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Explicitly Conditional Taxes and the Initial Phase of International Activity Exclusion

A conflict between paragraph 118.5.1 and paragraph 118.51 of the Commentary on Article 10.1, and what it means for the Gulf

On 11 September 2026 the OECD released the Administrative Guidance on the Global Anti-Base Erosion Model Rules (Pillar Two), September 2026, approved and declassified by the Inclusive Framework on BEPS (“IF”) on 2 September 2026.[1] The guidance deals with two matters: Explicitly Conditional Taxes, and the use of a local financial accounting standard under a Qualified Domestic Minimum Top-up Tax (“QDMTT”) where fiscal periods do not match. This study is concerned with the first.

The new provisions on Explicitly Conditional Taxes are drafted in terms wide enough, on their face, to capture the Initial Phase of International Activity exclusion in Article 9.3 of the Cases, Provisions, Conditions, Rules, Controls and Procedures attached to Cabinet Decision No. 142 of 2024 (the “UAE DMTT Rules”). The difficulty is not, however, that the Inclusive Framework has inadvertently caught a provision of its own Model Rules. It is narrower and more awkward than that. The initial phase exclusion does not form part of a QDMTT by default. Paragraph 118.51 of the Commentary on Article 10.1 offers jurisdictions three options, one of which is precisely the conditional design that paragraph 23.1 now describes, and assures them that the status of the QDMTT “will not be affected” whichever option they take. Every Gulf state that has enacted a domestic DMTT took that option. The September package has therefore inserted into the Commentary a general rule which contradicts an assurance given elsewhere in the same Commentary, at the very moment when transitional self-assessment of qualified status is replaced by a full legislative peer review.

What the September 2026 guidance provides

The guidance adds new paragraphs 23.1 to 23.6 after paragraph 23 of the Commentary to Article 4.2 of the Model Rules, and new paragraphs 118.5.1 and 118.5.2 after paragraph 118.5 of the Commentary on Article 10.1.

New paragraph 23.1 provides that a Covered Tax does not include an Explicitly Conditional Tax, and defines such a tax as one which:

  • “applies to a Constituent Entity (or a Joint Venture or member of a JV Group) under the condition that a Qualified IIR or a Qualified UTPR applies in respect of that Constituent Entity … in another jurisdiction and it is not eligible for the SbS Safe Harbour”; or
  • “does not apply to a Constituent Entity (or a Joint Venture or member of a JV Group) under the condition that a Qualified IIR or a Qualified UTPR does not apply in respect of that Constituent Entity … in another jurisdiction or that it is eligible for the SbS Safe Harbour”.

The two limbs are deliberately symmetrical. The guidance is explicit that inclusionary and exclusionary drafting are treated alike. A jurisdiction cannot escape the definition by writing the condition in the negative. Paragraph 23.2 adds that where the condition attaches to a separate, severable levy or surcharge, only that levy is tainted and the generally applicable tax remains a Covered Tax, but that “where a conditional feature is not imposed as a separate, severable levy or surcharge, the tax as a whole is an Explicitly Conditional Tax”.

Paragraph 23.5 confirms that a DMTT, an IIR or a UTPR that is an Explicitly Conditional Tax is likewise not a Covered Tax, and new paragraph 118.5.1 states that “[a] DMTT would not be a QDMTT if it is an Explicitly Conditional Tax”.

The consequences of that conclusion are severe, and they are worth setting out, because the qualified status of a DMTT is not an abstraction for the group or for the local Constituent Entity. Three things follow if a DMTT is not a QDMTT.

  1. The QDMTT Safe Harbour is unavailable. Parent jurisdictions can no longer switch off their own GloBE computation in respect of that jurisdiction, and the group must perform a full computation of GloBE Income, Adjusted Covered Taxes and the Substance-based Income Exclusion for it under the Model Rules.
  2. The tax paid locally is not a Qualified Domestic Minimum Top-up Tax payable, and so does not reduce the Jurisdictional Top-up Tax computed under Article 5.2.3. The amount that would have been collected locally is instead collected by the parent jurisdiction under its Qualified IIR.
  3. Most severely, the local tax is not a Covered Tax at all. Paragraph 23.6 requires an Explicitly Conditional Tax to be excluded from Adjusted Covered Taxes, and provides that it is not part of the Net Taxes Expense adjustment under Article 3.2.1(a) and is not added back in computing GloBE Income. The tax therefore does not raise the jurisdictional Effective Tax Rate either.

