UAE R&D Tax Credit Phase 1 vs Phase 2: Plan Now
Phase 1 of the UAE R&D Tax Credit is live. Phase 2 is expected to bring refundability. Here is how to structure your R&D now to benefit from both stages.
Shoayb Patel
Founder & CEO
At a glance
Phase 1 is live. From 1 January 2026, qualifying UAE businesses can claim a non-refundable R&D tax credit that reduces their corporate tax bill.
Phase 2 is expected but not yet legislated. Its features are signposted in official UAE government materials but have not been codified in Cabinet or Ministerial Decisions.
The core difference matters now. Phase 1 only delivers value to profitable businesses with corporate tax to offset. Phase 2 is expected to introduce refundability, which would change the economics for loss-making and pre-profit R&D companies.
What to do today. Build documentation, project definitions, and headcount records that satisfy Phase 1 rules. The same records will carry directly into Phase 2 without reconstruction.
For the headline credit rates and headcount thresholds, see UAE R&D Tax Credit Staffing Thresholds: the 2, 6 and 14 Rule. For what costs qualify, see UAE R&D Tax: Qualifying Expenditure Explained.
What Phase 1 actually looks like
Phase 1 of the UAE R&D Tax Credit operates under Cabinet Decision No. 215 of 2025 (CD 215/2025) and Ministerial Decision No. 24 of 2026 (MD 24/2026). It is effective for tax periods starting on or after 1 January 2026. Understanding its precise terms is essential before planning.
A non-refundable credit
The Phase 1 credit offsets corporate tax liability under Federal Decree-Law No. 47 of 2022. It is not a cash payment from the government. A business with no corporate tax liability, because it is loss-making or because it already has other reliefs that eliminate its tax bill, cannot convert the credit into cash under Phase 1. The credit can only reduce tax owed.
However, unused credits can be carried forward to subsequent tax periods under MD 24/2026 Article 5 (subject to conditions). The legislation does not specify a carry-forward expiry. A loss-making company today can therefore build up a credit balance now and apply it against future corporate tax liability when it returns to profit.
This still has a direct consequence for cash flow planning. The practical value of the credit in the current year depends on the business having sufficient taxable profit against which to apply it. Loss-making companies and early-stage businesses need to model the extent to which the credit is actually accessible in their tax period and how the carry-forward balance will unwind over time.
Tiered rates and the hard cap
MD 24/2026 Article 2(1) sets out three tiers of credit rate, each requiring both a minimum expenditure level and a minimum R&D headcount to be satisfied simultaneously:
Tier | Qualifying expenditure band | Rate | Minimum R&D staff |
|---|---|---|---|
1 | First AED 1,000,000 | 15% | 2 |
2 | AED 1,000,001 to AED 2,000,000 | 35% | 6 |
3 | AED 2,000,001 to AED 5,000,000 | 50% | 14 |
Maximum qualifying expenditure is capped at AED 5,000,000 per qualifying entity per tax period (or per Tax Group under Article 2(3)). Above this cap, no further credit accrues.
At the cap, the maximum credit value is:
15% × AED 1M = AED 150,000
35% × AED 1M = AED 350,000
50% × AED 3M = AED 1,500,000
Total = AED 2,000,000
The headline "AED 2 million credit" only materialises when the business has both at least AED 5,000,000 of qualifying expenditure and at least 14 R&D staff directly engaged in the qualifying activities. Most businesses will sit at Tier 1 or Tier 2 for their first claim.
Qualifying expenditure categories
Phase 1 qualifying expenditure covers four defined categories under CD 215/2025 Article 5(1), plus an open Minister-specified category and a provision for capitalised R&D costs:
Staff costs (with a 30% overhead uplift on qualifying staff costs only)
Consumable costs
Subcontracting fees (UAE-based, arm's length)
Cost contribution arrangement contributions
Capitalised R&D costs that fall within the categories above
The precise scope, exclusions, and gateway conditions are covered in UAE R&D Tax: Qualifying Expenditure Explained.
The pre-approval precondition
Every qualifying R&D project requires written pre-approval from the Emirates R&D Council under MD 24/2026 Article 4. The Council's pre-approval portal has not yet launched. Retrospective pre-approval is not available. There is no mechanism in the legislation to recover a missed pre-approval, so businesses must be ready to submit as soon as the portal opens. For a full walk-through of the pre-approval process, see Emirates R&D Council Pre-Approval: The Definitive Guide.
What Phase 2 is expected to bring
Phase 2 is referenced in the UAE Ministry of Finance announcement launching Phase 1 and in supporting UAE government guidance, but it has not yet been codified in Cabinet or Ministerial Decisions. No timeline for Phase 2 has been published. Based on the signposted design direction and comparable regime design internationally, the following features are expected:
Feature | Phase 1 (live) | Phase 2 (anticipated) |
|---|---|---|
Credit type | Non-refundable, offsets corporate tax | Expected to include refundability for qualifying businesses |
Qualifying expenditure cap | AED 5,000,000 per entity or Tax Group per period | Cap may increase, be tiered, or be removed |
Qualifying expenditure scope | Four defined categories under Art 5(1) | Expected to be broader |
Minimum spend per project | AED 500,000 per project per period (pre-uplift) | May be reduced or tiered |
Pre-approval process | Emirates R&D Council, mandatory, per project | May evolve as the Council establishes precedent |
Important caveat: The above Phase 2 features are anticipated, not confirmed. RDvault will update this guidance the moment Phase 2 is formally announced in legislation.
