusion Election and Qualified Flow-through Tax Benefits

7.5.1 A Filing Constituent Entity may make an Equity Investment Inclusion Election to include in the Pillar Two Income or Loss of a Constituent Entity, the accounting gain, profit, or loss with respect to any:

(a) fair value gains and losses and impairments on that Ownership Interest where the owner:

i. is taxable on a mark-to-market basis or on the impairment, provided that the tax consequences of the mark-to-market movements or impairments on the Ownership Interests are reflected in the income tax expense; or

ii. is taxable on a realization basis and the income tax expense includes deferred tax expense on the mark-to-market movements or impairments on the Ownership Interests;

(b) the profit and loss attributable to that Ownership Interest where the interest is in the Tax Transparent Entity and the owner accounts for the interest using the equity method; and

(c) the dispositions of that Ownership Interest which give rise to gains or losses that are included in the owner’s domestic taxable income, excluding any gain fully offset, and the proportionate share of any gain partially offset, by any deduction or other similar relief particular to the type of gain.

7.5.2 The accounting gain, profit, or loss included in the Pillar Two Income or Loss pursuant to Article 7.5.1 shall be adjusted in accordance with Article 3.2 except for Article 3.2.1(c).

7.5.3 Notwithstanding Article 4.1.3(a) and 4.4.1(a), where an Equity Investment Inclusion Election is made, all current and deferred tax expense or benefits that are derived from the accounting gain, profit, or loss included in the Pillar Two Income or Loss in accordance with Article 7.5.1 shall be included in the computation of Adjusted Covered Taxes subject to the relevant provisions of this Decision.

7.5.4 An owner subject to the Equity Investment Inclusion Election shall not apply Articles 7.5.1, 7.5.2 and 7.5.3 to a Qualified Flow-through Tax Benefit that flows through a Qualified Ownership Interest. Instead, the following provisions shall apply:

(a) the amount of a Qualified Flow-through Tax Benefit will be allowed as a positive amount in the Adjusted Covered Taxes of the direct owner of a Qualified Ownership Interest or an indirect owner of such an interest through a chain of Tax Transparent Entities that are not Constituent Entities of the MNE Group to the extent the Qualified Flow-through Tax Benefit was treated for financial accounting purposes as reducing a tax expense;

(b) the amount of a Qualified Flow-through Tax Benefit is equal to the amount of the tax credit or tax-deductible loss that have flowed through to the owner through a Qualified Ownership Interest to the extent that it reduces the owner’s investment in the Qualified Ownership Interest by:

i. the amount of such tax credit or tax loss:

ii. the amount of any distributions (including a return of capital) to the owner; or

iii. the amount of proceeds from a sale of all or part of the Qualified Ownership Interest.

(c) for the purposes of paragraph (b), a tax deductible loss is equal to the amount of the tax loss multiplied by the statutory rate applicable to the owner;

(d) the provisions of this Article 7.5.4 shall not cause the owner’s investment to be less than zero and accordingly no amount shall be treated as reducing the investment to the extent it would reduce the investment below zero;

(e) where the owner’s investment has been reduced to zero due to the obtention of tax credits or tax deductible losses through a Qualified Ownership Interest, or after receiving distributions (including a return of capital) or proceeds from the sale of all or part of the Qualified Ownership Interest:

i. any subsequent amount of any of tax credits or tax deductible losses obtained by the owner through a Qualified Ownership Interest shall be treated as a negative amount in the owner’s Adjusted Covered Taxes; and

ii. any subsequent amount of any distributions (including a return of capital), proceeds from the sale of all or part of the Qualified Ownership Interest, or Qualified Refundable Tax Credits obtained through the Qualified Ownership Interest shall be treated as a negative amount in the owner’s Adjusted Covered Taxes to the extent of the amount of any Qualified Flow-through Tax Benefit that flowed through the Qualified Ownership Interest and that were treated as a positive amount in the owner’s Adjusted Covered Taxes.

7.5.5 An owner subject to Article 7.5.4 that uses the proportional amortization method to account for its Qualified Ownership Interest for financial accounting purposes shall apply such method for determining the amount of investment that is recovered each year. Owners that do not use the proportional amortization method may irrevocably elect to apply this methodology provided that the election is made in the first Fiscal Year in which they acquire the Qualified Ownership Interest or are subject to Pillar Two Rules.

7.5.6 Where the proportional amortization method is applied in accordance with Article 7.5.5, any tax credit or tax loss that flows through or any distributions (including a return of capital) or proceeds from sales shall be treated as a reduction to the investment in proportion to the expected tax benefits ratio.

7.5.7 The expected tax benefits ratio is the ratio of the tax credits and tax losses that flowed through or are received in the Fiscal Year to the total of such items that are expected to flow through or are received in respect of the Qualified Ownership Interest over the term of the investment.

7.5.8 The amount of tax credits or tax losses that flow through or distributions (including a return of capital) or proceeds from sales received, in respect of the Qualified Ownership Interest, in excess of the reduction to the investment shall not be included as a positive amount in the owner’s Adjusted Covered Taxes.