This chapter explores the benefits and costs of current and planned tax incentives in the UAE, as well as policy considerations, including in light of the recent adoption of a corporate income tax, as well as the Global Minimum Tax.
Investment Policy Perspectives in the United Arab Emirates
Abstract
The recent introduction of a corporate income tax (CIT) and alignment with the Global Minimum Tax (GMT) represent a significant change to the UAE’s investment and fiscal policy. In 2022, the UAE introduced a CIT rate of 9%, as well as a Domestic Minimum Top-up Tax (DMTT), the latter being a key component of the GMT. These are important measures that can support long-term domestic fiscal sustainability, including diversification from hydrocarbon revenue, while aligning UAE with changes to international tax rules. These reforms also represent a shift in investment promotion, of which zero CIT rates have long been a feature.
These reforms, as well as changes to the international tax and economic environment, require consideration of how the tax system can continue to support investment and competitiveness while avoiding economic distortions. The UAE remains tax competitive, with a statutory CIT rate lower than regional peers. Many firms remain eligible for generous tax holidays, and the government is considering new incentives to support specific investments, notably in innovation and research and development (R&D). Policymakers and investors should also consider the impact of the DMTT – which implements the GMT through a top-up tax on low-tax excess profits of large multinational enterprises (MNEs) operating in the UAE as of 2025 – on tax and non-tax incentives. The benefits granted through tax incentives could be affected if they bring the effective tax rate of an MNE that is in-scope of the GMT below the minimum rate, while non-tax incentives granted on a case‑by-case basis could also be affected under the rules.
Beyond the GMT, as part of its new CIT system, the UAE is considering different tax and non-tax incentives to support investment, which come with benefits and risks. Tax incentives are often not the most appropriate policy tool to achieve investment policy objectives and are rarely sufficient to achieve investment priorities on their own. Well-designed tax incentives can help to overcome market failures or distortions that lead to suboptimal levels of investment, for example, in R&D or in clean technologies. But tax incentives also involve costs that may outweigh benefits.
Poorly designed incentives can result in economic distortions and inefficient use of public funds. More generous tax incentives (such as tax holidays) often do not generate enough investment to justify fiscal costs or provide tax benefits to investments that would have occurred even without the incentive. Governments with substantial fiscal space can choose to offer these incentives, but they may amount to a taxpayer subsidy to shareholders in firms that would have invested without the incentive. These funds could be more effectively used to reduce taxes for other projects, or support competitiveness through other means. In addition, incentives that benefit some firms or sectors over others can risk generating economic distortions and affecting competitive dynamics, which over time, can lead to reduced productivity and growth.
The GMT, as well as other developments in international tax agreements aimed at reducing risks of profit-shifting, can encourage use of better, more cost-effective tax incentives. The UAE can consider whether tax incentives are the most appropriate means of supporting the country’s investment goals, and how they can be better designed to attract new, additional investment and reduce economic distortions. The use of tax incentives should also be considered within the wider context of tax policy and tax administration; policymakers should look to support certainty, stability, clarity and good governance in terms of the design of the system and policies and how it is administered.
Consider how the GMT interacts with different tax incentives. In general, tax incentives reduce the taxes paid by MNEs in-scope of the GMT, which could lead to top-up taxation, reducing the monetary benefit of these incentives. However, the GMT treats certain tax incentives more favourably, notably where these incentives are directly linked to economic substance (including accelerated deprecation, Qualified Refundable Tax Credits, and Qualified Substance Based Tax Incentives). This can allow governments to continue to offer certain tax incentives to firms that have a large footprint in the UAE. Policymakers should consider the nuances of the rules, and which incentives may be more or less affected as a result.