Taken together, the Constituent Entity pays the local tax but that payment neither reduces top-up tax elsewhere nor improves the jurisdictional Effective Tax Rate. The same profits are then taxed again in the parent jurisdiction under a Qualified IIR, computed as though the local tax had never been paid. The outcome is economic double taxation of the same income with no mechanism of relief, borne by the group. That is why the drafting point examined below is worth taking seriously notwithstanding that the answer, on any sensible view, ought to be benign.

Only two carve-outs are provided. Paragraph 23.3 states, for the avoidance of doubt, that a tax is not an Explicitly Conditional Tax “solely because it only applies to Constituent Entities of MNE Groups whose consolidated revenues meet a certain threshold”. Paragraph 23.4, together with paragraph 118.5.2, provides a time-limited derogation for taxes whose conditional feature was enacted before 30 November 2024 and which cease to be conditional for Fiscal Years beginning on or after 1 January 2025.[2]

The rationale stated by the Inclusive Framework

Paragraph 7 of the guidance explains the mischief. A conditional tax is one designed to apply only when the MNE Group is subject to the IIR or UTPR in another jurisdiction and is not eligible for the SbS Safe Harbour. Such conditionality, the IF says, “discriminates against a local member of an MNE Group that is subject to the IIR or UTPR in another jurisdiction … by imposing a heavier local tax burden on such a member than on a member of a group that is not subject to the IIR or UTPR”.

Paragraph 8 adds the fiscal objection. The conditionality “enables the local jurisdiction to collect the tax that would otherwise be payable under the IIR or UTPR in another jurisdiction”, while sparing groups with no such exposure. Conditional taxes therefore have “similar characteristics to “soak-up taxes”…”, and their cost is borne largely by IIR and UTPR jurisdictions rather than by the taxpayer, whose additional local liability is broadly offset by a reduction in top-up tax elsewhere.

Paragraph 10 confines the scope of the release: it “deals only with the treatment of Explicitly Conditional Taxes”, with further guidance on other discriminatory features of a tax to be issued by 31 December 2026 and intended to apply prospectively.

The Initial Phase of International Activity exclusion

Article 9.3.1 of the UAE DMTT Rules provides that, notwithstanding Article 5, the Top-up Tax “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”.

Article 9.3.2 defines the initial phase by reference to two quantitative tests:

  1. the MNE Group must have Constituent Entities in no more than six Jurisdictions, and
  2. the sum of the Net Book Values of Tangible Assets of all Constituent Entities located outside the reference Jurisdiction must not exceed EUR 50 million.

Article 9.3.3 identifies the reference Jurisdiction as the one in which the Group has the highest total value of Tangible Assets in the Fiscal Year in which it first meets the Article 1.1.1 threshold.

The provision is not a UAE innovation, but nor is it a simple reproduction of the Model Rules. Article 9.3 of the Model Rules is a charging provision of the UTPR alone. It reduces the Total UTPR Top-up Tax Amount to zero and, as the July 2023 Agreed Administrative Guidance records, “does not impact the application of the IIR”. It is paragraph 118.51 of the Commentary on Article 10.1 that gives jurisdictions three options:

  1. not to adopt Article 9.3 in their QDMTT legislation;
  2. to adopt it “but limited to the cases where none of the Ownership Interests in the Constituent Entities located in the QDMTT jurisdiction are held by a Parent Entity subject to a QIIR”; or
  3. to adopt it without that limitation.

The paragraph then closes with an express assurance: “The status of the QDMTT will not be affected where the jurisdiction adopts any of these three options”.

Article 9.3.1 of the UAE DMTT Rules is the second of those three options. So is the corresponding provision in every other Gulf state that has enacted a DMTT. Bahrain[3], Kuwait[4] and Qatar[5] each condition the exclusion on the absence of a parent entity applying the IIR, in terms that differ in detail but not in substance. Saudi Arabia has not implemented the GloBE Rules, and Oman has legislated by Royal Decree with implementing regulations still pending.

