UAE R&D Tax Credit: Phase 1 Offers Up to 50 Percent on Qualifying Expenditure from 2026

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UAE launches Phase 1 of its R&D tax incentive - tax credit of 50% on qualifying expenditure

The UAE Ministry of Finance has launched Phase 1 of its first dedicated R&D tax credit regime under the corporate tax framework.
Qualifying businesses can claim a non-refundable tax credit of up to 50 percent on eligible R&D expenditure, capped at AED 5 million per tax period.
Credit rates are tiered at 15, 35 and up to 50 percent, linked to both spending levels and minimum R&D staff headcount thresholds.
The regime applies to tax periods starting on or after 1 January 2026, with the legal framework set by Cabinet Decision No. 215 of 2025 and Ministerial Decision No. 24 of 2026.
Free zone entities can access the credit only if they are subject to the 9 percent corporate tax rate or liable for Top-up Tax on relevant income.
Advisory firms are urging businesses to begin early eligibility assessments and establish robust R&D documentation systems ahead of their first claims.

How the UAE's First R&D Tax Credit Fits the Federal Tax Authority Framework

The UAE's corporate tax system, established under Federal Decree-Law No. 47 of 2022, has taken a significant step towards encouraging private-sector innovation. On 18 March 2026, the Ministry of Finance announced Phase 1 of a dedicated Research and Development Tax Incentives Programme, supported by Cabinet Decision No. 215 of 2025 and Ministerial Decision No. 24 of 2026. The programme introduces a non-refundable tax credit of up to 50 percent on qualifying R&D expenditure, designed to be claimed through the Federal Tax Authority (FTA) as a direct offset against corporate tax liabilities.

The initiative marks the UAE's first purpose-built R&D incentive under its relatively new tax regime. It is intended to attract advanced industries, technology firms and multinational groups considering the UAE as a base for research operations. Notably, the rules also address the position of Qualifying Free Zone Persons, ensuring the credit works within the broader structure of free zone tax benefits and global minimum tax requirements. Phase 1 parameters are deliberately conservative, with scope for expansion in future phases as the authorities refine administrative processes.

Tiered Credit Structure and Staffing Thresholds

The headline feature of Phase 1 is a progressive credit structure that links the tax credit rate to both the level of qualifying R&D expenditure and the number of R&D staff employed. According to professional summaries of Ministerial Decision No. 24 of 2026, the structure operates across three bands. The first AED 1 million of qualifying expenditure attracts a 15 percent credit, provided the entity or tax group employs at least two R&D staff on average during the tax period. Expenditure between AED 1 million and AED 2 million qualifies for a 35 percent credit rate, subject to a minimum of six R&D staff on average.

For further qualifying expenditure up to the overall Phase 1 cap of AED 5 million per tax period, a maximum credit rate of up to 50 percent applies, subject to enhanced staffing and other conditions. The credit is calculated by applying each rate to the portion of expenditure within that band, rather than a single flat rate across the total spend. This tiered approach rewards businesses that invest in both dedicated R&D headcount and meaningful project expenditure, while keeping initial fiscal exposure manageable for the authorities.

Legal Architecture: Cabinet and Ministerial Decisions

The R&D tax credit sits within a layered legal framework. Cabinet Decision No. 215 of 2025 establishes the high-level architecture, defining core concepts such as Qualifying Entity, Qualifying R&D Activities and Qualifying R&D Expenditure. It confirms the credit is calculated as a percentage of qualifying expenditure incurred in the relevant period and sets out the rules on utilisation, carry-forward and potential refundability. The Decision empowers the Minister to specify credit rates, conditions and whether the credit is refundable or non-refundable.

Ministerial Decision No. 24 of 2026 then provides the detailed implementation rules. It cross-refers to definitions in Federal Decree-Law No. 47 of 2022, Federal Decree-Law No. 28 of 2022 and Cabinet Decision No. 142 of 2024, and introduces the tiered credit table, staffing thresholds and aggregation rules for tax groups. For groups with multiple qualifying entities, both expenditure and staff numbers are aggregated at group level when testing the band thresholds, while the AED 5 million cap applies per qualifying entity or tax group. This is consistent with the documentation-intensive compliance approach already evident in the UAE's transfer pricing rules, where robust record-keeping underpins the entire regime.

