UAE Introduces Detailed Rules for Research & Development (R&D) Tax Credit: What Businesses Need to Know
The UAE has introduced detailed implementation guidance for the Research & Development (R&D) Tax Credit regime through Ministerial Decision No. 24 of 2026 on the Implementation of Certain Provisions of Cabinet Decision No. 215 of 2025 on R&D Tax Credit for the Purposes of Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses.
The Decision provides businesses with clarity on how they can qualify for and benefit from the UAE’s R&D Tax Credit incentive, which is designed to encourage investment in innovation, research, and technological development within the UAE.
The R&D Tax Credit allows eligible businesses to reduce their Corporate Tax and, where applicable, Top-up Tax liabilities by claiming a non-refundable tax credit based on qualifying R&D expenditure.
The regime applies to tax periods or fiscal years commencing on or after 1 January 2026.
What is the UAE R&D Tax Credit?
Unlike a tax deduction, which reduces taxable income, a tax credit directly reduces the amount of tax payable.
For example:
|
Description |
Amount |
|
Corporate Tax liability before credit |
AED 500,000 |
|
R&D Tax Credit |
AED 120,000 |
|
Corporate Tax payable after credit |
AED 380,000 |
This provides a direct incentive for businesses that invest in genuine research and development activities in the UAE.
Who Can Claim the R&D Tax Credit?
The incentive is available only to a Qualifying Entity that carries out Qualifying R&D Activities in the UAE.
Not every innovation, improvement, or technical project will qualify. Businesses must demonstrate that their activities represent genuine research and experimental development rather than routine operational improvements.
What Activities Qualify as R&D?
The Decision adopts the internationally recognised principles contained in the OECD Frascati Manual.
An R&D activity must satisfy all five of the following criteria:
1. Novel
The activity must aim to create new findings or knowledge.
Example:
Developing a new artificial intelligence model or creating a new technological solution that does not currently exist.
2. Creative
The activity must involve original concepts, hypotheses, or approaches.
Routine replication or implementation of existing solutions will generally not qualify.
3. Uncertain
The outcome or method of achieving the objective must not be known in advance.
Example:
Testing whether a new manufacturing process can achieve improved performance where the outcome is uncertain.
4. Systematic
The activity must follow a structured process supported by:
- Defined objectives;
- Project plans;
- Budgets;
- Methodologies; and
- Documentation.
5. Transferable or Reproducible
The results must be capable of being applied or reproduced in other contexts.
Activities That Do Not Qualify
The following activities generally fall outside the scope of qualifying R&D:
- Routine software implementation;
- Standard engineering activities;
- Ordinary product improvements;
- Marketing research;
- Social sciences research;
- Humanities; and
- Arts-related activities.
R&D Activities Must Be Performed in the UAE
Only R&D activities physically undertaken within the UAE qualify.
For example:
A project involves total expenditure of AED 10 million:
- UAE-based R&D activities: AED 4 million;
- Overseas R&D activities: AED 6 million.
Only the AED 4 million incurred for UAE activities may qualify.
Mandatory Pre-Approval Requirement
One of the most important requirements introduced by the Decision is mandatory pre-approval.
A Qualifying Entity must obtain approval from the relevant Council before claiming the R&D Tax Credit.
Businesses must ensure that their R&D projects are reviewed and approved before including the credit claim in their tax filings.
How Much R&D Tax Credit Can Businesses Claim?
The available credit depends on two factors:
- Qualifying R&D expenditure; and
- Average number of R&D staff.
The credit rates are progressive:
|
Qualifying R&D Expenditure |
Minimum Average R&D Staff |
Credit Rate |
|
First AED 1 million |
At least 2 staff |
15% |
|
Portion exceeding AED 1 million up to AED 2 million |
At least 6 staff |
35% |
|
Portion exceeding AED 2 million up to AED 5 million |
At least 14 staff |
50% |
To access a specific credit rate, both the expenditure and employee thresholds must be satisfied.
Where a business does not meet both requirements, the credit rate will be reduced to the highest rate for which both conditions are met.
Example of the R&D Tax Credit Calculation
Assume:
- Qualifying R&D expenditure: AED 3 million;
- Average R&D staff: 15 employees.
The credit would be calculated as follows:
- First AED 1 million × 15% = AED 150,000;
- Next AED 1 million × 35% = AED 350,000;
- Remaining AED 1 million × 50% = AED 500,000.
Total R&D Tax Credit: AED 1 million
What Costs Qualify?
