Qualifying Intellectual Property under UAE’s Free Zones Regime

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Introduction

The UAE Corporate Tax (CT) Law provides that Qualifying Income (QI) of Qualifying Free Zone Persons (QFZPs) is taxed at 0% CT rate. Non-qualifying income on QFZPs or income of non-QFZPs is taxed at the normal 9% CT rate from 1 June 2023.

Recently, the Cabinet Decision No. 100 of 2023 and Ministerial Decision No. 265 of 2023, have issued clarifications on various aspects of the QFZPs regime. In this write-up, we have analyzed the clarifications issued with respect to intellectual property or intangibles.

Repeal of previous decisions

The new decisions have repealed the Cabinet Decision No. 55 of 2023 and Ministerial Decision No. 139 of 2023. The repealed decisions categorized “ownership or exploitation of intellectual property assets” under Excluded Activities, i.e., income from such activities was not eligible for 0% tax rate under the QFZPs regime. However, in a welcome development, the new decisions consider “ownership or exploitation of Qualifying Intellectual Property” as Qualifying Activities eligible for 0% tax rate.

Qualifying Intellectual Property (QIP)

The Ministerial Decision 265 defines various terms as follows:

Calculation of QI

The recent decisions introduce a specific formula for calculating QI of QIP as follows:

-        Qualifying expenditures are expenses directly related to research and development activities, conducted by the QFZP or outsourced to an unrelated party, and associated with the creation, invention, or significant advancement of the QIP.

-        Uplift expenditures refer to additional costs or investments made to enhance the value, quality, or functionality of intellectual property assets. These expenditures are allowed up to 30% of qualifying expenditures, provided they do not exceed overall expenditures.

-        Total expenditures encompass all costs and expenses related to the QIP, including qualifying expenditures, acquisition costs, and any other associated expenses.

-        Overall income means royalties/any other income derived from QIP including embedded intellectual property income derived from the sale of products and the use of processes directly related to QIP.

As a general rule, QI does not include:

-        income attributable to a Domestic Permanent Establishment or a Foreign Permanent Establishment;

-        income derived from the ownership or exploitation of immovable property; or

-        income considered Taxable Income.

While the decisions la down the method of calculation of QI and non-qualifying income (NQI), it is imperative for the QFZP to maintain all records, books and documents differentiating the two types of income.

Conclusion

The recent decisions provide a structured approach to determine the tax treatment of income related to QIPs, offering a clear criteria for qualifying and non-qualifying income for QFZPs. Businesses dealing with intellectual property assets in Free Zones should take these rules into account for tax planning and compliance.

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