Consider if new tax or non-tax incentives are affected by the GMT as “related benefits”. The GMT includes rules on “related benefits” that prevents countries that have adopted the GMT from providing tax incentives, grants, or other benefits that would undermine the integrity of the GMT. This could include grants that refund top-up taxes in-scope MNEs pay under the GMT. Tax and investment authorities should be mindful of whether tax or non-tax incentives – including grants offered at the Emirate level, and in particular discretionary incentives granted on a case‑by-case basis – could be considered “related benefits”, as this would threaten the qualified status of the UAE’s DMTT. This risk is reduced if grants are offered to a wide range of investors, based on a clear set of criteria rather than on a case‑by-case basis. Improving reporting on grants available by different agencies could support co‑ordination and information sharing to the Ministry of Finance.
Continue to strengthen tax administration and monitor CIT collection and size of the tax base, as well as other relevant data to inform evaluations. As the government begins to collect CIT revenue on most firms, it will be important to monitor how broad the tax base is in practice, given continued tax exemptions in free zones. If in practice most corporate profits are exempt from CIT, this will limit the revenue potential of the CIT and can create competitive distortions for the local economy. Ongoing efforts to ensure tax compliance are also important to ensure revenue mobilisation and credibility and fairness of the CIT regime. Further, the government could consider collecting and sharing additional disaggregated data on performance of free zone firms and costs of incentives, to inform evaluations.
Ensure tax and non-tax incentives complement and are aligned with other policies. Attracting investment that can support the UAE’s diversification agenda (including that outlined in Vision 2030, advancing the knowledge economy and the green transition) requires more than reducing the tax burden on these investments. Any future tax incentives should be considered in the context of other policies – including those outlined elsewhere in this review – that might be more effective to develop the sector or activity or should come first.
7.2.1. Overview of recent reforms
A broad corporate income tax is relatively new in the UAE. Prior to 2023, the UAE applied CIT narrowly on the oil and gas sector and foreign banks. The government introduced a broader-based CIT of 9% on taxable income above AED 375 000 (around EUR 90 180) for most businesses starting on 1 June 2023.1 Income below this threshold qualifies for a 0% rate. Businesses involved in natural resources (extraction and non-extraction2) remain subject to Emirate‑level corporate taxation, often set in concession agreements with the local government. Taxation of foreign banks is also set at the Emirate level.3 Certain exemptions to CIT apply. For example, income from dividends and capital gains (from qualifying shareholdings) and qualifying intra-group transactions and re‑organisations are not subject to CIT. State‑owned enterprises, public benefit entities, and investment funds are also CIT exempt.
Despite the introduction of the CIT system, some firms continue to pay no tax in the aftermath of the reforms. Notably, a CIT exemption applies in free zones, of which there are more than 40 across the UAE.4 In zones, qualifying income, and income from qualifying activities and transactions, is subject to a long-term 0% rate.5 Qualifying income includes income derived from transactions with companies within the zone, from the ownership or exploitation of certain Intellectual Property (IP), or income below de minimis requirements. Income from a range of qualifying activities can also benefit from the 0% rate for transactions with companies outside the zone; qualifying activities are defined broadly and include manufacturing, processing, reinsurance, logistics, and fund, wealth, and investment management services.6 Some exceptions apply to both the definitions of qualifying income and qualifying activities and transactions, including income attributable to a foreign or domestic permanent establishment, or income from immovable property. Any non-qualifying income is subject to the 9% CIT rate (Federal Tax Authority, 2024[1]; Federal Tax Authority, 2024[2]).7 To benefit from 0% rates, firms must meet certain substance requirements in respect to assets, full-time employees and operating expenditures.
In addition to a CIT system, the UAE has implemented a domestic minimum tax of 15% on the excess profits of large MNEs. In line with Pillar Two of the two‑pillar international tax agreement (also referred to as the Global Minimum Tax, or GMT), the UAE has set a minimum level of effective taxation for large MNEs through a Domestic Minimum Top-up Tax, effective from 1 January 2025 (
Box 7.1. How the Global Minimum Tax works
The Global Minimum Tax (GMT) represents a major change in the taxation of multinational businesses. It modernises the international tax system to tackle longstanding issues of corporate tax avoidance by MNEs and places multilaterally agreed limits on international tax competition. This allows governments to strike a better balance between domestic resource mobilisation through corporate income taxes and attracting FDI.