Free Zone Entities and Utilisation Rules

A notable feature of the regime is the treatment of free zone companies. Cabinet Decision No. 215 of 2025 specifies that a Qualifying Free Zone Person can access the R&D tax credit only if it meets certain conditions. The entity must either pay corporate tax at the standard 9 percent rate on income from qualifying R&D activities, or be liable for Top-up Tax for the relevant fiscal year. This prevents free zone entities that pay zero percent tax on qualifying income from also claiming an unrestricted R&D credit on the same income.

Under Phase 1, the credit is non-refundable and must be used to reduce corporate tax or Top-up Tax liabilities. Article 6 of Cabinet Decision No. 215 of 2025 requires the credit to be offset against the entity's liability for the period in which a valid claim has been submitted to the FTA, before any remaining balance can be carried forward. The Decision also includes provisions for transferring credits within domestic groups under Article 7, subject to procedural requirements and limitations.

Qualifying Activities and Expenditure Scope

While the full legal definitions are contained in the underlying Cabinet Decision, secondary commentary gives a clear indication of what the authorities consider eligible. Qualifying R&D activities are expected to cover the development of new products, processes or services where there is genuine scientific or technological uncertainty. This includes software and digital platforms involving systematic experimentation, as well as industrial and scientific research in sectors such as healthcare, clean energy, advanced manufacturing and artificial intelligence.

Routine operational expenses, standard process improvements, market research and non-innovative projects are explicitly excluded, in line with international R&D tax credit principles. On the expenditure side, eligible costs are expected to include staff salaries for employees directly engaged in R&D, consumables and materials used in experimentation, attributable overheads and potentially third-party R&D services. The Ministry of Finance has stressed that Phase 1 is designed to reward genuine, measurable innovation rather than general business spending.

Practical Steps for Tax Advisors and Corporate Finance Teams

The launch of the UAE's first R&D tax credit creates immediate work for tax advisory and corporate finance professionals. Advisory firms are recommending that businesses identify current and planned projects that may qualify under the new definitions, classify them by activity type and sector, and assess whether they meet the qualifying entity conditions. This includes reviewing free zone status, corporate tax exposure and any Top-up Tax implications. For firms already navigating the corporate tax registration wave that has intensified through early 2026, the R&D credit adds another layer of compliance planning.

Staffing levels are a critical variable. Businesses should evaluate their R&D headcount against the band thresholds in Ministerial Decision No. 24 of 2026 to understand which credit rates they can access. For tax groups with multiple qualifying entities, the aggregation rules mean that group-level planning is essential. Documentation is equally important: firms will need project tracking systems, cost allocation methodologies and evidence of scientific or technological uncertainty to substantiate claims to the FTA.

Commentators note that the initial Phase 1 parameters are deliberately conservative, with the AED 5 million cap and non-refundable nature limiting both fiscal risk and administrative complexity. However, early movers with well-documented R&D programmes stand to secure meaningful tax savings while helping to shape the administrative practice that will inform future phases. The regime also positions the UAE more competitively against jurisdictions that already offer R&D tax incentives, which could influence multinational location decisions for research operations.

What Clients are Asking their Advisors

What counts as qualifying R&D expenditure under the UAE tax credit?

Qualifying expenditure covers staff costs for employees directly engaged in research and development, consumables and materials used in experiments or prototypes, and certain overheads directly attributable to R&D activities. Routine operational spending, market research and general business improvements are excluded. Third-party R&D services may also qualify, subject to the detailed rules in Cabinet Decision No. 215 of 2025.

How do UAE businesses apply for the R&D tax credit under Phase 1?

Businesses must submit a valid claim to the Federal Tax Authority for the relevant tax period. The credit is then offset against the entity's Corporate Tax or Top-up Tax liability. Advisory firms recommend that companies begin early eligibility assessments and establish robust project tracking and cost allocation systems to support their claims.

Can UAE free zone companies claim the R&D tax credit?

Free zone entities classified as Qualifying Free Zone Persons can access the credit under specific conditions. They must be subject to the standard 9 percent corporate tax rate on qualifying R&D income, or liable for Top-up Tax for the relevant fiscal year. Free zone businesses paying zero percent tax on qualifying income cannot claim the credit on that income.

What happens to unused R&D tax credit amounts under Phase 1?

Under Phase 1, the R&D tax credit is non-refundable, meaning it cannot be paid out as cash. However, any excess credit may be carried forward to subsequent tax periods or transferred within a domestic group. These transfers are subject to conditions set out in Cabinet Decision No. 215 of 2025.