Navigating corporate tax in the UAE can be challenging, especially when it comes to handling income from intellectual property (IP).
In this blog, we'll explore how Qualifying Intellectual Property (QIP) can impact your corporate tax liability and how to benefit from it.
What is Qualifying Intellectual Property?
Qualifying Intellectual Property refers to specific types of IP that can benefit from special tax rules in the UAE.
This includes patents, copyrighted software, and rights equivalent to patents. Trademarks and other marketing-related IP are not included.
How Does Corporate Tax Apply to QIP?
Income derived from QIP can benefit from a 0% corporate tax rate if there's a direct connection, or "nexus," between the income and the research and development (R&D) expenditures incurred by the Qualifying Free Zone Person (QFZP).
If a QFZP acquires QIP or outsources R&D to a related party outside the UAE, this portion of the income will not be considered Qualifying Income and will be subject to the standard 9% corporate tax rate.
Case Study 1: Tracking R&D Expenditures
Company G is a tech firm in a free zone that developed a new software. They spent AED 200,000 on R&D and earned AED 300,000 from the software. Since they conducted the R&D in-house, the income from the software is treated as Qualifying Income and benefits from the 0% tax rate.
Case Study 2: Outsourcing R&D
Company H outsourced part of their R&D to a related party outside the UAE, costing AED 100,000. They earned AED 400,000 from the resulting patent. Only the portion of income related to the AED 300,000 spent on in-house R&D benefits from the 0% rate. The remaining income is taxed at 9%.
Benefits of Proper Tracking
To benefit from these rules, a QFZP must track expenditures and income related to QIP accurately. This involves maintaining detailed records and establishing a system that shows how R&D expenditures contribute to the income from QIP.
How Fastlane Can Help
At Fastlane, we specialize in helping businesses navigate the complexities of corporate tax. Our experts can assist in setting up robust tracking systems to ensure you maximize your benefits from QIP and remain compliant with UAE tax laws.
