Can Free Zone Companies Claim UAE R&D Tax Credits?

The short answer is yes, but with conditions

Many founders and finance directors in UAE free zones assume they are automatically excluded from the UAE R&D Tax Credit. The position is commonly misunderstood, and it is costing businesses credits they are legitimately entitled to claim.

Cabinet Decision No. 215 of 2025 does not exclude free zone companies outright. It sets out specific pathways through which a free zone company can access the credit. Whether your company qualifies depends on which tax regime applies to you, not simply on where you are incorporated.

This guide explains both pathways, which free zone companies fall outside them, and the claw-back triggers that could wipe out credits you have already claimed.

What is a Qualifying Free Zone Person?

A Qualifying Free Zone Person (QFZP) is a legal entity incorporated in a UAE free zone, such as DMCC, DIFC, ADGM, JAFZA, RAKEZ, or any other designated zone, that meets the QFZP conditions under the UAE Corporate Tax Law.

A QFZP is taxed at 0% on its Qualifying Income. That 0% rate is precisely why the R&D Tax Credit question becomes complicated: the credit offsets corporate tax, and if you are paying 0%, there is no liability to offset.

But not all free zone companies sit in the QFZP position. And QFZP status can be lost. The legislation covers both scenarios.

The two qualifying pathways

Pathway 1: Free zone company subject to 9% Corporate Tax on R&D-derived income

A Free Zone entity qualifies under Pathway 1 where it is subject to Corporate Tax at 9% on Taxable Income derived from the Qualifying R&D Activities in the relevant Tax Period. Cabinet Decision No. 215 of 2025 Article 3(2)(a) reads:

"It is subject to Corporate Tax at a rate of 9% (nine percent) on Taxable Income for the Tax Period in which the Qualifying R&D Expenditure is incurred, and such Taxable Income is derived from the Qualifying R&D Activities."

Scenario A: The principal route, loss of QFZP status

In practice, Pathway 1 is most commonly triggered where the entity has lost QFZP status for the relevant tax period. This can happen in two ways.

First, the QFZP may breach the de-minimis threshold under Cabinet Decision No. 100 of 2023, where non-qualifying revenue exceeds the lower of AED 5,000,000 or 5% of total revenue. Loss of QFZP status under this route triggers a 5-period lock-out: the tax period of loss and the four subsequent tax periods. During that window the entity is subject to the standard 9% Corporate Tax on all taxable income.

Second, the entity may elect out of QFZP status under Article 18(2) of Federal Decree-Law No. 47 of 2022, in which case the entity is a standard 9% Corporate Tax payer from the start of the relevant period. The duration of a voluntary election and whether it triggers the same 5-period lock-out consequence as de-minimis failure are matters on which FTA guidance should be checked before any restructuring decision.

In either case, once the entity is subject to 9% Corporate Tax, the R&D Tax Credit is available on the same basis as any mainland UAE business: satisfy the five qualifying activity criteria under Ministerial Decision No. 24 of 2026 Article 3, satisfy the staffing and expenditure thresholds, obtain pre-approval from the Emirates R&D Council, and meet the general conditions in Article 3(1) of CD 215/2025 (including beneficial entitlement to the returns of the R&D).

Scenario B: A narrow technical second reading

Article 3(2)(a) could also, on a literal reading, apply to an otherwise valid QFZP where specific R&D-derived income falls within the Taxable Income category at 9% (for example, non-qualifying income sitting within the de-minimis pocket, taxed under FDL 47/2022 Article 3(2)(b)). This second reading is not confirmed by Emirates R&D Council or FTA guidance as at the date of this article. Any QFZP considering this route should obtain a formal ERDC or FTA clarification before filing. In most practical cases, a QFZP interested in accessing the R&D Tax Credit will be better served by Pathway 2 (DMTT) if in scope, or by electing out of QFZP status under Pathway 1 with a full understanding of the 5-period consequence.

The 5-period lock-out is a material planning consideration. A QFZP considering a deliberate structure change to access Pathway 1 must model a minimum five-year commitment to 9% Corporate Tax status.

Pathway 2: Free zone entity within a Domestic Group subject to DMTT

The second pathway applies to free zone entities that are Constituent Entities, Joint Ventures, or JV Subsidiaries of a Domestic Group within the scope of the Domestic Minimum Top-up Tax (DMTT).

The DMTT is a 15% minimum tax introduced under Cabinet Decision No. 142 of 2024, applying to UAE entities that are members of multinational enterprise groups with consolidated global revenues of EUR 750 million or more. It aligns with the OECD's Pillar Two framework.

Under MD 24/2026 Article 14, the R&D Tax Credit arising to a Qualifying Entity that is a Constituent Entity, Joint Venture, or JV Subsidiary of a Domestic Group within the scope of CD 142/2024 is utilised against the Top-up Tax liability of the relevant Domestic Group, not the individual entity. This is a meaningful concession: large multinationals with UAE free zone operations actively spending on qualifying R&D in the UAE can use the credit against their Domestic Group's DMTT charge.

