Executive Summary

The UAE has introduced a Research & Development (‘R&D’) tax credit regime under its Corporate Tax (‘CT’) framework, advancing its knowledge-based economic objectives. Following a public consultation in April 2024 and a policy announcement in December 2024, the initiative was given statutory effect through Federal Decree-Law No. (28) of 2025, modifying provisions relating to the settlement of tax to include tax credits arising from incentives, along with permissibility of corresponding refunds for excess tax credits.

Cabinet Decision No. (215) of 2025 (‘CD 215’) introduced the overarching framework, covering eligibility, qualifying expenditure, and utilization principles. Ministerial Decision No. (24) of 2026 (‘MD 24’) sets out the detailed implementing rules. These decisions apply to Tax Periods or Fiscal Years commencing on or after 1 January 2026. In its public announcement, the Ministry of Finance has described the current design as ‘Phase 1’, under which a non-refundable R&D tax credit of up to 50% is available on qualifying R&D expenditure, capped at AED 5 million, with potential enhancements (including refundability and/or expansion of qualifying R&D expenditure) to be considered in later phases.

The regime prescribes tiered rates (15% / 35% / 50%) linked to qualifying spend and average R&D staff headcount, requires mandatory project pre-approval by the Emirates R&D Council, and limits qualifying costs to specified categories (including staff costs with a 30% uplift, consumables, subcontracting fees and arm’s length cost contribution agreement contributions). The credit may be utilized against CT and subject to ordering rules, against Top-up Tax liabilities. This alert provides a summary of the Decisions and highlights key practical implications for businesses undertaking qualifying R&D activities in the UAE.

Dhruva Perspective: Key Practical Considerations

The Dual-Threshold Design Demands Workforce Planning

In order to qualify for a specific R&D tax credit rate, a two-fold test will apply. A qualifying entity will need to meet both the qualifying expenditure threshold AND the minimum R&D headcount requirement. Should the qualifying entity fall short of either threshold, the rate will be adjusted down to the highest rate for which both tests are satisfied. Businesses should model scenarios that optimise the interplay between expenditure levels and headcount thresholds. In some cases, the marginal cost of additional R&D hires may be offset by the incremental benefit gained.

How Dhruva Can Assist

As the UAE’s leading tax-exclusive advisory firm and a Ryan company, Dhruva is uniquely positioned to support businesses across the full lifecycle of R&D Tax Credit planning, compliance, and execution:

• R&D Activity Assessment: Technical review of your R&D portfolio against the Frascati Manual criteria to identify qualifying activities and quantify the credit opportunity.
• Pre-Approval Support: Preparation and submission of comprehensive pre-approval applications to the Council, including project descriptions, expenditure projections, and staffing plans.
• Expenditure Quantification: Detailed analysis of staff costs (including uplift calculations), consumables, subcontracting fees, and CCA contributions to maximise qualifying expenditure.
• Group Structuring Advisory: Optimisation of Tax Group and Domestic Group credit utilisation, transfer mechanisms, and ordering rules to maximise the benefit across the tax group.
• Transfer Pricing for CCAs: Ensuring arm’s length allocation of contributions and expected benefits under Cost Contribution Arrangements.
• Documentation Frameworks: Design and implementation of ongoing R&D documentation protocols that meet the seven-year compliance standard.
• Pillar Two / DMTT Integration: Modelling the interaction between R&D Tax Credits and Top-up Tax obligations for Domestic Groups within the scope of the GloBE rules.
• Claw-Back Risk Assessment: Scenario analysis for restructuring, Free Zone election, or ownership change scenarios to avoid inadvertent claw-back triggers

Critical Notice for Businesses
The regime incorporates mandatory pre-approval from the Emirates Research and Development Council (‘Council’) a gating condition with no exceptions. No pre-approval means no credit, regardless of whether underlying activities and expenditure otherwise qualify. Taxpayers with active or planned R&D operations should treat this as a priority compliance and planning matter.

What is the UAE R&D Tax Credit?

The R&D Tax Credit is an expenditure-based incentive under the UAE Corporate Tax framework. Unlike a deduction to taxable income, it operates as a direct credit against Corporate Tax and/or Top-up Tax liabilities.
Key parameters:

• The credit operates on a tiered, progressive basis, starting at 15%, 35% and finally 50% for the upper threshold
• The credit is non-refundable, it may only be utilised against Corporate Tax and/or Top-up Tax liabilities
• Qualifying expenditure is capped at AED 5 million per Qualifying Entity or Tax Group per Tax Period
• Applies to tax periods beginning on or after 1 January 2026
• First claims are expected to be filed in 2027

Credit Rates and Dual-Threshold Structure

The credit operates on a progressive, tiered basis. Qualifying Entities or Tax Groups must satisfy both a qualifying expenditure threshold AND a minimum average R&D staff headcount to access each credit tier:

If a taxpayer meets the expenditure threshold for a particular tier but not the staff threshold, the credit rate is adjusted downward to the highest tier where both conditions are satisfied
There is also a minimum qualifying R&D expenditure threshold of AED 500,000 per project that must be met. Projects not meeting this minimum requirement are specifically excluded as per Article 5 (3)(b) of the CD

Illustrative Calculation

The following example demonstrates the progressive calculation for an entity with AED 3.5 million qualifying expenditure and 14 or more average R&D staff:

In this example, the effective blended credit rate is approximately 35.7% of total qualifying expenditure, yielding a credit of AED 1,250,000 against Corporate Tax and/or Top-up Tax liabilities.

