How pillar two is accelerating the shift from tax incentives to sustainable investment growth?

For decades, Gulf Cooperation Council (GCC) countries have successfully attracted foreign investment through a combination of strategic location, world-class infrastructure, business-friendly regulations, and attractive tax incentives.

Today, the global investment landscape is entering a new phase.

The implementation of the OECD’s Pillar Two rules and the 15% Global Minimum Tax is changing how multinational enterprises evaluate investment destinations, while tax efficiency remains important, investors are increasingly focused on economic substance, innovation capacity, digital infrastructure, talent availability, and long-term business sustainability.

Rather than reducing the GCC’s attractiveness, this shift presents an opportunity for the region to strengthen its position as a global investment hub built on real economic value creation.

➜ What Is Changing?

Historically, many investment incentives around the world relied on reduced tax rates, tax holidays, or other forms of tax relief.

Under Pillar Two, multinational groups with annual consolidated revenues exceeding €750 million may become subject to additional taxation when profits are taxed below the global minimum threshold.

As a result, tax incentives based solely on reducing effective tax rates may deliver less value for certain multinational groups than they did in the past.

This does not mean incentives are disappearing.

Instead, governments are redesigning incentive frameworks to encourage genuine business activity, innovation, job creation, and long-term investment.

The focus is shifting from:

➜ Tax Reduction

to

➜ Economic Substance

➜ A New Era of Competitiveness

The most competitive investment destinations in the coming decade are unlikely to be those offering the lowest tax rates.

Instead, investors are expected to prioritize jurisdictions that provide:

➜ Regulatory certainty

➜ Highly skilled talent

➜ Advanced digital infrastructure

➜ Strong logistics networks

➜ Access to regional and international markets

➜ Research and innovation ecosystems

➜ Sustainable and ESG-focused investment opportunities

The GCC has already invested heavily in many of these areas, positioning the region favorably for the next phase of global investment competition.

➜ How GCC Countries Are Adapting

United Arab Emirates

The UAE continues to strengthen its position as a leading investment destination through regulatory modernization, digital transformation initiatives, foreign ownership reforms, advanced infrastructure, and innovation-focused economic policies.

Recent investment trends show growing foreign investment in digital technologies, renewable energy, research and development, cloud computing, artificial intelligence, and data centre infrastructure, reinforcing the country's role as a regional innovation hub.

Saudi Arabia

Saudi Arabia is leveraging Vision 2030 to attract large-scale investment into manufacturing, infrastructure, technology, tourism, and regional headquarters operations.

The Kingdom's strategy increasingly focuses on attracting substantive business operations, regional decision-making functions, and strategic sector investments rather than relying solely on tax considerations.

Qatar

Qatar continues to build on its strengths in infrastructure, financial services, and international connectivity while pursuing long-term economic diversification and innovation-led growth strategies.

Bahrain, Kuwait & Oman

These jurisdictions are also evolving their investment frameworks to remain competitive within the new international tax environment, with increasing emphasis on investment quality, economic diversification, and sustainable growth.

➜ Why Free Zones Still Matter

One of the most common misconceptions surrounding Pillar Two is that free zones will lose their relevance.

In reality, the strongest free zones have never been defined solely by tax advantages.

Their value proposition increasingly includes:

➜ Efficient regulatory frameworks

➜ Simplified licensing procedures

➜ International connectivity

➜ Sector-specific ecosystems

➜ Access to talent

➜ Customs facilitation

➜ Advanced infrastructure

For many investors, these operational advantages remain as important as any tax benefit.

The future of free zones is therefore likely to be driven by ecosystem quality rather than tax preferences alone.

 ➜ Strategic Sectors to Watch

Across the GCC, future investment incentives are expected to become increasingly targeted toward sectors that support national economic transformation strategies.

Key sectors likely to benefit include:

➜ Advanced Manufacturing

➜ Artificial Intelligence (AI)

➜ Digital Infrastructure

➜ Data Centers

➜ Renewable Energy

➜ Financial Services & Fintech

➜ Life Sciences

➜ Research & Development

➜ Advanced Technologies

This trend is already visible in regional investment patterns, particularly in the UAE, where renewable energy, digital sectors, technology services, and innovation-focused industries are attracting increasing levels of foreign direct investment.

➜ The Future of Incentives

The next generation of incentives is expected to look very different from traditional tax holidays.

Governments are increasingly considering:

➜ Refundable tax credits

➜ Direct investment grants

➜ Payroll and employment incentives

➜ Infrastructure support programs

➜ Research and innovation funding

➜ Workforce development initiatives

➜ Public-private co-investment arrangements

These tools can encourage real economic activity while remaining aligned with evolving international tax standards.

 ➜ What Should Businesses Do Next?

Multinational groups operating in or expanding into the GCC should consider several strategic questions:

➜ Does our operating model demonstrate sufficient economic substance?

➜ Are our regional headquarters performing genuine management functions?

➜ Can we benefit from innovation-focused incentives and strategic sector programs?

➜ How will Pillar Two impact our effective tax rate across jurisdictions?

➜ Are our investment structures aligned with evolving international tax standards?

Organizations that combine tax efficiency with genuine commercial activity are likely to be best positioned for long-term success.

 Key Takeaways

✓ Pillar Two is transforming global investment decisions.

✓ Tax incentives remain relevant, but their design is evolving.

✓ Economic substance is becoming increasingly important.

✓ Free Zones and RHQ regimes continue to offer significant value.

✓ Innovation, technology, renewable energy, and digital infrastructure are emerging as priority sectors.

✓ The GCC remains one of the world's most attractive regions for long-term investment.

 Kozman & Co. Insight

Pillar Two should not be viewed solely as a tax development, it represents a broader shift in how governments compete for investment and how multinational groups evaluate business locations.

Successful organizations will increasingly focus on building operational substance, leveraging innovation ecosystems, and aligning investment strategies with evolving international tax and regulatory frameworks.

At Kozman & Co. | SBC Global., we help multinational enterprises, investors, and growing businesses navigate the changing GCC landscape through practical, commercially focused advisory services.

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Whether you are expanding into the region, restructuring existing operations, or assessing the impact of Pillar Two, our specialists can help you identify opportunities and manage risks.

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