UAE corporate tax: What qualifies as intellectual property and patent?

Definition of qualifying income has been expanded by latest updated cabinet decision

The National
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Corporate tax in the UAE, launched on June 1, 2023, is now having an impact on ever more existing entities whose new fiscal year is only beginning.

This is driving members of the business community to look anew at themselves.

A business is made up of more elements than many might realise. Besides core trading, there is the question of whether there are processes or components that are distinctive enough to consider them patents.

After all, businesses survive by inventing and innovating themselves into current relevance, such is the essence of competition.

The recent release of Cabinet Decision No 100, a five-page extension adding to the guidance on qualifying free zone persons, should particularly resonate with those self-aware enough to protect their intellectual property.

Effective national tax law encourages strategically targeted economic activities. The introduction of qualifying intellectual property carves out patents and software as elements that will attract zero per cent corporate tax.

Let us deal with patents first. Patents awarded anywhere under a competent authority are recognised.

More interesting is the recognition of equivalency. These are described as including “utility models, intellectual property assets that grant protection to plants and genetic material, (and) orphan drug designations”.

Proving there is no such thing as a free lunch, there are provisos. Marketing-related intellectual property, such as trademarks, do not qualify.

It is not unfair to think of patents as a very expensive path to protecting your work and what I am outlining above may be beyond the treasury of many.

Good news. The UAE government has already laid the groundwork for supporting a quasi-form of the same. The scope of the solution is clearly defined.

Called a utility certificate, this protects the innovation of technical ideas where the rules of nature underpin the solution. By this, they mean shape, structure or combination.

For avoidance of doubt, a patent is a greatly elevated version of the same. These are issued by the Development of Innovation in the Economy and Patents Department.

Called industrial design, the same department will also issue protection for rights to shape, pattern, colour or combination of these in a three dimensional form for aesthetic purposes.

How many of you in the production space know about these?

On to copyrighted software. Its inclusion appears linked to a 2020 ministerial decision that decreed its similarity to patent assets. The Federal Tax Authority is likely to release a document that drills further down into the details that would highlight particular divergences.

Until now we have only been looking at income. What about the qualifying costs? On this detail is light. However, it would appear that the OECD framework is being followed. Using that we can make some informed predictions.

All research and development costs incurred in the UAE, potentially including those from parties outside free zones and foreign based unconnected persons, might be allowable.

UAE corporate tax: What you need to know

UAE corporate tax: What you need to know

This total can have an additional 30 per cent of other costs added to come to a sum number. The principle is that costs are rarely incurred standalone and need supporting elements to ensure their effectiveness.

What is missing is any direction regarding acquisition costs of intellectual property.

The object here is to create what we can call the UAE patent box. It’s a well-developed framework used by governments globally to encourage the development and domiciling of commercial intellectual property in their respective domestic markets.

This demonstrates the UAE’s determination to compete internationally within the norms of other standard government approaches.

I leave you with this observation and a call for you to be ever more attentive. Corporate tax law is currently very fluid.

Decisions from the three relevant authorities, the Cabinet, Ministry of Finance and the Federal Tax Authority are being released at an accelerated rate.

Specifically, keep a watch on what has been previously released and has been subsequently changed. The following is an example.

Ministerial Decision No. 139, released in June 2023, has been repealed and superseded by Ministerial Decision No. 265, released in October 2023. This detail sits at the end of the latter document.

It would be very easy to miss this repealing clause and formulate your tax planning using out-of-date information.

David Daly is a partner at the Gulf Tax Accounting Group in the UAE

Updated: November 20, 2023, 3:30 AM