The same qualifying conditions apply: the R&D must meet all five criteria (novel, creative, uncertain, systematic, transferable), the activity must be conducted within UAE territory, and pre-approval from the Emirates R&D Council is mandatory per project.

Who does not qualify

This is the part most commentary glosses over, and it is the most important section for the majority of UAE free zone companies.

If your company is a QFZP paying 0% on all its qualifying income, and it is not a Constituent Entity, Joint Venture, or JV Subsidiary of a Domestic Group in scope for DMTT, it does not currently qualify for the UAE R&D Tax Credit.

The credit is non-refundable and only offsets a Corporate Tax or Top-up Tax liability. A pure QFZP at 0% has no liability to offset against and cannot claim. Because a pure QFZP cannot claim in the first place, there are no credits to carry forward into any future period where tax liability might arise.

This affects many small and medium-sized free zone businesses operating in DMCC, DIFC, ADGM, RAKEZ, and similar zones under the standard QFZP structure. If your accountant has confirmed that your company is a QFZP paying 0% on its qualifying income and you are not part of a Domestic Group subject to DMTT, you are outside the current regime.

Cabinet Decision No. 215 of 2025 Article 2(2) contemplates that R&D Tax Credits may become refundable through a future ministerial decision. The statutory framework for refundability is already in place. It simply has not been activated yet. Until it is, plan on the basis of the current live regime.

The 5-year claw-back risk every free zone company must know

Whether you are a mainland company or a free zone company claiming through one of the two pathways, there is a structural risk specific to corporate structure changes that requires careful planning.

MD 24/2026 Article 16(2) sets out a 5-year claw-back. Where, within five years from the end of the tax period in which an R&D Tax Credit was last claimed, the Qualifying Entity:

• ceases to be a Taxable Person, or

• becomes a Qualifying Free Zone Person, or

• applies the small business relief, or

• enters into liquidation, or

• redomiciles outside the State,

then any R&D Tax Credit that has been utilised is clawed back as Payable Tax or Due Tax, and any unutilised R&D Tax Credit is forfeited.

Two further consequences follow under the broader claw-back framework of CD 215/2025 Article 8:

• No other tax credits, special reliefs, Tax Losses or Pillar Two Losses may be directly or indirectly offset against the tax liability arising from the claw-back. It is a clean, unmitigable cash bill.

• Penalties applicable under Federal Decree-Law No. 28 of 2022 can apply. The clawed-back amount is treated as Due Tax or Payable Tax for penalty purposes.

In plain terms: if your company claims R&D Tax Credits as a standard Corporate Tax entity, and then restructures into a QFZP (or any of the other trigger events) within 5 years of the last period in which credits were claimed, the Federal Tax Authority can recover those credits in full, with no ability to offset the liability against other reliefs or losses.

The claw-back exception under Article 16(3) applies only to business restructuring transactions that meet the conditions of Article 7 of MD 24/2026. Standard free zone migration is not covered by this exception.

This is a direct and serious risk for companies considering a free zone migration for tax planning purposes. The claw-back must be modelled alongside any restructuring plan before a decision is made.

The same logic applies in reverse under the DMTT pathway: if you are claiming under Pathway 2 and your entity subsequently ceases to be a Constituent Entity, Joint Venture or JV Subsidiary of an in-scope Domestic Group, your future eligibility ends. Historic utilisations may also be exposed depending on the facts of the exit.

Plan your corporate structure before you claim, not after.

What to check before you file

If you are a free zone company and you believe you may qualify, work through these four questions before approaching the Emirates R&D Council for pre-approval.

1. What tax regime applies to your entity for the relevant tax period?

Confirm with your tax adviser whether your entity is:

• A QFZP paying 0% on all qualifying income (outside the regime unless also in scope for DMTT),

• A QFZP that has lost its status under Cabinet Decision No. 100 of 2023, now subject to 9% CT for the current tax period and the four subsequent tax periods (Pathway 1 Scenario A applies),

• A QFZP with specific R&D-derived income that might fall within the Taxable Income category at 9% CT within an otherwise valid QFZP (Pathway 1 Scenario B under CD 215/2025 Article 3(2)(a), contingent on ERDC/FTA clarification),

• A Constituent Entity, Joint Venture or JV Subsidiary of an in-scope Domestic Group (Pathway 2 applies), or

• Some combination of the above across different tax periods.

2. Is your entity part of a multinational group with EUR 750M+ consolidated global revenue?

If yes, confirm whether the UAE entity is within the scope of the DMTT under Cabinet Decision No. 142 of 2024. Pillar Two exposure globally is a strong indicator.