The GMT applies through the Global Anti-Base Erosion (GloBE) Rules, a co‑ordinated system of domestic rules that ensure a minimum level of taxation for in-scope MNEs across jurisdictions. In-scope MNEs have annual global revenues equal to or greater than EUR 750 million in at least two of the four previous financial years. Under the rules, where the combined income and taxes of all its subsidiaries in a given jurisdiction yields an effective tax rate (ETR) below the minimum rate of 15%, a top-up tax is due to bring the ETR up to 15%. This top-up tax will either be paid in the jurisdiction where the profit is under-taxed, or – if that jurisdiction does not implement the rules – in another jurisdiction that has implemented the GMT.
The GMT applies to an MNE’s excess profits, which are determined after deducting a substance‑based income exclusion (SBIE). The SBIE is computed as a fixed percentage of the MNE’s payroll and tangible assets located in the jurisdiction. Limiting the application of the GMT to excess profits means that firms with substantial economic activity in a jurisdiction may continue to benefit from reduced tax rates in that jurisdiction without being subject to the top-up tax. This means routine profits on substantive activities in the UAE will be shielded from the effect of GMT, even if they have an effective tax rate below 15%. It also means tax incentives that succeed in stimulating real economic substance will be less affected by the GMT.
By implementing a Domestic Minimum Top-up Tax (DMTT), the UAE has ensured that under-taxed profit generated in the UAE will be taxed by the UAE rather than by another jurisdiction that has implemented the rules. The UAE’s DMTT rules align closely to the GloBE Model Rules, agreed by the OECD/G20 Inclusive Framework on BEPS. The Model Rules are designed to ensure consistence and co‑ordination in the application of the GMT across different jurisdictions. The UAE government has said it expects its DMTT will achieve “Qualified” status, which allows for a common recognition of the rules across jurisdictions.
Note: The UAE DMTT is set out in Federal Decree‑Law No. 60 of 2023 Amending Certain Provisions of the Federal Decree‑Law No. 47 of 2022 on the Taxation of Corporations and Businesses, and Cabinet Decision No. 142 of 2024 on the Imposition of a Top-up Tax on Multinational Enterprises.
Source: OECD (2021[3]), Tax Challenges Arising from Digitalisation of the Economy – Global Anti-Base Erosion Model Rules (Pillar Two): Inclusive Framework on BEPS. https://doi.org/10.1787/782bac33-en
). The DMTT applies to the excess profits of MNEs operating in the UAE with annual global revenues equal to or greater than EUR 750 million. Excess profits are determined after deduction of a percentage of the MNE’s economic substance in the UAE (the substance‑based income exclusion or SBIE). This means that in-scope firms with a large tangible presence in the UAE may still pay effective tax rates of below 15%, as will be discussed further below. The UAE’s DMTT is closely aligned to the Global Anti-Base Erosion (GloBE) Rules, which set out the GMT through a co‑ordinated system of rules, applied domestically, that ensure in-scope MNEs pay a minimum level of tax in each jurisdiction where they operate. The decision to implement a top-up tax allows the UAE to tax any low-taxed profit arising in the UAE in priority over other jurisdictions that might levy top-up tax on UAE in-scope profit under the rules.
A substantial number of firms may be affected by the DMTT. Based on publicly reported aggregated Country-by-Country Reports (CbCRs), there are at least 5 000 subsidiaries from around 900 in-scope MNE groups operating in the UAE. This represents MNE groups from 25 different countries, though the available data does not include investors from countries with large FDI inflows in the UAE (including the UK and the Netherlands). This means the likely number of in-scope firms is much higher. Reported profit before tax from these MNE groups in UAE in 2020 was just under USD 65 billion, with the highest profits reported by UAE‑headquartered firms (Figure 7.1). As the UAE’s statutory CIT rate is below the 15% minimum rate, the DMTT could be a substantial source of government revenue. However, some in-scope firms may not be subject to the top-up tax, depending on their activities, substance, and profits. Given the breadth of firms that are in-scope, it is important for investment and tax officials to understand how the GMT leads to top-up taxes, particularly for firms that receive tax incentives (outlined below).
