Introduction of Research and Development related tax incentives in the UAE

The UAE continues to reinforce its position as a regional and global centre for innovation through the introduction of a comprehensive Research and Development (R&D) Tax credit regime. As part of this initiative, the UAE Ministry of Finance (MoF) undertook a public consultation in April 2024, followed by a policy announcement in December 2024. These developments culminated in amendments to the UAE Corporate Tax Law through Federal Decree‑Law No. (28) of 2025, which formally introduced provisions recognising tax credits arising from qualifying incentive schemes.

Building on this legislative foundation, the MoF has now issued Cabinet Decision No. 215 of 2025 and Ministerial Decision No. 24 of 2026, setting out a structured incentive framework aimed at encouraging private‑sector investment in research activities, the development of new technologies, and the creation of intellectual capital within the UAE.

Together, these decisions mark the formal implementation of the UAE’s R&D Tax credit regime under the Corporate Tax framework. Effective for Tax Periods commencing on or after 1 January 2026, the regime introduces a tiered credit mechanism, providing credit rates of up to 50%, determined by reference to qualifying R&D expenditure and the number of R&D personnel employed. Eligible taxpayers may utilise the R&D Tax credit to offset their Corporate Tax and/or Pillar Two Top‑Up Tax liabilities, subject to an annual cap on qualifying expenditure of AED 5 million per entity or per Tax Group.

In its public announcement, the UAE Ministry of Finance characterised the current framework as ‘Phase 1’, under which a non‑refundable R&D tax credit of up to 50% is available on qualifying R&D expenditure, subject to a cap of AED 5 million. The design of Phase 1 takes into account recent developments under the OECD Pillar Two framework. The MoF has indicated that potential enhancements such as refundability and/or an expansion of qualifying R&D expenditure may be considered in subsequent phases.

The key aspects covered under the decision are highlighted below:

The incentive is available to:

• UAE‑incorporated companies (including Free Zone Persons subject to CT or Top‑up Tax);
• Foreign companies with a UAE permanent establishment performing R&D activities,

which are involved in conducting Qualifying R&D Activities.

Entities which are neither subject to the UAE corporate tax nor the Top Up Tax or have elected for small business relief, are not eligible to claim the R&D tax credit.

A Qualifying Entity must meet all conditions below:

• Pre-approval from the R&D Council for each R&D Project;
• Minimum number of R&D staff;
• Financial burden of R&D borne by the Qualifying Entity;
• Beneficial entitlement to returns from resulting intangibles (including right to transfer);
• Objective of the R&D activities is to increase knowledge stock or develop new applications.

To claim the R&D Tax credit, QFZP entities must be either:

• subject to 9% Corporate Tax on taxable income from Qualifying R&D Activities, or
• subject to Top‑up Tax in the fiscal year in which qualifying expenses are incurred.

In order to qualify, the R&D project should have a minimum AED 500,000 expenditure per tax period (excluding any uplift).

R&D activities (or a portion thereof) must be conducted in the UAE and must be novel, creative, uncertain, systematic, and capable of being replicated or transferred, in order to be considered as Qualifying activities. The assessment would be done using the OECD Frascati Manual criteria¹.

R&D activities in relation to social sciences, humanities and the arts are specifically excluded.

The R&D Tax credit is calculated progressively (not a flat rate) as a percentage of the Qualifying R&D expenditure incurred, subject to minimum R&D staff in each tax period or fiscal year. The R&D credit is non-refundable.

Notes:

1. To qualify for a specific R&D Tax credit rate, the Qualifying Entity or Tax Group must meet both the Qualifying R&D Expenditure threshold and the minimum average number of R&D Staff threshold. If either threshold is not met, the R&D Tax credit rate will be adjusted downward to the highest rate for which both thresholds are satisfied.
2. The average number of R&D staff shall be calculated by adding the total number of R&D staff for each month during the Tax Period or Fiscal Year (regardless of whether they worked the full month or part of it) divided by total number of months in which the Qualifying R&D activities were undertaken.

The total amount of qualifying R&D expenditure is capped at AED 5 million per Tax Period. This results in a maximum R&D tax credit of AED 2 million per Qualifying Entity or per Tax Group.

R&D tax credit can be utilized against corporate tax and/or top up tax liability of the Qualifying Entity, Tax Group, Domestic Group or transferred to commonly owned entities.

