Up to 50% for Innovation: How the New R&D Loan in the UAE Works

The Antwort Law team notes an important change in the United Arab Emirates' tax system—the launch of the first phase of the research and development (R&D) tax incentive program. This innovation reflects the country's strategic focus on developing an innovative economy and aligning tax policy with international standards.

This involves the introduction of a tax credit that can reach 50% of qualifying R&D expenses, with a cap of AED 5 million per tax period. The credit is non-refundable: it does not involve direct payments but is used to reduce the tax burden.

From a practical standpoint, the mechanism is implemented through a combination of decisions by the Cabinet of Ministers and relevant bodies, which helps maintain a balance between business incentives and compliance with the requirements of the global tax system, including Pillar Two rules.

A key feature of the program is its calculation approach. It does not use a single rate: the amount of the tax benefit depends on both the volume of investment and the actual presence of the R&D team in the country. Thus, the state stimulates not only funding but also the creation of a fully-fledged research infrastructure.

To summarize the mechanics, it is as follows:

• The base level is approximately 15% of the initial expenditure.
• As investment grows, the rate increases to 35%.
• The maximum level is 50% for significant expenditures and a well-established R&D team.
• A mandatory requirement is the presence of employees engaged in research and development.

Regarding the range of potential participants, the program is targeted at companies already registered with the UAE corporate tax system. These can be both local companies and international groups operating through a permanent establishment.

However, the legislator has deliberately limited access for some businesses. Specifically, the following will not be able to take advantage of the incentive:

• Companies using the small business regime
• Entities without real research activities
• Projects where "innovations" are of a formal or marketing nature

This approach demonstrates a focus on substantive, rather than nominal, R&D initiatives.

The definition of R&D activity itself deserves special attention. Legislators rely on international OECD standards, which means a fairly strict approach. This applies to projects that involve elements of uncertainty, experimentation, and the creation of new knowledge.

In practice, this means that the following are generally eligible for the tax credit:

• technological developments
• engineering and manufacturing projects
• life science and energy solutions

While areas such as marketing, humanities research, or standard IT setups are not taken into account.

From an administrative perspective, the program is quite strict. To qualify for the tax credit, companies must coordinate their projects in advance with the Emirates Research and Development Council and provide full documentation.

Key compliance requirements include:

• preliminary approval of each R&D project
• submission of the application simultaneously with the tax return
• availability of supporting documentation for expenses
• long-term storage of documentation
• readiness for audits and subsequent inspections

In the event of non-compliance, a mechanism for refunding the received tax benefits is provided.

Separately worth noting is the decision to make the loan non-refundable in the initial stage. According to the Antwort Law team, this is due to the need to ensure proper integration into the global minimum tax rules and reduce administrative complexity for international groups.

In a broader context, the launch of R&D incentives appears to be a logical continuation of the development of the UAE tax system. The country is gradually moving from a basic tax model to more complex instruments aimed at attracting investment and developing high-tech industries.

Compared to other countries in the region, the UAE's approach appears more systemic. Instead of targeted incentives or preferences in individual zones, a universal mechanism integrated into the corporate tax system is being developed, making it more understandable for international businesses.

In the short term, the program's effectiveness will depend on several factors:

• speed and transparency of the project approval process
• clear explanations of qualifying expenses
• consistency in tax administration

At Antwort Law, we view the introduction of the R&D tax credit as a significant step toward strengthening the UAE's investment attractiveness. If implemented correctly, it could attract companies focused on long-term technology investments to the country.

We already recommend that businesses conduct a preliminary assessment of their activities and determine whether they meet the program's criteria. Early preparation will not only mitigate risks but also maximize the effectiveness of the program, create new opportunities for tax planning.

Lidia Ivanova

International lawyer
Antwort Law