Note: Count of number of MNE groups with annual revenues above 750 million euros operating in the UAE, based on aggregated CBCR data. Figure excludes countries that report fewer than 10 MNE groups in the UAE with reported profits below USD 15 million, notably Romania, Bahrain, Greece, Azerbaijan, Mexico and Indonesia. RHS=right hand side.
Source: OECD, Aggregated Country-by-Country Reports (CbCRs).
The Global Minimum Tax (GMT) represents a major change in the taxation of multinational businesses. It modernises the international tax system to tackle longstanding issues of corporate tax avoidance by MNEs and places multilaterally agreed limits on international tax competition. This allows governments to strike a better balance between domestic resource mobilisation through corporate income taxes and attracting FDI.
The GMT applies through the Global Anti-Base Erosion (GloBE) Rules, a co‑ordinated system of domestic rules that ensure a minimum level of taxation for in-scope MNEs across jurisdictions. In-scope MNEs have annual global revenues equal to or greater than EUR 750 million in at least two of the four previous financial years. Under the rules, where the combined income and taxes of all its subsidiaries in a given jurisdiction yields an effective tax rate (ETR) below the minimum rate of 15%, a top-up tax is due to bring the ETR up to 15%. This top-up tax will either be paid in the jurisdiction where the profit is under-taxed, or – if that jurisdiction does not implement the rules – in another jurisdiction that has implemented the GMT.
The GMT applies to an MNE’s excess profits, which are determined after deducting a substance‑based income exclusion (SBIE). The SBIE is computed as a fixed percentage of the MNE’s payroll and tangible assets located in the jurisdiction. Limiting the application of the GMT to excess profits means that firms with substantial economic activity in a jurisdiction may continue to benefit from reduced tax rates in that jurisdiction without being subject to the top-up tax. This means routine profits on substantive activities in the UAE will be shielded from the effect of GMT, even if they have an effective tax rate below 15%. It also means tax incentives that succeed in stimulating real economic substance will be less affected by the GMT.
By implementing a Domestic Minimum Top-up Tax (DMTT), the UAE has ensured that under-taxed profit generated in the UAE will be taxed by the UAE rather than by another jurisdiction that has implemented the rules. The UAE’s DMTT rules align closely to the GloBE Model Rules, agreed by the OECD/G20 Inclusive Framework on BEPS. The Model Rules are designed to ensure consistence and co‑ordination in the application of the GMT across different jurisdictions. The UAE government has said it expects its DMTT will achieve “Qualified” status, which allows for a common recognition of the rules across jurisdictions.
Note: The UAE DMTT is set out in Federal Decree‑Law No. 60 of 2023 Amending Certain Provisions of the Federal Decree‑Law No. 47 of 2022 on the Taxation of Corporations and Businesses, and Cabinet Decision No. 142 of 2024 on the Imposition of a Top-up Tax on Multinational Enterprises.
