Unlocking the 0% Corporate Tax Benefit on Intellectual Property for Free Zone Companies in the UAE

The UAE’s evolving corporate tax regime introduces valuable opportunities for Free Zone businesses, especially those engaged in developing and exploiting intellectual property (IP). With a 0% corporate tax rate available for Qualifying Free Zone Persons (QFZPs) on income from Qualifying Intellectual Property (QIP), businesses can gain a significant advantage—provided they meet strict compliance conditions.
In this article, we break down what qualifies as QIP, how the preferential rate applies, and the compliance framework set by Ministerial Decision No. 265 of 2023 and Cabinet Decision No. 100 of 2023.
 
What is Qualifying Intellectual Property?

According to Cabinet Decision No. 100 of 2023, Qualifying Intellectual Property includes:

• Patents (UAE or foreign jurisdiction)
• Copyrighted software
• IP rights functionally equivalent to patents, such as:
  • Utility models
  • Plant and genetic material protection
  • Orphan drug designations
  • Supplementary protection certificates

Marketing-related IP, including trademarks, brand names, and similar assets, are not considered QIP and are excluded from the 0% tax benefit.
 
How is Qualifying Income from IP Calculated?

Under Ministerial Decision No. 265 of 2023, the QIP benefit is linked to the nexus approach—a formula that ensures the 0% rate only applies to income generated through substantial in-house R&D efforts or properly supervised outsourcing to non-related parties.

The formula is as follows:

Qualifying Income = (Qualifying Expenditure × 130%) ÷ Overall Expenditure × Overall Income

• Qualifying Expenditure: R&D costs conducted by the QFZP or outsourced to a non-related party.
• Overall Expenditure: Total R&D costs including acquisition or related party expenses.
• Overall Income: Royalties and revenue directly attributed to the QIP.

 
R&D expenses paid to related parties are excluded from qualifying expenditures.
 
Common Pitfalls and De Minimis Rule

To retain QFZP status and the 0% rate, companies must ensure:

1. Non-qualifying revenue remains below:
   • 5% of total revenue or
   • AED 5 million, whichever is lower (per Article 3 of Ministerial Decision 265 of 2023).
2. They do not engage in Excluded Activities, such as:
3. Leasing IP other than QIP
4. Marketing and branding-related IP
5. Adequate economic substance in the Free Zone
6. Audited financial statements
7. Transfer pricing compliance and documentation

Practical Example

Case Study 1

Company A, based in a UAE Free Zone, develops software in-house, spending AED 1.2M on R&D. It earns AED 2M from licensing this software. All income qualifies for the 0% tax rate because:

• The IP is copyrighted software (QIP)
• The R&D was conducted in-house
• The company meets all other QFZP conditions

Case Study 2

Company B outsources its R&D to a related party abroad. While it earns AED 3M from its IP, In this case only the portion tied to eligible R&D (excluding related-party costs) benefits from the 0% rate. The rest is taxed at 9%.
 
Recordkeeping and Documentation

To qualify, QFZPs must maintain clear records showing:

• Ownership and right to exploit the QIP
• Detailed R&D expenditure breakdown
• Income streams directly linked to QIP
• Evidence of compliance with the nexus requirement

The Federal Tax Authority (FTA) may audit these records at any time.
 
How Virtual Accountants Can Help

Our team at Virtual Accountants Consultants specializes in guiding businesses through the intricate requirements of UAE Corporate Tax Law. We assist in:

• Evaluating IP portfolios for QIP eligibility
• Structuring compliant R&D operations
• Setting up tracking systems for QIP income
• Preparing audited financial statements

 
Final Thoughts

The 0% corporate tax regime for Qualifying Intellectual Property is a powerful incentive for innovation-driven Free Zone businesses. However, to benefit fully, businesses must align their economic substance, R&D strategy, and financial reporting with the regulatory framework.

If you're unsure whether your IP income qualifies or need help with compliance, reach out to our tax advisory team today.

Contact us at info@corporatetaxcalculator.ae and WhatsApp: +(971) 568510264 or Visit www.corporatetaxcalculator.ae
 
References:

• Cabinet Decision No. 100 of 2023
• Ministerial Decision No. 265 of 2023
• Federal Decree-Law No. 47 of 2022
• CT Alert 6 – March 2025 Update