Why Phase 2 changes your planning today
Even though Phase 2 has not launched, its anticipated features should influence how businesses structure their R&D programmes right now. The reason is simple: the documentation, project definitions, headcount records, and compliance standards established under Phase 1 will form the basis of any Phase 2 claim. Businesses that build strong foundations under Phase 1 will transition into Phase 2 without rebuilding.
The refundability opportunity
Cabinet Decision 215/2025 Article 2(2) expressly contemplates refundability via a future ministerial decision. This is the statutory hook that makes Phase 2 refundability more than speculation, the framework to introduce it already exists in the primary legislation, it simply has not been activated yet.
If Phase 2 introduces refundable credits, the regime becomes accessible to loss-making and pre-profit companies that cannot currently extract cash from the non-refundable Phase 1 credit. This is a material change for the UAE startup and scale-up ecosystem. A company burning cash on a serious R&D programme could be entitled to a cash refund rather than carrying the credit forward until profitability.
For finance teams at loss-making R&D companies, the implication is that documentation should start now. The records built under Phase 1, even if no Phase 1 credit is actually claimed, will underpin any future Phase 2 claim.
Expanded qualifying expenditure
If Phase 2 widens the categories of qualifying expenditure, costs that fall outside Phase 1 rules today may qualify under Phase 2 rules. Keeping comprehensive records of all R&D-adjacent spending, not just the four Phase 1 categories, preserves optionality at low cost.
Project definitions that carry over
The five criteria under MD 24/2026 Article 3 (novel, creative, uncertain, systematic, transferable) are assessed having regard to the Frascati Manual and are the foundation of the qualifying R&D activity definition. These criteria are highly unlikely to change in Phase 2, because they are the international standard for what constitutes R&D. Projects defined and documented rigorously under Phase 1 will satisfy Phase 2 without rework.
Phase 1 cash flow reality
For businesses that are profitable and have UAE corporate tax liability, Phase 1 is a real, bankable benefit. But timing needs careful modelling.
The credit is claimed on the corporate tax return for the relevant tax period. UAE corporate tax returns are filed after the period ends, and the Emirates R&D Council pre-approval must precede the claim. The typical sequence:
R&D expenditure incurred during the tax period (for example, January to December 2026)
Pre-approval application submitted to the Emirates R&D Council during or shortly after the period
Pre-approval granted (timelines unknown until the portal launches)
Tax return filed after period end, incorporating the R&D tax credit
Credit applied to reduce corporate tax liability, cash benefit realised when tax payment is made
The practical gap between incurring expenditure and realising the cash benefit is likely to be 12 months or more. This is not a reason to avoid the credit. It is a reason to model the timing realistically in the FP&A plan rather than assuming an immediate cash inflow.
For loss-making companies: Under Phase 1, if the credit exceeds the available tax liability, it cannot be converted to cash. Phase 2 refundability would change this fundamentally. Loss-making R&D businesses should build documentation now in anticipation.
How to structure your R&D for both phases
The following actions will position a business well for both Phase 1 and Phase 2:
Define projects rigorously. Each project needs a clear scientific or technological objective, a documented technical uncertainty, and a systematic methodology. These standards will carry over to Phase 2 without change.
Document all R&D-adjacent spending. Track costs that fall outside the Phase 1 qualifying categories as well, for potential Phase 2 inclusion. This is a low-cost insurance policy.
Maintain time records for all R&D staff. Staff costs are the largest qualifying category and the foundation of both phases. Precise time allocation records are not optional.
Engage with the Emirates R&D Council early. Businesses that build strong compliance records under Phase 1 are well positioned to benefit from any streamlined approval track in Phase 2.
Model both scenarios in the FP&A plan. Build a financial model that shows Phase 1 credit timing and a Phase 2 scenario with refundability assumed. This helps boards and investors understand the full opportunity.
Summary
Phase 1 of the UAE R&D Tax Credit is live from 1 January 2026. It offers a non-refundable credit at 15%, 35%, or 50% against qualifying expenditure, capped at AED 5,000,000 of qualifying expenditure and AED 2,000,000 of credit per entity (or per Tax Group) per period. Pre-approval from the Emirates R&D Council is mandatory for every project.
Phase 2 is anticipated to introduce refundable credits and potentially wider qualifying categories, but has not yet been formally launched in legislation.
Businesses that structure their R&D rigorously under Phase 1, with Frascati-compliant project definitions, comprehensive documentation, and strong headcount and expenditure monitoring, will be positioned to transition smoothly into Phase 2 without rebuilding their compliance infrastructure.
Loss-making companies and pre-profit businesses should build documentation now, even if Phase 1 credit is not immediately accessible, in anticipation of Phase 2 refundability.
Contact RDvault to discuss how to structure your R&D for both phases.
Sources: Cabinet Decision No. 215 of 2025 | Ministerial Decision No. 24 of 2026 | UAE Ministry of Finance Phase 1 announcement. Phase 2 features are anticipated based on signposted design direction, not confirmed legislation. For informational purposes only, not tax advice.