Source: OECD (2021[3]), Tax Challenges Arising from Digitalisation of the Economy – Global Anti-Base Erosion Model Rules (Pillar Two): Inclusive Framework on BEPS. https://doi.org/10.1787/782bac33-en
7.2.2. CIT and competitiveness for UAE
For many foreign investors, tax is only one, and often not the determining, factor in decisions to enter a particular market, alongside factors including macroeconomic stability and political predictability, rule of law, the regulatory framework, infrastructure and connectivity, labour, skills, and the domestic market (OECD, 2015[4]; James, 2014[5]).8 The UAE’s significant reforms to ensure an enabling investment climate beyond competitive tax rates (outlined throughout this report) make it an attractive investment destination, as evidenced by consistently strong FDI inflows (Figure 7.3). FDI stock relative to GDP is more than double that of most regional peers (Figure 7.3, left panel). Stock relative to GDP has steadily increased since 2014, far outpacing peers, and rebounding quickly from a drop during the COVID‑19 crisis (right panel). The UAE has also attracted growing shares of new greenfield investment; in 2023, it came in second globally in terms of number of announced greenfield projects (UNCTAD, 2023[6]). FDI will remain a key source of investment for UAE, as there is some evidence that domestic investment is modest. Specifically, gross fixed capital formation has increased as a share of GDP in recent years, such that it is now fairly in line with peers, though remains slightly below peaks reached before the global financial crisis (Figure 7.4).
Continuing efforts to support the wider tax and investment climate is key to attracting higher levels of investment in target sectors, locations and activities. In discussions with investment policy officials in the UAE, policymakers underscored that investors are attracted by the UAE’s quality infrastructure, security, ease of doing business, regulatory certainty, strategic geographic location, and talent pool. Continuing these reforms is therefore important, as is ensuring recent legal and regulatory reforms – including to tax policy – are clear to investors.
The UAE remains tax competitive. The UAE has long used zero tax rates as a key part of its investment attraction strategy. Even with recent reforms, the country remains very tax competitive relative to peers, offering among the lowest statutory CIT rates in the MENA region and among top FDI recipients in Asia (Figure 7.2). While CIT policy can influence investment decisions – such as in which jurisdiction and in which asset or project to invest, and how much to invest – its impact varies across firms and context. Large, profitable MNEs – especially those with significant intangible assets, market power or profit-shifting opportunities – are less sensitive to tax policies when making their investment decisions (Hanappi and Whyman, 2023[7]; Zwick and Mahon, 2017[8]; Millot, 2020[9]). There is also some evidence that investment decisions have become less sensitive to corporate tax changes over time, particularly since the Global Financial Crisis (Hanappi, Millot and Turban, 2023[10]; Zwick and Mahon, 2017[8]). This suggests that tax incentives may not offer the bang-for-the‑buck in attracting FDI relative to their costs. This is important to consider when introducing new tax incentives and weighing reforms to tax or non-tax aspects of the investment climate (as discussed below).
Tax incentives should complement and be aligned with other policies. Increasing investment in R&D or targeted industries requires more than reducing the tax burden on these investments. Complementary policies are necessary to ensure growth potential is realised. The UAE has outlined several strategies to advance investment in and development of knowledge‑based sectors (including advanced manufacturing, financial and ICT services, and renewable energy).9 This includes through public investment in digital infrastructure and education, targeted regulatory reforms, and policies to attract international talent. Any future tax incentives should be considered in the context of these other tools; other policies might be more effective to develop the sector or activity or should come first.
Source: OECD Corporate Tax Statistics.
FDI stock in the UAE and selected regional peers
Note: Left panel: Inward FDI stock as a percentage of GDP, 2023. Right panel: Peer countries are Bahrain, Kuwait, Qatar, Saudi Arabia and Türkiye. Derived values have only been used for FDI to ensure consistency across the sample (Officially reported FDI data is not available for the UAE, Saudi Arabia, and Qatar).
Source: IMF CDIS (FDI), World Economic Outlook April 2025 (GDP).
GFCF as a percentage of GDP in 2023 (left panel) and average since 2000 (right panel)
Note: Right panel: Average GFCF as a percentage of GDP, 2000-2023; Regional peers are Bahrain, Kuwait, Saudi Arabia and Türkiye. GFCF data is not available for Qatar.
Source: IMF World Economic Outlook April 2025.