What Qualifies as R&D?

An activity conducted in the UAE as part of an R&D Project qualifies where it meets all five criteria drawn from the OECD Frascati Manual:

• Novel – aims to produce new findings
• Creative – involves original concepts or hypotheses
• Uncertain – the outcome or means of achieving it are not known in advance
• Systematic – follows a plan and budget
• Transferable/Reproducible – results can be applied or replicated in other contexts

The following does not qualify:

• R&D activities in social sciences, humanities, and the arts
• Routine upgrades, aesthetic changes, standard market research, or quality control testing
• Any R&D conducted outside the UAE, only the in-State portion qualifies

Qualifying R&D Expenditure

The Decision defines three categories of qualifying expenditure, each with specific conditions and exclusions:

The 30% Staff Cost Uplift
The automatic 30% uplift on staff costs to account for overheads is a meaningful benefit. It effectively increases the qualifying expenditure base without requiring separate tracking or substantiation of actual overhead allocations. For R&D-intensive businesses where staff costs dominate the expenditure profile, this uplift can materially improve the overall credit quantum.

Cost Contribution Arrangements (CCAs)

Where a Qualifying Entity participates in a CCA for joint R&D, its qualifying expenditure is the portion of its contribution determined at arm’s length and corresponding to its expected share of benefits. Only the portion attributable to R&D carried out within the UAE qualifies. Transfer pricing documentation is essential for CCA participants.

Mandatory Pre-Approval

This is a Hard Gating Condition
Pre-approval from the Council is mandatory for every R&D Project for which the credit is claimed. The Council may also require ongoing progress updates, supported by technical documentation. Late or incomplete applications risk disqualification regardless of the merits of the underlying R&D.

Unlike many international R&D incentive schemes that operate on a self-assessment basis with post filing review, the UAE has adopted a gatekeeping model. Businesses should treat pre-approval preparation with the same rigour as a ruling application, including:

• Detailed project descriptions with clear articulation of each of the Frascati criterion
• Expenditure projections broken down by category
• R&D staffing plans with headcount projections
• Evidence of UAE-based activity and oversight

Record-Keeping Requirements

Qualifying Entities must maintain comprehensive technical documentation for seven years following the end of the relevant Tax Period or Fiscal Year. Documentation shall include written, visual, and electronic records and must cover:

• Project objectives and scientific/technical hypotheses
• Methodologies, processes, and experimental design
• Experiment records and findings
• Expenditure tracking and cost attribution to R&D activities
• Evidence that activities were conducted in the UAE

The Council may request progress updates and technical documentation at any time, not only at the point of filing. Documentation must be created contemporaneously and meet the prescribed standards accordingly.

Commercial Significance

The R&D Tax Credit can materially change the economics of innovation investment. For an entity spending AED 3.5 million on qualifying R&D with sufficient headcount, the credit can reach AED 1.25 million, a material benefit to any business.

Who should be prioritising this now:

• Technology and digital platform businesses investing in product development
• AI, biotech, and advanced manufacturing companies
• Construction and engineering companies investing in novel techniques and capabilities
• Free zone innovation hubs and R&D centres
• Multinationals establishing regional R&D operations in the UAE
• SMEs with systematic development programmes

A Note for Early-Stage Companies
The non-refundable nature of the credit means pre-profit or loss-making businesses will not receive cash back and cannot immediately benefit. The carry-forward mechanism provides meaningful relief, but ownership continuity requirements and the five-year exit claw-back constrain utility for companies undergoing rapid growth, fundraising, or restructuring.

Pre-Approval Is a Strategic Imperative, Not an Administrative Formality

Businesses should treat pre-approval preparation with the same rigour as a formal ruling application. Late or incomplete applications risk disqualification regardless of the merits of the underlying R&D. We recommend beginning preparation immediately, even before formal Council guidance is published.

Intra-Group Transactions Require Careful Structuring

The Decision consistently excludes intra-Tax Group transactions from qualifying expenditure, whether staff cost recharges, consumable purchases, or subcontracting fees between group members. Groups with centralised R&D functions that recharge costs to operating entities will need to review their transfer pricing arrangements and ensure qualifying expenditure is correctly identified and attributed.

Interaction with Pillar Two / DMTT Adds Complexity

The credit’s application against Top-up Tax liability for Domestic Groups introduces an additional layer of complexity for large multinationals. The ordering rule Corporate Tax first, then Top-up Tax must be carefully modelled, particularly for groups where the effective tax rate is close to the 15% minimum.
The interplay between Qualified Refundable Tax Credits under GloBE rules and the UAE’s nonrefundable R&D Tax Credit will require bespoke analysis.

Get in Touch

Please reach out to Nimish Goel, Rakesh Jain, Fran Wilhelm and Farid Jumah or contact your Dhruva relationship partner to explore your R&D eligibility and readiness.