For years, a common design for Gulf groups placed a UAE entity at the top of a structure precisely because it sat outside a corporate tax net, with a European holding beneath it to reach into the single market. The introduction of federal corporate tax in the United Arab Emirates has not made that design wrong, but it has made it something that has to be checked rather than assumed, and a number of structures built on the old premise now carry an exposure their owners have not looked at.
The UAE entity is now a taxpayer
The most basic change is that a UAE company is now within a corporate tax system, with its own rules on what is taxed, what qualifies for relief, and what substance is required to access preferential treatment. A structure that treated the UAE entity as a neutral point at the top of the chain now has a taxable node there, and the flows into and out of it, dividends, interest, service fees, have to be analysed rather than ignored.
The rates are set in Article 3 of Federal Decree-Law No. 47 of 2022 on corporate tax, as amended, which applies to tax periods commencing on or after 1 June 2023. Taxable income is charged at zero per cent up to an amount fixed by Cabinet decision and at nine per cent above it, and Cabinet Resolution No. 116 of 2022 fixes that amount at 375,000 dirhams for the tax period. A qualifying free zone person, which has to meet the conditions of Article 18, is taxed on a different basis: zero per cent on qualifying income and nine per cent on taxable income that is not qualifying income. The practical question for a holding at the top of a group is which of those rules its income falls under, and whether an exemption takes that income out of the base altogether.
What the UAE parent does with a European dividend
Dividends that a Dutch holding pays up to its UAE parent are not simply taxed at nine per cent. Article 22 of the decree-law leaves dividends from a participating interest in a foreign company out of taxable income, and Article 23 defines that interest. It requires an ownership interest of at least five per cent, or an acquisition cost above a threshold where the Minister so prescribes, held or intended to be held for an uninterrupted period of at least twelve months, and a subsidiary that is subject to corporate tax, or to a tax of similar character, at a rate not less than nine per cent. The same article adds an entitlement of at least five per cent of the distributable profits and of the liquidation proceeds, a rule that not more than fifty per cent of the direct and indirect assets of the subsidiary consist of ownership interests or entitlements that would not qualify if held directly, and any further conditions the Minister prescribes.
The rate test is where a Dutch holding needs care, because its own dividend income is often exempt at home under the Dutch participation exemption, although for tax periods commencing on or after 1 January 2025 Article 6 of Ministerial Decision No. 302 of 2024 treats the test as met where the participation is resident for tax purposes throughout the tax period in a country that levies a tax applied on a similar basis to corporate tax at a statutory rate not less than nine per cent, and provides that differences in reductions and reliefs do not prevent a tax from being treated as applied on a similar basis, while Article 6(4) sets out the cases in which a tax is not considered to be of a similar nature to corporate tax. Article 23(3) also addresses that case: a participation is treated as meeting the rate test where its principal objective and activity is acquiring and holding shares that meet the conditions of the article, and its income substantially consists of income from participating interests, read with Article 7 of that decision, which sets further conditions for holding companies. A Dutch holding that also earns other income, or whose own subsidiaries do not qualify, has to be tested on its facts rather than assumed through.
Two further clauses matter in practice. Under Article 23(6)(a) the exemption does not apply insofar as the subsidiary can deduct the distribution under the tax law that applies to it. Under Article 23(10), if the interest of at least five per cent is not held for an uninterrupted twelve months, the income previously left out is brought back into taxable income in the tax period in which the holding falls below five per cent.
Substance requirements now exist on both sides
Previously, the substance conversation was largely a European one, centred on the Dutch holding. Now both ends of the structure face substance expectations, and they have to be coherent with each other. A group cannot claim that genuine management sits in the UAE for one purpose and in the Netherlands for another. The two positions have to tell the same story, and the story has to be true. Our note on Dutch substance requirements sets out the European side.
The tax treaty between the Netherlands and the Emirates already asks that question. Under its Article 4, a company is a UAE resident for treaty purposes if it has its place of effective management in the Emirates. Where a company is resident in both states, the competent authorities are to endeavour to settle its residence by mutual agreement, having regard to its place of effective management, the place where it is incorporated or otherwise constituted and any other relevant factors, and if they cannot, to endeavour to agree how the treaty applies to it. The domestic law now points the same way: under Article 11(3)(b) of the decree-law, a company established abroad that is effectively managed and controlled in the Emirates is a UAE resident. A Dutch holding whose decisions are in fact taken in the Emirates is therefore not only a Dutch substance problem.
The structure did not become wrong. It became something that has to be re-examined against a rule that did not exist when it was built.
Treaty access and the purpose test
A structure that routes European income up to a UAE parent relies on the treaty position and on the arrangements having a genuine business purpose. In a world where the UAE entity is a taxpayer with real functions, that purpose is easier to demonstrate, provided the functions are real. In a world where the UAE entity remains a name on a certificate, the principal purpose test set out in our note on treaty access and beneficial ownership becomes a live risk. The reform has, if anything, rewarded the groups that always had substance and exposed the ones that did not.