¹_{Frascati Manual on Guidelines for Collecting and Reporting Data on Research and Experimental Development, The Measurement of Scientific, Technological and Innovation Activities issued and updated from time to time by the Organisation for Economic Co-operation and Development.} 

All R&D projects must obtain pre‑approval[1] from the R&D Council.

Applications must be submitted and receive approval in the year that the R&D activities take place.

The pre-approval is valid for one tax year only. If the project continues into a subsequent year, a new pre-approval application must be submitted before filing any tax claim.

The R&D Council may require Qualifying entities to submit progress updates as evidence that activities remain consistent with the approved scope, and other necessary requirements are being met.

Qualifying R&D expenditure shall be the expenditure incurred wholly and exclusively for R&D activities performed in the UAE.

²_{Procedure and requirements available on Tawwer portal}

Utilisation – The R&D Tax credit must be utilised based on a FIFO approach against the Corporate Tax and/or Top-up Tax liability of the Qualifying Entity for the relevant Tax Period, prior to any portion of such credit being carried forward or transferred.

Carry forward – Unutilised R&D Tax credits may be carried forward indefinitely subject to maintaining 50% ownership continuity (excluding entities listed on recognized stock exchange), or business continuity.

Transfer to group company – R&D Tax credits may be transferred where entities are at least 75% commonly owned or either of them owns the other by that percentage and transfers do not exceed the transferee’s remaining tax liability.

Transfer under business restructuring – Unutilized credits may be transferred to the transferee if the business including Qualifying R&D activities continue for at least 2 years, and all related R&D conditions remain satisfied.

All the above provisions are similar to carry forward of tax loss provisions under the UAE Corporate Tax law.

Where a Tax Group includes more than one Qualifying Entity, the Qualifying R&D Expenditure and R&D Staff of all such entities shall be aggregated for the purposes of calculating whether the relevant thresholds have been met.

• Any R&D Tax credit generated by a qualifying member is applied against the Corporate Tax liability of the entire Tax Group (and not individual entities).
• Tax Groups must first apply the R&D Tax credit to reduce their Corporate Tax liability before it can be used as credit against Top‑up Tax.
• If a company with existing R&D Tax credits joins a Tax Group, its unused pre‑grouping credits are still valid and must be used before group‑level credits (this is unlike pre-grouping Tax Loss of a entity which is restricted to be set off against the concerned entity’s attributable income).
• If an entity exits the group, group credits remain with the Tax Group, while unused pre‑grouping credits stay with the entity that exits;
• On cessation of the Tax Group, any unutilised R&D Tax credit of the Tax Group shall remain with the Parent Company if it continues to exist, otherwise it will be forfeited. Exception applies to any unutilised pre-Grouping R&D Tax credits which will remain with the relevant Qualifying Entity.
• The Parent Company shall be responsible for applying for pre-approval and submitting the claim for the R&D Tax credit as part of the Tax Return.

The introduction of the R&D tax credits alongside the Domestic Minimum Top-up Tax (DMTT) regime in the UAE has important implications for in-scope multinational (MNE) groups.

Under the DMTT framework currently in force in the UAE:

• Only Qualified Refundable Tax Credits (QRTCs) and Marketable Transferable Tax Credits (MTTCs) receive favourable treatment.
• The UAE R&D tax credit is neither refundable nor marketable, so it does not qualify as a QRTC or MTTC.
• As a result, the credit is generally treated as a reduction in Covered Taxes, which can reduce the UAE Pillar Two ETR.
• Where the jurisdictional ETR drops below 15%, the UAE DMTT will apply to effectively bring the ETR back to 15%. This can partially or fully offset the benefit of the R&D credit, meaning the incentive may operate more as a timing/cash flow benefit rather than a permanent ETR reduction. Unutilised R&D tax credits can still be used in later years against Corporate Tax and/or DMTT liabilities.  

In January 2026, the OECD’s latest Administrative Guidance (the “Side-by-Side” or SbS Package) introduced a Substance-Based Tax Incentive Safe Harbour (SBTI Safe Harbour). This creates a new category of Qualified Tax Incentives (QTIs) aimed at expenditure-based or production-based incentives such as R&D credits.   

