The Four Categories of Qualifying R&D Expenditure

Ministerial Decision No. 24 of 2026 identifies four specific categories of cost that can constitute Qualifying R&D Expenditure for the purposes of the R&D Tax Credit. These categories are exhaustive — costs that do not fall within one of these four categories cannot be claimed, regardless of how clearly they relate to R&D activities. The four categories are: Staff Costs, Consumable Costs, Subcontracting Fees, and contributions under a Cost Contribution Arrangement.

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Category 1: Staff Costs

Staff costs are the most significant qualifying expenditure category for most businesses — and the only category that benefits from the automatic 30% overhead uplift. Staff costs mean amounts incurred in respect of R&D Staff — full-time or full-time equivalent employees, or externally provided workers, who are directly and actively engaged in qualifying R&D activities and located in the UAE when performing those activities.

✅ What's Included

  • Salaries and wages
  • Allowances (housing, transport, etc.)
  • Medical insurance
  • Pension contributions (GPSSA, ADPF)
  • End-of-service gratuity
  • Bonuses and incentive payments
  • Benefits in kind
  • Training costs for R&D staff related to qualifying activities
  • Any other employment-related expenses under the employment contract
  • Secondees — where costs are borne by the Qualifying Entity

❌ What's Excluded

  • Employee stock option plans
  • Staff costs recharged from Tax Group members
  • Staff not located in the UAE when performing R&D activities
  • Staff not under the supervision and direct control of the Qualifying Entity

The 30% Staff Cost Uplift — Don't Leave It on the Table

Article 8(3) of Ministerial Decision No. 24 of 2026 provides that for the purposes of calculating qualifying R&D expenditure, the amount of staff costs is automatically uplifted by 30% to account for overheads reasonably attributable to the undertaking of qualifying R&D activities. This is not optional — it is a mandatory uplift built into the legislation that increases your qualifying base without requiring you to prove or identify specific overhead costs.

The 30% Staff Cost Uplift Formula

Applied automatically to all qualifying staff costs before the credit rate is applied

AED 2,000,000
Actual staff costs
× 130%
=
AED 2,600,000
Qualifying R&D expenditure

The AED 600,000 uplift requires no additional documentation — it is computed automatically.

Partial-Time R&D Employees

Where an employee does not engage in qualifying R&D activities on a full-time basis — for example, a software engineer who spends 60% of their time on qualifying R&D and 40% on commercial development — only the portion of staff costs reasonably attributable to the R&D time qualifies. In this example, 60% of that employee's total employment costs (then uplifted by 30%) would constitute qualifying R&D expenditure. Robust timesheets and activity logs are essential to support this allocation, and Fastlane's accounting team implements time-tracking systems specifically for this purpose.

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Category 2: Consumable Costs

Consumable costs are amounts incurred for consumable or transformable materials or items that are directly used in performing qualifying R&D activities and are no longer usable in their original form after such use. The key is that the material is consumed or transformed — items that remain usable after the R&D process do not qualify.

✅ What's Included

  • Consumable or transformable materials (water, fuel, power, raw materials)
  • License fees and similar costs related to intangible assets that are not capital in nature
  • Payments to patients or subjects participating in clinical trials that form part of qualifying R&D activities
  • Partial costs — where a material is only partially used in R&D, the attributable portion qualifies

❌ What's Excluded

  • Consumables disposed of in the ordinary course of business for consideration (i.e. sold)
  • Consumable costs acquired from another member of the same Tax Group
  • Capital expenditure on equipment or assets (even if used in R&D)

⚠️ Capital Expenditure Is Not a Qualifying Cost Category

Notably, the four categories of qualifying R&D expenditure do not include capital expenditure on equipment, machinery or infrastructure used in R&D activities. The acquisition cost of a laboratory, computer hardware or scientific instrument is not qualifying R&D expenditure under Ministerial Decision No. 24 of 2026. Only the consumable materials used within the R&D process qualify — not the equipment performing the process.

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Category 3: Subcontracting Fees

Where a Qualifying Entity contracts out qualifying R&D activities to a third party, the fees paid to that subcontractor may constitute qualifying R&D expenditure — but only if all six conditions under Article 10 are met simultaneously.

✅ Six Mandatory Conditions

  1. The Qualifying R&D Activities are contracted out to a person based in the UAE
  2. The activities are undertaken within the UAE
  3. The activities are not themselves subcontracted to the Qualifying Entity by another party
  4. The subcontractor does not further subcontract the activities to another party
  5. The expenditure is not attributable to a Foreign Permanent Establishment
  6. Where the Qualifying Entity and subcontractor are Related Parties, the subcontractor maintains audited financial statements

❌ What's Excluded

  • Subcontracting between members of the same Tax Group
  • Subcontractor based outside the UAE
  • Activities subcontracted to the Qualifying Entity by another party (back-to-back)
  • Amounts not at arm's length (subject to Article 34 CT Law transfer pricing rules)

For related-party subcontracting, the audited financial statement requirement for the subcontractor creates an additional compliance obligation. Fastlane's audit and accounting services cover this requirement for both the Qualifying Entity and related-party subcontractors.

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Category 4: Cost Contribution Arrangements (CCA)

A Cost Contribution Arrangement is a contractual arrangement among parties to share the contributions and risks involved in joint R&D activities, where those activities are expected to create benefits for each participant's individual business. Where a UAE Qualifying Entity participates in a CCA, its contributed portion of qualifying R&D expenditure may qualify — provided two conditions are met:

✅ Two Conditions for CCA Expenditure

  • The contribution is determined in accordance with the arm's length principle
  • The contribution corresponds to the Qualifying Entity's expected share of the benefits arising from the arrangement

Where CCA activities are conducted partly within the UAE and partly outside, only the portion attributable to UAE-based activities constitutes qualifying R&D expenditure. Transfer pricing documentation is typically required to support the arm's length determination of each party's contribution — this falls within Fastlane's Corporate Tax advisory scope.

The Tax Group Exclusions — A Common Pitfall

Three important intra-group exclusions apply across all cost categories that businesses operating as Tax Groups must be aware of:

  • Staff costs: Any staff costs recharged to a Qualifying Entity from another Tax Group member are not qualifying R&D expenditure — even if the underlying staff activity is genuinely R&D.
  • Consumable costs: Consumable materials or licenses acquired from a Tax Group member are excluded.
  • Subcontracting: Where the subcontracting is between Tax Group members, the fees are not qualifying expenditure.

These exclusions mean that internal group recharging arrangements need to be restructured carefully for the R&D Tax Credit to work effectively. Fastlane advises on optimal group structure for R&D cost flows as part of our Corporate Tax planning service.

How the Four Categories Interact: A Practical Example

Consider a UAE-based biotechnology company conducting a novel drug formulation R&D project:

  • Staff costs for 10 in-house R&D scientists: AED 1,500,000 × 130% uplift = AED 1,950,000
  • Raw materials and reagents consumed in experiments: AED 300,000
  • Clinical trial subject payments: AED 80,000
  • Subcontracting to a UAE-based independent laboratory (arm's length, non-group): AED 400,000
  • Total Qualifying R&D Expenditure: AED 2,730,000

With an average of 10 R&D staff (above the 6-staff threshold but below 14), the credit would be computed at 15% on the first AED 1M and 35% on the next AED 1M, with the remaining AED 730,000 also at 35% — yielding a total credit of AED 605,500. Reaching 14 average R&D staff would unlock 50% on the AED 730,000 above AED 2M, adding an additional AED 109,500 of credit.