Its presence in the UAE legislation, and across the Gulf, is a consequence of the implementation of the GloBE framework as agreed, not of any unilateral policy choice. It is, more precisely still, the uniform take-up of an option that the Inclusive Framework itself put on the table and warranted as status-neutral.

The overlap

Placed side by side, the fit is exact. Limb (b) of paragraph 23.1 catches a tax which does not apply to a Constituent Entity under the condition that a Qualified IIR does not apply to that Constituent Entity in another jurisdiction. Article 9.3.1 reduces the UAE Top-up Tax to zero on the condition that no UAE Constituent Entity is held by a Parent Entity subject to a Qualified IIR in another Jurisdiction. The trigger is the same, the direction of the condition is the same, and the consequence is the same.

Nor does paragraph 23.2 assist. The initial phase exclusion is not a separate, severable levy or surcharge; it is a feature of the charging provision itself. On the language of paragraph 23.2, that would make “the tax as a whole” an Explicitly Conditional Tax and therefore, by paragraph 118.5.1, not a QDMTT.

Whether the stated rationales distinguish Article 9.3

It is tempting to answer that the two provisions pursue opposite policies: a conditional tax reaches out to capture revenue, whereas the initial phase exclusion gives revenue up. In our view that answer does not survive examination.

Take the discrimination rationale in paragraph 7. Under Article 9.3, a UAE Constituent Entity whose parent is subject to a Qualified IIR abroad bears UAE Top-up Tax; an otherwise identical UAE Constituent Entity whose parent is not so subject bears nothing. That is precisely a heavier local tax burden on the GloBE taxpayer than on the non-GloBE taxpayer, which is the discrimination paragraph 7 describes.

Take the soak-up rationale in paragraph 8. The UAE collects under Article 9.3 in exactly the case in which another jurisdiction would otherwise have collected under the IIR, and does not collect where no such exposure exists. The taxpayer is broadly indifferent, because the UAE liability displaces top-up tax elsewhere; the cost falls on the IIR jurisdiction. That is the soak-up characteristic the IF identifies.

The framing that the exclusion “surrenders revenue” is simply a description of exclusionary drafting, and limb (b) of paragraph 23.1 exists to prevent that framing from working. Both of the IF’s stated rationales are therefore satisfied by a literal application of the new definition to Article 9.3.

The conflict within the Commentary

The result is that two paragraphs of the Commentary on Article 10.1 now point in opposite directions. Paragraph 118.51 tells a jurisdiction that it may adopt the initial phase exclusion in its QDMTT legislation limited to cases where no Parent Entity is subject to a Qualified IIR, and that the status of its QDMTT will not be affected if it does. Paragraph 118.5.1, added by September 2026 Administrative Guidance, tells the same jurisdiction that a DMTT which applies on a conditional basis is not a QDMTT. A design expressly sanctioned by the first paragraph answers exactly to the description in the second.

The ordinary techniques for resolving such a conflict pull in different directions. Paragraph 118.51 is the more specific provision, addressed to Article 9.3 alone, which argues for its survival. Paragraph 118.5.1 is the later provision, and is expressed as a general rule about QDMTT status, which argues for its priority. The September guidance says nothing about the relationship between them, and the Terms of Reference for the full legislative review do not supply a rule of precedence either.

What can be said is that the Inclusive Framework knew how to protect an existing conditional design when it wished to. Paragraphs 23.4 and 118.5.2 do precisely that for conditional taxes enacted before 30 November 2024 which cease to be conditional from 1 January 2025. That derogation does not describe the initial phase exclusion, which is not intended to sunset and which the Gulf legislation applies to Fiscal Years well beyond 2025. The absence of a corresponding saving for paragraph 118.51 is therefore conspicuous rather than obviously inadvertent.

What might still be said for Article 9.3

Two points remain, and both are worth stating carefully because neither appears in the text of the guidance.

The first is coordination rather than design. The initial phase condition is prescribed uniformly by the GloBE framework and applies on identical terms in every implementing jurisdiction. It therefore produces no competitive advantage for any one jurisdiction and no variation in outcome between comparable groups depending on where they happen to have a Constituent Entity. A unilateral conditional DMTT produces both. The distinction is real, but it is a distinction about the authorship of the rule rather than about what the rule does. It is also weaker than it first appears, since paragraph 118.51 offered a third option (adoption without the IIR limitation), which would not have been conditional at all. The Gulf legislatures chose the conditional design when an unconditional one was available to them.

