Article 9 - Transition rules

Article 9.1. Tax Attributes Upon Transition

9.1.1 When determining the Effective Tax Rate for the UAE in a Transition Year, and for each subsequent year, the MNE Group shall take into account all of the deferred tax assets and deferred tax liabilities reflected or disclosed in the financial accounts of all of the Constituent Entities in the UAE for the Transition Year. Such deferred tax assets and liabilities must be taken into account at the lower of the Minimum Rate or the applicable domestic tax rate. A deferred tax asset that has been recorded at a rate lower than the Minimum Rate may be taken into account at the Minimum Rate if the taxpayer can demonstrate that the deferred tax asset is attributable to a Pillar Two Loss. For purposes of applying this Article, the impact of any valuation adjustment, or accounting recognition adjustment with respect to a deferred tax asset is disregarded.

9.1.2 Deferred tax assets arising from items excluded from the computation of Pillar Two Income or Loss under Article 3, including those that derive from deductions that are not allowed for accounting purposes, must be excluded from the Article 9.1.1 computation when such deferred tax assets are generated in a transaction that takes place after 30 November 2021.

9.1.3 In the case of a domestic or cross-border transfer of assets between Constituent Entities after 30 November 2021 and before the commencement of a Transition Year, the Pillar Two tax basis in the acquired assets (other than inventory) shall be based upon the disposing Entity’s carrying value of the transferred assets upon disposition with the deferred tax assets and liabilities brought into the application of the Pillar Two Rules determined on that basis.

9.1.4 For purposes of Article 9.1.1:

(a) a deemed deferred tax asset from losses that have not been recognised due to an accounting recognition adjustment or valuation allowance, or because the recognition criteria was not met, may be generated;

(b) the deferred tax assets and deferred tax liabilities shall not be subject to any adjustments under Article 4.4.1(a), (b), (c), or (d), or Article 4.4.4, except for the adjustments referred to in Article 9.1.2;

(c) notwithstanding Article 4.4.1(e), deferred tax assets that derive from a tax credit carry-forward shall be taken into account and their amount shall be equal to the deferred tax assets accrued in the financial accounts if the tax rate used to determine the deferred tax assets is below the Minimum Rate or, in any other case, such deferred tax assets shall be determined in accordance with the following formula:

9.1.5 For purposes of Article 9.1.4(c), the following provisions apply where the tax rate applicable to the Constituent Entity changes in a subsequent Fiscal Year:

(a) the formula must be re-applied to the outstanding balance of the tax credit in the financial accounts to determine the revised deferred tax asset for purposes of this Decision;

(b) the change in the amount of the deferred tax asset resulting from re- application of the formula in Article 9.1.5 shall not be treated as deferred tax expense included in the computation of Adjusted Covered Taxes in the re-application year; and

(c) the deferred tax expense for the re-application year and subsequent years shall be determined by reference to the amount of the reversal of the deferred tax asset after re-application of the formula in Article 9.1.5.

9.1.6 The Transition Year referred to in Article 9.1.3 is the Transition Year of the disposing Constituent Entity. The Transition Year of the disposing Constituent Entity is the first year in which its low-taxed income becomes subject to charge under the Pillar Two Rules irrespective of when other Constituent Entities in the UAE are subject to the Pillar Two Rules.

9.1.7 For purposes of Article 9.1.3, a transfer of assets includes but is not limited to:

(a) any transfer of rights to an item of economic value in which the acquiring Entity creates or increases the carrying value of an asset in its financial accounts and the disposing Entity recognises the corresponding amount of income after 30 November 2021 and before the commencement of a Transition Year;

(b) transfers or deemed transfers of assets within the same Entity;

(c) sale of an asset;

(d) capital leases, which are accounted for in the same or similar manner as a purchase of an asset;

(e) licenses that are effectively treated as a sale for accounting purposes;

(f) transfers of assets through a sale of a Controlling Interest;

(g) prepayment of royalties or rents, where the licensor/lessor records the prepayment as income and the licensee/lessee capitalizes and amortizes the asset in its financial accounts;

(h) total return swaps where the underlying asset is transferred to the financial accounts of the Entity that acquired the rights to income and capital gains generated by an underlying asset;

(i) migration of an Entity/Entities where an MNE Group receives a step-up in the tax basis or carrying value (e.g. based on fair value of assets) of the relocated assets; and

(j) changes to fair value accounting where the Entity records the relevant gains or losses from fair value changes of the underlying asset and corresponding adjustments to the carrying value of the asset.

9.1.8Article 9.1.3 does not apply to a lease, license, or a total return swap where the transacting parties account for the income and corresponding expense items in the same Fiscal Years.

9.1.9 For purposes of Article 9.1.3, the following provisions shall apply for purposes of determining the Pillar Two tax basis in the acquired assets that are transferred between Constituent Entities after 30 November 2021:

(a) the carrying value of the transferred assets may be increased by capitalised expenditures or decreased by amortization or depreciation that arise after the transaction and before the beginning of the Transition Year, in accordance with the accounting standard used in the financial statements used for purposes of determining the Pillar Two Income or Loss;

(b) any increased depreciation or amortization attributable to recording assets at fair value in the financial accounting of the acquiring Entity must be excluded from the computation of the Pillar Two Income or Loss; and

(c) where an acquiring Constituent Entity recorded the asset acquired at fair value in its financial accounts, it may instead use the carrying value of that asset reflected in its financial accounts in all subsequent years if it would otherwise be entitled to take into account a deferred tax asset equal to the Minimum Rate multiplied by the difference in the local tax basis in the asset and the Pillar Two carrying value of the asset determined under Article 9.1.3.

