The UAE’s Corporate Tax Regime: Incentivizing Innovation Through Qualifying Intellectual Property

In recent years, the United Arab Emirates (UAE) has introduced a series of significant tax reforms to diversify state revenues and align with international best practices. Starting with the rollout of Value Added Tax (VAT) in 2018, followed by the introduction of Economic Substance Rules (ESR) and Country-by-Country Reporting (CbCR) in 2019, the UAE continued its shift toward greater fiscal transparency and global integration.

In 2022, the Ministry of Finance issued Federal Decree-Law No. 47 on the Taxation of Corporations and Businesses, introducing a federal Corporate Tax applicable for financial years starting on or after 1 June 2023, at a standard rate of 9% on taxable income above AED 375,000.

Overview

As part of this framework, special provisions were introduced to incentivize innovation and intellectual property (IP) ownership in the UAE. Businesses, particularly those operating in Free Zones, may benefit from a 0% corporate tax rate on income derived from Qualifying Intellectual Property, subject to strict conditions.

This exemption is set out in Cabinet Decision No. 100 of 2023 on Determining Qualifying Income for Qualifying Free Zone Persons, pursuant to Federal Decree-Law No. 47 of 2022. The aim is to encourage innovation, R&D, and IP ownership within the UAE, aligning with global best practices.

What is “Qualifying Intellectual Property” (“QIP”)

To benefit from the exemption or zero rate, the IP must be “qualifying.” Under the UAE Corporate Tax Law, Qualifying Intellectual Property refers to patents, copyrighted software, and any rights that are functionally equivalent to a patent.

• Patents protect inventions that are new, involve an inventive step, and are capable of industrial application. They grant their owner exclusive rights to prevent others from using the invention without permission, for a period of 20 years in the UAE.
• Copyrighted Software: Copyright extends to creative works such as books, films, music, architectural works, and photographs, and in this case specifically, computer software. In the UAE, copyright protection arises automatically once the work is created, but registering with the Ministry of Economy strengthens enforcement.
• Other legal rights which are functionally equivalent—similar to patents and subject to a similar approval and registration process. This includes, for example, utility models to new varieties and extensions of patent protection such as supplementary protection certificates.
• Excluded: Marketing-related intellectual property, such as trademarks, brands, and other similar IP used primarily for marketing are not considered “qualifying intellectual property.”

Who can Benefit: Free Zone Persons (“QFZPs”)

The regime is particularly relevant to “Qualifying Free Zone Persons” (entities in UAE Free Zones) under the corporate tax law. The Federal Tax Authority confirms that a free zone person refers to a juridical person, i.e. incorporated, established, or otherwise registered in a free zone, including a branch of a Non-Resident Person or a UAE juridical person that is registered in a free zone.

How “Qualifying Income” is Computed

There is a specific formula under Ministerial Decision No. 265 of 2023 to determine how much of an entity’s IP-derived income qualifies. The core idea is to link the income to the R&D or development efforts (expenditures) that generate or significantly develop the QIP.

The calculation is based on the following formula:

Qualifying Income = (Qualifying Expenditures + Uplift Expenditures) ÷ Overall Expenditures × Overall Income

Only the resulting proportion of income is treated as Qualifying Income and therefore benefits from the 0% corporate tax rate.

Conclusion

In conclusion, the UAE’s corporate tax regime reflects a deliberate balance between global tax alignment and sustaining its competitiveness as a hub for innovation.

For companies willing to invest in research, development, and IP ownership in the UAE, the framework offers both fiscal advantages and a stable, internationally credible environment to grow and commercialize innovation.

For tailored guidance on leveraging IP incentives under the UAE Corporate Tax Law, please reach out to our team.