The second is purpose. The IIR condition in Article 9.3 is not there to capture foreign top-up tax. It is there to prevent the relief from being wasted. Without it, relieving the UAE Top-up Tax for a group whose parent is already subject to a Qualified IIR would not benefit the group at all: the relieved amount would simply be collected by the IIR jurisdiction instead. The condition preserves the benefit of the relief for the taxpayer rather than converting it into a transfer between treasuries. The mechanism and the distributive effect nonetheless remain those described in paragraphs 7 and 8 of the September 2026 Guidance.

Neither point is in the text. Both are arguments about what the Inclusive Framework must have meant, advanced against a definition which says something else.

Why the point matters now

Until September 2026 this would have been of limited practical consequence. Qualified status rested on a transitional self-assessment recorded in the Central Record, and no reviewer was required to test a jurisdiction’s legislation against each paragraph of the Commentary.

The same package changed that. The Terms of Reference and Assessment Methodology for the Full Legislative Review, released on 11 September 2026, establish a peer review of implementing legislation against the GloBE Model Rules, the Commentary and the Administrative Guidance, with recommendations where inconsistencies are identified. Jurisdictions whose rules took effect on or before 1 April 2025 have a transitional period of three years within which to initiate that review.

The UAE DMTT holds transitional qualified status and will fall to be reviewed. A reviewer applying the Commentary as it now stands will encounter paragraph 118.5.1 and Article 9.3 of the UAE DMTT Rules in the same exercise. The answer will no doubt be that Article 9.3 is outside the intended scope of the definition; but that answer will have to be reasoned rather than read, and the same question will arise for every jurisdiction that has implemented the initial phase exclusion in its domestic minimum top-up tax. In the Gulf that means Bahrain, Kuwait and Qatar alongside the UAE, each of which will come to review with the same feature in its legislation and the same assurance in paragraph 118.51 to rely on.

Practical example

Assume an MNE Group with a calendar Fiscal Year which first met the Article 1.1.1 threshold before 31 December 2023, has Constituent Entities in five Jurisdictions, and holds Tangible Assets with a Net Book Value of EUR 30 million outside its reference Jurisdiction. Its UPE is located in a jurisdiction which has not implemented an IIR.

The quantitative tests in Article 9.3.2 are met. No UAE Constituent Entity is held by a Parent Entity subject to a Qualified IIR in another Jurisdiction, so the condition in Article 9.3.1 is satisfied. The UAE Top-up Tax is accordingly reduced to zero.

As to duration, Article 9.3.4 provides that the Article does not apply for any Fiscal Year starting later than five years after the first day of the first Fiscal Year in which the Group originally met the Article 1.1.1 threshold, but that for Groups which met that threshold as of 31 December 2023 “the period of five years will start at the time a Qualified UTPR comes into effect”. Since the UTPR applies for Fiscal Years beginning on or after 31 December 2024, the five-year period for such a Group begins with the 2025 Fiscal Year rather than with the year in which it crossed the threshold. The exclusion is therefore available to the Group for Fiscal Years 2025 to 2029.

Two observations follow:

  1. for a UAE-parented Group the condition in Article 9.3.1 is satisfied by construction, since there is no Parent Entity above the Ultimate Parent Entity. The exclusion turns entirely on the two quantitative tests.
  2. the exclusion does not carry the “once out, always out” consequence attaching to the Transitional CbCR Safe Harbour, and does not depend on the existence of a Qualified CbC Report.

For a Group which satisfies Article 9.3.2, it is therefore a more robust basis for a nil result than the transitional safe harbour, and it should be tested first.

Conclusion

The September 2026 Guidance is a necessary and, in its own terms, well-targeted response to jurisdictions designing taxes that switch on only when the GloBE Rules would otherwise bite. Its difficulty is that the definition it introduces is drafted by reference to the trigger rather than to the purpose, and the Inclusive Framework’s own initial phase relief uses the same trigger. The difficulty is compounded by the fact that the Inclusive Framework did not merely permit that trigger but offered it as one of three designs and warranted that it would not affect qualified status.