9.1.10 For purposes of Article 9.1.1, any deferred tax asset or liability arising in the financial accounts used for the computation of the Pillar Two Income or Loss as a result of a transaction described in Article 9.1.3 shall be disregarded except where and to the extent that:

(a) a Covered Tax was paid by:

i. the disposing Entity; or

ii. a member of the disposing Entity’s domestic consolidated tax group; and

(b) any deferred tax assets that would have been recognised under Article 9.1.1 by the disposing Constituent Entity with respect to the assets transferred had the transaction in Article 9.1.3 not occurred.

9.1.11 For purposes of the exception in Article 9.1.10:

(a) The MNE Group has the burden of proving:

i. the amount of tax paid in respect of the transaction;

ii. the amount referred to in Article 9.1.10(b); and

iii. the amount of any Covered Taxes that are attributable to the transaction and that would have been allocated to the disposing Entity under Article 4.3;

(b) the deferred tax asset referred to in Article 9.1.10 shall not exceed the Minimum Rate multiplied by the difference in the local tax basis in the asset and the Pillar Two carrying value of the asset determined under Article 9.1.3;

(c) the deferred tax asset referred to in Article 9.1.6 shall not reduce the Adjusted Covered Taxes of a Constituent Entity; and

(d) the deferred tax asset referred to in Article 9.1.6 shall be adjusted annually in proportion to any decrease in the carrying value of the asset for the year.

9.1.12 The following provisions apply where the Top-up Tax applies to Constituent Entities in the UAE in a Fiscal Year that begins on or before the Fiscal Year that a Qualified IIR or Qualified UTPR first become applicable to those Constituent Entities:

(a) the Fiscal Year that the Qualified IIR or Qualified UTPR came into effect for such Constituent Entities will be the new Transition Year and the attributes of those Constituent Entities will be reset in accordance with the other provisions of this Article;

(b) any excess negative tax expense carry-forward under Article 4.1.6 or Article 5.2.6 shall be eliminated at the beginning of the new Transition Year;

(c)Article 4.4.4 shall not apply to any deferred tax liability that was taken into account in computing the Effective Tax Rate under the provisions of the Top-up Tax and that was not recaptured prior to the new Transition Year, but it shall apply to deferred tax liabilities that are taken into account in and after the new Transition Year;

(d) in relation to Article 4.5, any Pillar Two Loss Deferred Tax Asset that arose in a year preceding the new Transition Year must be eliminated and the Filing Constituent Entity may make a new Pillar Two Loss election in the new Transition Year;

(e)Article 9.1.2 shall apply to transactions occurring after 30 November 2021 and before the beginning of the new Transition Year;

(f) where the Top-up Tax was payable due to the application of Article 4.1.5 in respect of a deferred tax asset attributable to a tax loss, such deferred tax asset shall not be treated as arising from items excluded from the computation of Pillar Two Income or Loss under Article 3.

Article 9.2. Transitional relief for the Substance-based Income Exclusion

9.2.1 For the purposes of applying Article 5.3.3, the value of 5% shall be replaced with the value set out in the table set out below for each Fiscal Year beginning in each of the following calendar years:

9.2.2 For the purposes of applying Article 5.3.4, the value of 5% shall be replaced with the value set out in the table set out below for each Fiscal Year beginning in each of the following calendar years:

Article 9.3 Initial Phase of International Activity

9.3.1 Notwithstanding the requirements otherwise provided in Article 5, the Top- up Tax calculated pursuant to this Decision shall be reduced to zero during the initial phase of an MNE Group’s international activity provided that none of the ownership interests of the Constituent Entities located in the UAE are held by a Parent Entity subject to a Qualified IIR in another Jurisdiction.

9.3.2 An MNE Group is in its initial phase of its international activity if, for a Fiscal Year:

(a) it has Constituent Entities in no more than six Jurisdictions; and

(b) the sum of the Net Book Values of Tangible Assets of all Constituent Entities located in all Jurisdictions other than the reference Jurisdiction does not exceed EUR 50 million.

9.3.3 For the purposes of Article 9.3.2, the reference Jurisdiction of an MNE Group is the Jurisdiction where the MNE Group has the highest total value of Tangible Assets for the Fiscal Year in which the MNE Group originally meets the threshold in Article 1.1.1. The total value of Tangible Assets in a Jurisdiction is the sum of the Net Book Values of all Tangible Assets of all the Constituent Entities of the MNE Group that are located in that Jurisdiction.

9.3.4 This Article shall not apply for any Fiscal Year that starts later than five years after the first day of the first Fiscal Year when the MNE Group originally meets the threshold in Article 1.1.1. For MNE Groups that meet the threshold in Article 1.1.1 as of 31 December 2023, the period of five years will start at the time a Qualified UTPR comes into effect.