Where an incentive meets the conditions to qualify as a QTI:

• The QTI is treated as an addition to Covered Taxes (rather than a reduction), helping to protect the jurisdictional ETR.
• The benefit is limited by a substance cap, equal to the higher of:
  • 5.5% of eligible payroll costs, or
  • 5.5% of the depreciation cost of tangible assets in the jurisdiction.
    (An optional simplified cap of 1% of the carrying value of tangible assets may also be applied.)
• The QTI is generally equal to the actual reduction in Covered Tax arising from use of the incentive in the Fiscal Year.

The SBTI Safe Harbour is not yet formally enacted into UAE law. However, UAE DMTT rules have so far followed the OECD framework closely, and earlier OECD Administrative Guidance has already been incorporated via Ministerial Decision No. 88 of 2025.  Accordingly, it is reasonable to expect domestic implementation of the SbS Package, including the SBTI Safe Harbour. If implemented in line with the OECD model, the UAE R&D tax credit would be expected to qualify as a QTI, so that (subject to the substance cap) its utilisation would not reduce the UAE ETR.

The Decision contains anti-avoidance provisions to counter cases of artificial separation i.e. where a business has been artificially split to remain within lower expenditure thresholds or where it lacks economic substance or is not undertaking genuine R&D activities.

Credits may be clawed back if:

• eligibility conditions are not met,
• credits were obtained through artificial arrangements, or
• the entity ceases to be a Taxable Person (e.g. becomes a QFZP, elects small business relief, liquidates, or redomiciles outside the UAE) within five years, except in the case of a business restructuring as per the provisions of Article 27 of the UAE CT Law.

In case of a claw back:

• Clawed‑back tax credits are treated as Due Tax/Payable Tax, and administrative penalties may apply.
• No other tax credits, special reliefs, Tax Losses or Pillar Two Losses can be offset against the tax liability arising from the claw-back.

Entities must maintain technical documentation and financial records evidencing Qualifying R&D activities and supporting expenditure details for seven (7) years from the end of the tax period. 

R&D tax credit claims would be required to be submitted as part of the Tax Return or Top-up Tax Return for the Tax Period or Fiscal Year in which the Qualifying R&D Expenditure is incurred.

Proof of pre-approval from R&D Council, a senior management declaration, a breakdown of Qualifying R&D Expenditure, and audited financial statements are to be submitted along with claim.

Claims submitted after the due date for filing the Tax Return or Top-up Tax Return will not be considered unless accepted by the Authority in exceptional circumstances.

Taxpayers need to take a planned approach to claim this benefit:

• Determine whether you are a Qualifying Entity – i.e. undertake Qualifying R&D activities, meet the AED 500,000 threshold per project and the employees’ thresholds.
• Prepare a detailed R&D project proposal for pre‑approval
• Ensure necessary technical documentation and financial records are maintained. Track Qualifying R&D expenditure. The technical documentation includes records detailing the objectives, processes, methodologies, experiments, and findings associated with the Qualifying R&D Activities.
• Ensure submission of the R&D tax credit claim with the Corporate Tax return or Top-up Tax return. Delay in submission of tax return could result in forfeiture of claim.
• Consider anti-abuse and claw back rules as any non‑compliance can result in repayment of credits and penalties.

Additionally, the in‑scope MNE groups should:

• Assess whether the UAE R&D tax credit yields a real net benefit after UAE DMTT is taken into account;
• Monitor UAE legislative developments on the adoption of the SbS package and SBTI Safe Harbour; and
• Align R&D structuring and documentation to support both domestic R&D credit eligibility and QTI treatment under Pillar Two.

The regime reinforces the UAE’s commitment to fostering real economic activity, innovation, and research‑driven growth while positioning itself competitively within the global tax landscape.

From a readiness perspective, businesses should evaluate whether the potential R&D activities are eligible, by referring to the technical criteria derived from the OECD’s Frascati Manual and ensure robust documentation maintenance.

As the framework is newly implemented and detailed provisions continue to evolve, interpretation gaps may arise in practice. Accordingly, businesses seeking to benefit from the R&D Tax credit should take a proactive approach, ensuring robust internal governance, maintaining comprehensive technical and financial documentation, and establishing clear audit trails to support eligibility. Doing so, will be essential to achieving seamless compliance and mitigating the risk of future challenges or claw‑back exposures.

If you need assistance, please reach out to your advisors at KPMG or the contacts mentioned below.