Tax incentives can support specific investment goals but are not necessarily the most appropriate or cost-effective policy tool. In light of the recently introduced CIT, the UAE government is considering whether tax incentives might be appropriate to support specific goals, such as increased investment in R&D. Tax incentives are targeted provisions that deviate from the standard tax treatment (Celani, Dressler and Wermelinger, 2022[11]). CIT incentives are used widely across countries in an effort to increase investment in specific sectors or locations, or encourage certain investor behaviour, such as investing in innovation or employee training (OECD, 2025[12]). If well designed, tax incentives can help to overcome market failures or distortions that lead to suboptimal underinvestment, for example, in R&D or in clean technology. But tax incentives also involve costs – including economic distortions and inefficient use of government funds – that may outweigh benefits. Tax incentives are also not always the most appropriate policy tool and are rarely sufficient on their own to achieve policy objectives (OECD, forthcoming[13]). For example, investment in R&D also requires sufficient skills in the workforce and digital infrastructure.
Whether tax incentives are effective at achieving stated objectives, and if their benefits outweigh direct and indirect costs, depends on both tax incentive design and country context. Some incentive designs are more cost effective than others, outlined below. But macroeconomic, political, and other policy factors can also affect tax incentive outcomes; tax incentives seem to be less effective if investors face economic or policy uncertainty (Guceri and Albinowski, 2021[14]; Klemm and Van Parys, 2012[15]). Predictability and simplicity of policies might take precedence in some contexts. Governments’ ability to effectively administer tax incentives is also important; low-capacity countries may struggle to implement complex incentives, and limited audit capacity can open opportunities for misuse.
Tax incentives should seek to stimulate investment that would not have otherwise occurred. A tax incentive that makes a new investment profitable where it was not before – rather than increasing the profitability of already profitable investments – will most effectively support this additional investment. This in turn helps protect government revenues and reduces the risk of windfall gains, which can arise when projects that are profitable, and occur without an incentive, receive tax support. Some incentive designs are less cost effective than others. Governments with substantial fiscal space can choose to offer these incentives, but they amount to a taxpayer subsidy to foreign or domestic shareholders that would have invested anyway. These funds could be more effectively used to reduce taxes for other projects, or support competitiveness through other means, such as through financing public spending (IMF-OECD-UN-World Bank, 2024[16]).
More generous incentives do not necessarily generate additional investment. Tax exemptions or reduced CIT rates tend to offer generous reductions in firm tax liability. These incentives are often referred to as income‑based incentives, because they provide tax benefits in relation to the profit of a firm. As such, they tend to disproportionately benefit investors and projects that are profitable, many of which are less likely to require government assistance or would occur without the tax support. Evidence on the positive impact of income‑based incentives on overall investment is mixed. Where income‑based incentives have led to an increase in FDI, these investors might be highly mobile – not bringing substantive economic activity or spillovers to local firms – or can lead to crowding out of domestic investment (Klemm, 2009[17]; Botman, Klemm and Baqir, 2008[18]; Knoll et al., 2021[19]).
Profit-based incentives can also result in risks of tax avoidance and are subject to international standards. Income‑based incentives – particularly for geographically mobile activities – tend to provide more opportunities for tax abuse, aggressive tax planning or tax avoidance.10 To reduce these profit shifting risks, Action 5 of the OECD/G20 BEPS project requires that taxpayers meet certain substantial activities requirements to benefit from preferential tax regimes. These include that core income‑generating activities are carried out in the jurisdiction, including with adequate operating expenditures and employees. Separate requirements apply for tax benefits for IP income.11 Free zones in the UAE comply with these substantial activities’ requirements.12
Generous tax benefits in free zones can come at costs to the local economy. When there is a large difference in tax treatment between free zones and the general regime, there is a risk that investment concentrates in zones, narrowing the tax base (and associated revenue), and, given tax advantages to zone firms, creating an uneven playing field with non-zone firms.13 The success of zones at supporting wider economic development appears in part linked to reducing performance gaps between firms in and outside zones, in order to ensure local firms are attractive suppliers and local workers sufficiently skilled employees (UNCTAD, 2019[20]; Otchia and Wiryawan, 2025[21]). This requires congruent reforms to the local economy, as well as policies to encourage linkages between zone and non-zone firms but can also entail the gradual removal of benefits to zone firms.14 As the new CIT could reduce the competitive advantage of non-zone firms, the government could consider whether continued generous tax treatment in zones hinders or supports knowledge and productivity spillovers.