In our view the correction required is not a new carve-out but a reconciliation. Paragraph 118.5.1 and paragraph 118.51 cannot both stand as drafted, and the Inclusive Framework should say which governs: either paragraph 118.5.1 is subject to the options preserved by paragraph 118.51, or paragraph 118.5.1 is withdrawn and jurisdictions that took the second option are given a transition to the third. The commitment to issue further guidance on discriminatory features by 31 December 2026 is the natural vehicle for saying so.

Until that happens, the four Gulf states that have enacted a domestic minimum top-up tax hold an assurance from the Commentary that the design they adopted is status-neutral, and a general rule in the same Commentary that suggests otherwise. The risk is small in likelihood and disproportionate in consequence, since the loss of qualified status would expose groups to double taxation of the kind described above. It is also entirely avoidable by a single sentence of drafting.

Disclaimer

This study reflects the position as at 16 September 2026 and is based on the Administrative Guidance on the Global Anti-Base Erosion Model Rules (Pillar Two), September 2026, the Terms of Reference and Assessment Methodology for the Full Legislative Review, the Consolidated Commentary (2026), and the Gulf legislation cited in the footnotes. It is general commentary and does not constitute legal or tax advice.

Pursuant to the MoF’s press-release issued on 19 May 2023 “a number of posts circulating on social media and other platforms that are issued by private parties, contain inaccurate and unreliable interpretations and analyses of Corporate Tax”.

The Ministry issued a reminder that official sources of information on Federal Taxes in the UAE are the MoF and FTA only. Therefore, analyses that are not based on official publications by the MoF and FTA, or have not been commissioned by them, are unreliable and may contain misleading interpretations of the law. See the full press release here.

This study has not been commissioned, authorised, or endorsed by the Ministry of Justice, the Federal Supreme Court, or any other judicial authority in the UAE. It is not intended to convey, and should not be understood as conveying, any official position of those authorities. Nor does it purport to suggest that the interpretations, conclusions, or proposals set out in it are binding on the courts or must necessarily be adopted in judicial practice.

You should factor this in when dealing with this article as well. It is not commissioned by the MoF or FTA. The interpretation, conclusions, proposals, surmises, guesswork, etc., it comprises have the status of the author’s opinion only. Furthermore, it is not legal or tax advice. Like any human job, it may contain inaccuracies and mistakes that I have tried my best to avoid. If you find any inaccuracies or errors, please let me know so that I can make corrections.

[1]OECD (2026), Tax Challenges Arising from the Digitalisation of the Economy – Administrative Guidance on the Global Anti-Base Erosion Model Rules (Pillar Two), September 2026: Inclusive Framework on BEPS, OECD/G20 Base Erosion and Profit Shifting Project, OECD, Paris, https://www.oecd.org/content/dam/oecd/en/topics/policy-sub-issues/global-minimum-tax/administrative-guidance-on-the-global-anti-base-erosion-model-rules-pillar-two-september-2026.pdf.

[2] Paragraph 23.4 of the Commentary to Article 4.2 and paragraph 118.5.2 of the Commentary on Article 10.1 in September 2026 Administrative Guidance.

[3] Article 15(A)(3) of Bahrain Decree-Law No. 11 of 2024 requiring that “none of the ownership interests in the Constituent Entities located in the Kingdom are held by a parent entity which applies the Income Inclusion Rule (IIR)”. The mechanics of the tangible asset and jurisdiction counts are elaborated in Article 57 of the Executive Regulations.

[4] Article 16(3) of Kuwait Decree-Law No. 157/2024, and Article 64(3) of the Implementing Regulation issued by Ministerial Decision No. 55/2025. The two texts are not identical: Article 16(3) refers to “a parent entity applying the Income Inclusion Rule (IIR)”, whereas Article 64(3) of the Regulation refers to “an Ultimate Parent Entity that applies an income inclusion rule”. On the Regulation’s wording an intermediate parent entity subject to a Qualified IIR would not defeat the exclusion, which is narrower than the option described in paragraph 118.51 and narrower than the Law it implements.

[5] Article 9.3.1 of the Resolution of the Qatar Council of Ministers No. 2 of 2026. The Qatari drafting differs in two respects. The exclusion is not automatic: the provision states that “the Minister is entitled to issue a decision on reducing the Top-up Tax”, so the relief depends on a further exercise of ministerial discretion. The condition also extends to Stateless Constituent Entities located in the State.