Article 10 of the same treaty limits the tax the source state may charge on dividends whose beneficial owner is a resident of the other state. The main purpose clause in paragraph 9 of that article, which the consolidated Dutch text still prints, no longer governs. Both states listed the treaty under the multilateral instrument and notified that paragraph in their deposited positions, the Dutch position and the UAE position, and under Article 7(17)(a) of the multilateral instrument a provision notified by both states is replaced by the principal purpose test of Article 7(1). The synthesised text published by the Netherlands records the replacement, with effect for taxes withheld at source where the event giving rise to them occurs on or after 1 January 2020 and for other taxes for periods beginning on or after 1 March 2020. The test denies any benefit of the treaty in respect of an item of income where it is reasonable to conclude, having regard to all relevant facts and circumstances, that obtaining it was one of the principal purposes of any arrangement or transaction that resulted directly or indirectly in it, unless it is established that granting it in these circumstances would be in accordance with the object and purpose of the relevant provisions. Both states also chose Article 7(4): the competent authority that would otherwise have granted a denied benefit treats the person as entitled to it, or to different benefits with respect to a specific item of income or capital, where, on that person’s request and after considering the facts and circumstances, it determines that such benefits would have been granted in the absence of the arrangement or transaction, and where the request comes from a resident of the other state, it consults the competent authority of that state before rejecting it.
The protocol, which forms an integral part of the treaty, adds a limit that any group relying on a preferential regime at either end should read. Section I provides that the treaty’s benefits do not apply to companies or other persons wholly or partly exempted from tax by a special regime under the laws of either state, nor to income from such companies or other persons derived by a resident of the other state, nor to shares, “jouissance” rights or interests in them, and it extends that to identical or substantially similar legislation, added to or replacing such a regime, enacted after the treaty entered into force, unless the competent authorities decide otherwise by mutual agreement, and to companies or other persons treated in the same or a similar way under administrative practice. It leaves the two competent authorities to decide by mutual agreement which special regime is meant, so whether a given regime falls within the clause is a matter for that agreement and not for the group’s own reading.
Pillar Two for the larger groups
Groups above the global revenue threshold face the additional overlay of the global minimum tax, which interacts with both the UAE and the Netherlands and can produce top-up liabilities that a purely domestic analysis would miss. We deal with this in our note on Pillar Two and the Netherlands. For these groups the UAE reform is one moving part among several, and the structure has to be modelled as a whole rather than jurisdiction by jurisdiction.
On the UAE side, Article 3(3) of the decree-law directs the Cabinet to regulate a top-up tax on multinational enterprises so that their total effective rate is fifteen per cent. The Ministry of Finance states that the UAE domestic minimum top-up tax took effect for financial years starting on or after 1 January 2025, that it reaches constituent entities of groups with annual global revenues of 750 million euros or more in at least two of the four preceding financial years, subject to the exclusions it describes, and that the Emirates have decided, at this stage, not to implement the income inclusion rule. The Dutch Wet minimumbelasting 2024 applies a threshold of 750 million euros in at least two of the four preceding years in its Article 2.1. A group above both thresholds is therefore within the reach of top-up rules at both ends of the structure, subject to their exclusions.
Pricing the flows between the two ends
In a group of this kind, interest, service fees and management charges between the UAE parent and the European companies are transactions between related parties at both ends. Article 34 of the decree-law requires such transactions to meet the arm’s length standard and any conditions prescribed in a decision issued by the tax authority, with the arm’s length result determined by one or a combination of five named methods, or by another method where the taxpayer can demonstrate that none of them can reasonably be applied and that the method used still produces an arm’s length result. Under Article 55, a taxable person whose transactions with related parties and connected persons meet conditions prescribed by the Minister must keep a master file and a local file, and must submit them within thirty days of a request by the tax authority, or by a later date it directs. Under Article 55(4), a taxable person must, on request by the tax authority, provide any information supporting the arm’s length nature of its transactions or arrangements with related parties and connected persons, within thirty days of the request or by a later date the authority directs.
The Dutch side applies the same principle from the other direction. Article 8b of the Wet op de vennootschapsbelasting 1969 determines the profits of related entities as if the conditions independent parties would have agreed had applied, and requires the entities concerned to keep records showing how their transfer prices were set and whether they are on arm’s length terms. A management fee charged by the UAE parent and deducted by the Dutch holding is therefore priced under two laws, and where both documentation duties apply, the two files have to describe the same functions.
What to actually do
The sensible response is neither panic nor inertia. It is a review: map the structure as it stands, identify where the UAE reform creates a new taxable event or a new substance expectation, test the treaty position against the purpose test, and model any Pillar Two exposure. Most structures come through this with adjustments rather than demolition. The ones that do not are the ones that were always fragile, and for them the reform is simply the moment the fragility became visible. Better to see it now, in a review, than later, in an assessment.
Montclare runs a dedicated Middle East desk, structuring the corporate, tax and holding architecture for groups and families entering Europe through the Netherlands. Our services are set out on our services page.
This article is informational and does not constitute tax or legal advice. The treatment of any structure depends on its facts and on the law of each jurisdiction involved. Each engagement is subject to scope and applicable regulation.