Expenditure‑based incentives are more likely to offer value for money to incentivise investment. In contrast to preferential tax treatment based on income, policymakers can design tax incentives to give relief based on firm expenditure. Expenditure‑based incentives (such as accelerated depreciation, tax allowances and credits) typically provide tax relief in relation to capital investment (e.g. machinery) or current expenses (e.g. for training, R&D activities). As such, they can be designed so that they provide tax relief in direct proportion to a given kind of firm investment. Expenditure‑based incentives more directly reduce the cost of capital, which can provide greater support to investment that would not have occurred in the absence of an incentive. Empirical studies in high-income countries have found these incentives to be effective at promoting additional investment (House and Shapiro, 2008[22]; Rodgers and Hambur, 2018[23]; Maffini, Xing and Devereux, 2019[24]; Ohrn, 2019[25]; Guceri and Liu, 2017[26]; Hall, 2019[27]; OECD, 2023[28]; Zwick and Mahon, 2017[8]).
Tax incentives should be monitored and evaluated to assess their impacts and costs, and to inform policy reform. As CIT is new to the UAE, it is particularly pertinent to track how tax holidays in free zones affect the tax base overall, the costs of these exemptions, as well as the performance of free zone firms compared to other firms in the economy. The collection of CIT returns for all firms15 (including those that are tax exempt) can now inform useful comparisons between firms in and outside free zones; while free zone firms report specific financial information under Action 5, the Ministry of Finance reported not having much visibility on non-free zone firms. Monitoring performance and characteristics of free zone firms, as well as revenue foregone from tax holidays, can provide key data for assessing how effectively zones are stimulating investment and employment, and whether non-free zone firms are lagging behind. Different approaches to evaluation exist, depending on government administrative capacity and data availability. As a first step, it would be important to construct descriptive statistics on take‑up, firm characteristics and observable outcomes of free zone and non-zone firms and compare these to policy goals. While this will not speak to causal impact, it can provide useful information on whether free zones are contributing to a dual economy. As a next step, conducting direct cost estimates of the free zones (in terms of revenue foregone) would be important to understand how much they reduce the tax base.
The design of the Global Minimum Tax preserves the ability of countries to use tax incentives to support and steer investment, especially where the incentives result in tangible assets and jobs. Where incentives are not delivering value for money, it gives countries the opportunity to strike a better balance between using the tax system to influence investment decisions while limiting revenue costs and associated competitive distortions that come from very generous incentives offered to the most profitable firms. The GMT treats different types of incentives differently, as will be discussed below. As the UAE has adopted a DMTT, where certain tax incentives result in ETRs being reduced for in-scope firms below 15%, the monetary benefit of some incentives will be reduced or nullified. It is therefore important for investment and tax policymakers to consider which tax incentives the GMT will affect, and as the government considers new tax incentives, which designs are treated favourably under the GMT and can continue to provide ETRs below 15%.
How the GMT affects tax incentives – in the UAE and elsewhere – depends on the tax incentive design and the characteristics of MNEs and their activities in the country. Notably, GMT will not affect tax incentives that benefit firms that are not in-scope, such as domestic firms or subsidiaries of MNE groups with revenues below EUR 750 million. For in-scope firms, the GMT will have the greatest impact on those that receive very generous incentives – that reduce their effective tax rates well below 15% – and that have a low physical footprint in the UAE. The GMT provides more favourable treatment to certain expenditure‑based and production-based tax incentives, where these incentives are associated with tangible assets and employment. As will be discussed below, these features mean that incentive types that offer least value for money are discouraged under the GMT (OECD, 2022[29]). As such, the GMT can encourage the use of tax incentives that offer greater value for money.