Staff Costs
Qualifying staff costs include:
- Salaries and wages;
- Allowances;
- Medical insurance;
- Pension contributions;
- End-of-service gratuity;
- Bonuses;
- Benefits in kind; and
- Other employment-related expenses.
The Decision also provides a 30% uplift on qualifying staff costs to recognise reasonably attributable overheads.
Example:
Staff costs: AED 1 million
Qualifying amount after uplift:
AED 1.3 million
Consumable Costs
Consumable costs may include materials and items directly used and consumed during qualifying R&D activities, including:
- Laboratory materials;
- Chemicals;
- Fuel;
- Water;
- Electricity;
- Transformable materials; and
- Clinical trial participant payments.
The costs must be directly linked to the R&D activity.
Subcontracting Costs
Businesses may claim subcontracting costs where specific conditions are met, including:
- The subcontractor is based in the UAE;
- The activities are performed in the UAE;
- The subcontracted work is not further subcontracted; and
- Relevant transfer pricing requirements are satisfied where applicable.
Cost Contribution Arrangements
Where businesses jointly undertake R&D activities through a cost contribution arrangement, each participant may claim its share of qualifying expenditure provided:
- Contributions are determined on an arm’s length basis; and
- Each participant expects to benefit from the arrangement.
Documentation and Record-Keeping Requirements
Businesses claiming the R&D Tax Credit must maintain sufficient technical and financial documentation for seven years following the relevant tax period or fiscal year.
Records should include:
- Project plans;
- Technical reports;
- Research methodologies;
- Experiments and test results;
- Project budgets;
- Cost records;
- Employee involvement records; and
- Evidence supporting the nature of the R&D activities.
The authorities may request this documentation during review procedures.
Carry Forward of Unused R&D Tax Credits
Where a business cannot utilise the full R&D Tax Credit in the relevant period, the unused credit may generally be carried forward, subject to specific ownership and business continuity conditions.
The carry-forward rules aim to ensure that genuine businesses investing in long-term R&D activities can continue benefiting from the incentive.
Transfer of R&D Tax Credits Within Groups
The Decision allows qualifying businesses to transfer unused R&D Tax Credits to other UAE entities subject to specific conditions.
Generally, the entities must have at least 75% common ownership or meet the required ownership relationship conditions.
Transferred credits must be utilised against the recipient’s tax liability and cannot subsequently be carried forward or transferred.
Business Restructuring Rules
Where a business transfers its entire business or an independent part of its business, unused R&D Tax Credits may transfer to the acquiring entity if certain conditions are satisfied.
These include:
- The acquiring entity continues the transferred business and associated R&D activities for at least two years;
- The restructuring meets the relevant Corporate Tax requirements; and
- The credit was validly claimed before the transfer.
Failure to maintain the required conditions may result in clawback of the benefit.
Anti-Abuse Measures
The Decision includes strong anti-abuse provisions designed to protect the integrity of the incentive.
The Federal Tax Authority may challenge arrangements involving:
- Artificial splitting of businesses to access higher credit rates;
- Creation of non-genuine R&D projects;
- Inflation of qualifying costs;
- Misclassification of routine activities as R&D; or
- Arrangements lacking genuine economic substance.
Where abuse is identified, the R&D Tax Credit may be clawed back and penalties may apply.
Key Actions for Businesses
Businesses planning to benefit from the UAE R&D Tax Credit should consider taking the following steps:
- Identify potential R&D projects conducted in the UAE.
- Assess whether activities satisfy the OECD Frascati criteria.
- Obtain required pre-approval before claiming the credit.
- Establish systems to track qualifying expenditure and employee involvement.
- Maintain detailed technical documentation.
- Review ownership structures and group arrangements to understand carry-forward and transfer implications.
- Ensure ongoing compliance to avoid potential clawback.
Conclusion
The UAE R&D Tax Credit represents a significant opportunity for businesses investing in innovation, technology, and research activities within the UAE.
However, the incentive is highly compliance-driven. Businesses must demonstrate that their activities represent genuine R&D, maintain robust supporting documentation, and comply with pre-approval and ongoing monitoring requirements.
Companies that invest in innovation should evaluate their activities now to determine whether they may benefit from this new tax incentive from 2026 onwards.
Our tax team at XB4 can assist businesses in assessing eligibility, preparing R&D documentation, evaluating qualifying expenditure, and supporting compliance with the UAE R&D Tax Credit requirements.