3. Is there any planned restructuring in the next 5 years?

If your company is considering a change in structure, a QFZP election, a small business relief election, a merger or acquisition, or a redomiciliation, the 5-year claw-back window under MD 24/2026 Article 16(2) must be modelled. Pre-approval, utilisation, and any restructuring plan need to be sequenced.

4. Is your R&D activity genuinely conducted in the UAE?

Free zone companies sometimes operate with distributed teams. MD 24/2026 Article 3(3) requires that R&D activities are carried out within UAE territory. Where a project spans UAE and overseas activity, only the UAE-performed portion qualifies; the overseas portion is ring-fenced out. Remote or overseas R&D activity alone does not qualify, regardless of where the entity is incorporated.

Activity in the fields of social sciences, humanities, and the arts is also excluded from Qualifying R&D Activity under MD 24/2026 Article 3(4), regardless of whether it is conducted in the UAE.

What you should do now

If you have worked through those four questions and believe your free zone company has a qualifying pathway, the next step is an eligibility assessment before committing resources to a claim.

RDvault works with UAE free zone businesses to determine whether Pathway 1 or Pathway 2 applies, scope qualifying R&D activities, and prepare Emirates R&D Council pre-approval applications. Book a free assessment or use our eligibility checker to get an initial read on your position.

If you have confirmed you qualify and want to understand the full claiming process, the step-by-step guide to claiming the UAE R&D Tax Credit covers the statutory requirements from pre-approval through to submission.

For a deeper understanding of what expenditure qualifies, see UAE R&D Tax: Qualifying Expenditure Explained. For the staffing and headcount thresholds, see UAE R&D Tax Credit Staffing Thresholds: the 2, 6 and 14 Rule.

If you are not yet certain which tax regime applies to your R&D income, speak to your tax adviser first. Claiming on the wrong basis is worse than not claiming at all.

Frequently asked questions

Can a DMCC company claim UAE R&D Tax Credits?

Only if the DMCC entity satisfies one of the two QFZP pathways under CD 215/2025 Article 3(2). Pathway 1 requires the entity to be subject to 9% Corporate Tax on taxable income derived from the qualifying R&D activities, most commonly because QFZP status has been lost for the period under Cabinet Decision No. 100 of 2023 (de-minimis failure, triggering a 5-period lock-out) or because the entity has elected out of QFZP status under Federal Decree-Law No. 47 of 2022 Article 18(2). Pathway 2 requires the entity to be subject to Top-up Tax as a Constituent Entity, Joint Venture, or JV Subsidiary of a Domestic Group in scope for Cabinet Decision No. 142 of 2024. A DMCC QFZP that is also a Constituent Entity of an MNE group within CD 142/2024 scope may still qualify under Pathway 2 by utilising the credit at Domestic Group level. A pure DMCC QFZP paying 0% on qualifying income and not in scope for DMTT does not currently qualify.

What is the DMTT and how does it interact with the R&D credit?

The Domestic Minimum Top-up Tax is a 15% minimum tax applying to UAE entities that are members of multinational enterprise groups with consolidated global revenue of EUR 750 million or more, under Cabinet Decision No. 142 of 2024. Under MD 24/2026 Article 14, the R&D Tax Credit arising to a Constituent Entity, Joint Venture, or JV Subsidiary of a Domestic Group within the scope of CD 142/2024 is utilised against the Domestic Group's Top-up Tax liability, not the individual entity's liability.

What are the 5-year claw-back triggers under Ministerial Decision No. 24 of 2026?

MD 24/2026 Article 16(2) lists five triggers, any of which within five years from the end of the tax period in which the R&D Tax Credit was last claimed results in a claw-back: ceasing to be a Taxable Person, becoming a Qualifying Free Zone Person, applying small business relief, entering liquidation, or redomiciling outside the UAE. Utilised credits are clawed back as Payable Tax and unused credits are forfeited. Under CD 215/2025 Article 8(3), no other tax credits, special reliefs, Tax Losses or Pillar Two Losses may be offset against the claw-back liability. Federal Decree-Law No. 28 of 2022 penalties can also apply, with the clawed-back amount treated as Due Tax for penalty purposes.

Does being in DIFC or ADGM affect eligibility differently from other free zones?

Under the current legislation, the QFZP framework applies equally across all designated zones. DIFC and ADGM entities are not treated differently from DMCC or JAFZA entities for R&D credit purposes. What matters is the tax regime applicable to the entity, not the specific free zone. Future Emirates R&D Council guidance may refine this position.

Is there a cash refund available for free zone companies?

Not at present. The credit is non-refundable and can only offset a current Corporate Tax or DMTT Top-up Tax liability, or carry forward against future liabilities under MD 24/2026 Article 5 (subject to the ownership-continuity or same-business test). Cabinet Decision No. 215 of 2025 Article 2(2) contemplates refundability through a future ministerial decision, but this has not been activated.

Last reviewed: 19 April 2026. This article is for informational purposes only and does not constitute tax advice. Consult a qualified UAE tax adviser on your specific circumstances.