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The UAE Ministry of Finance recently issued guidance on Research and Development (R&D) and invited industry consultation on potential R&D tax incentives in the UAE. The goal of these incentives is to encourage higher investments in R&D projects, promote technological advancement, and stimulate economic growth.
The guide explains the definition of R&D and outlines criteria to distinguish R&D activities from non-R&D activities.
R&D Incentives Around the World
Several countries already have R&D incentive schemes, which may include direct tax benefits or other forms of support like subsidies and discounted interest rates. For example:
- India: Offers tax deductions for R&D expenditure, tax holidays, cash grants, financial support, patent-related incentives, and indirect tax refunds.
- USA: Provides accelerated depreciation of R&D assets and tax credits.
- Argentina: Offers accelerated depreciation on R&D assets, cash grants, and reduced tax rates.
- Belgium and other European countries: Provide reduced tax rates, tax credits, and tax holidays.
- Tunisia and Algeria (MENA countries): Offer tax deductions and cost-based incentives for innovative sectors and R&D investments.
Highlights from the Guide
- Definition of R&D
The guide defines R&D as "practicing creative thinking processes in a systematic, logical, and orderly manner to increase human, cultural, and societal knowledge, and to create new applications based on existing knowledge."
- Criteria for R&D Activities
For an activity to qualify as R&D, it must meet the following five criteria:
1. Novel: Generates new knowledge.
2. Creative: Creates new concepts or ideas, requiring human intervention (not routine changes).
3. Uncertain: The outcome cannot be precisely estimated.
4. Systematic: Carried out in a systematic manner with detailed records of resources used, expected outcomes, and funds utilized.
5. Transferable & Reproducible: The knowledge created should be transferable and reproducible by other researchers.
- Included and Excluded Activities
The guide further identifies R&D activities and distinguishes them from routine science and technology activities. Activities must satisfy the five core criteria to be classified as R&D. Activities that do not meet any of these criteria will be excluded. Routine science and technology activities related to commercial production, regular design changes, etc., are generally excluded.
- Examples of Non-R&D Activities:
1. Scientific and Technical Information Services: Collecting, coding, recording, classifying, publishing, translating, and analyzing information.
2. Testing and Standard Unification: Routine testing to maintain national standards.
3. Feasibility Studies: Economic feasibility studies.
4. Policy-Related Activities: Analysis/evaluation of government programs, policies, and operations.
5. R&D Funding Management Services: Managing and distributing R&D grants.
6. Indirect Support Services: Provision of technology services that are indirectly supportive.
Conclusion and interplay with Free Zone regulations
While the UAE Ministry of Finance is yet to announce R&D incentives, the guidance clarifies the basic concepts and criteria for classifying activities as R&D.
It is worth noting that, the Free Zone Persons guide throws light on certain R&D activities as far as determining the Qualifying Intellectual Property (QIP) is concerned. While income generated from QIPs will attract no tax, income from non-qualifying IPs will attract 9% tax. In such a case, expenditure incurred on non-QIPs might be eligible for other incentives. However, R&D incentives are yet to be announced in UAE and their interplay with Free Zone regulations remains to be seen.
As the government progresses towards announcing these incentives, companies should use this guidance to establish systems for classifying activities and maintaining records. This preparation will streamline the process of claiming benefits when the incentives are implemented.
Disclaimer: Content posted is for informational and knowledge sharing purposes only, and is not intended to be a substitute for professional advice related to tax, finance or accounting. The view/interpretation of the publisher is based on the available Law, guidelines and information. Each reader should take due professional care before you act after reading the contents of that article/post. No warranty whatsoever is made that any of the articles are accurate and is not intended to provide, and should not be relied on for tax or accounting advice.