This means that subsidiaries of in-scope MNEs operating in free zones and enjoying a full CIT exemption are more likely to be subject to top-up taxes, especially where they lack economic substance. But, if these firms have substantial economic substance – in terms of employees and tangible assets – they may be less or not at all subject to the top-up tax, due to the substance‑based income exclusion (SBIE) (Box 7.1).
). Whether an MNE group is subject to the top-up tax also depends on the incentives received and activities of all its subsidiaries in the jurisdiction, as ETRs are calculated at the level of the MNE group in the jurisdiction. If one subsidiary of a particular MNE receives a tax holiday and three others within the same group and jurisdiction do not, the MNE group might not be liable for top-up taxes on its profits in that jurisdiction, and the low-taxed subsidiary can continue to benefit from a low tax rate. Understanding the impact of the GMT in more detail requires micro-level data on the activities and financials of firms in the UAE, though it seems likely a substantial number of firms are affected (Figure 7.1).
The GMT treats some cost-based incentives more favourably. This includes tax incentives that accelerate tax deductions for tangible assets, such as accelerated depreciation or immediate expensing for tangible assets. This is because the rules are designed to avoid imposing top-up taxes on low taxed profit in a particular year that is due to timing differences between the treatment of tax liabilities for accounting and tax purposes. The GloBE Rules also follow financial accounting by treating cash grants and “qualified” refundable tax credits (QRTC) as income, which means that these types of incentives are less likely to lead to low ETRs under the rules (Box 7.2). However, for refundable tax credits to be considered “qualified” certain conditions must be met, and governments should exercise caution in their granting due to potential high fiscal costs and difficulty in forecasting these (outlined in Box 7.2), the GMT treats qualifying tax incentives (QTIs) favourably. Qualifying expenditure‑ and production- based incentives are not treated as reductions in taxation, up to a cap based on the economic substance of the MNE in the jurisdiction (OECD, 2026[30]). This means that the more substance (payroll and tangible assets) the MNE has in the jurisdiction, the more of the tax benefit from QTIs will be preserved (less subject to top-up taxes) (Box 7.3).
As the UAE considers the use of tax incentives to influence investment decisions, it should consider tax incentives that are less affected under the GMT. The UAE currently does not offer any expenditure‑based incentives, though two are currently under consideration (planned R&D tax credit outlined below). Immediate expensing for tangible assets does not lead to lower ETRs under the GloBE rules and can be effective at stimulating additional capital investment, such as in machinery or infrastructure. Qualified expenditure‑based incentives, which include incentives where the amount of tax relief is calculated based on a portion of expenditure, can lead to low tax outcomes without giving rise to top-up tax, if the MNE group has sufficient economic substance in the UAE. In addition, where expenditure‑based incentives are used to promote investment in tangible assets and/or labour, they can also increase the size of SBIE, and therefore allow these firms to pay lower – or no – top-up taxes. This includes allowances linked to current expenditure such as labour costs (including for R&D). Incentives that are narrowly targeted to certain categories of income or expenditure may also not lead to lower ETRs, due to the blending of MNEs’ income within a jurisdiction.
The GMT can also have an impact on non-tax incentives such as grants and subsidies, where these are considered “Related Benefits”. The GloBE rules prevent jurisdictions that have implemented the rules from providing tax or non-tax benefits related to the GMT that have the effect of returning taxes paid, as this would undermine the integrity of the GMT (See 118.13 of the Consolidated Commentary) (OECD, 2025[31]). The Inclusive Framework is currently working on further guidance for identifying Related Benefits and is developing an ongoing monitoring process to preserve the integrity of the rules. Related Benefits can be provided by national or sub-national governments, as well as other governmental bodies such as agencies outside the Ministry of Finance or Tax Administration.
The UAE should carefully consider if discretionary grants offered to large MNEs at the Emirate‑level could be considered Related Benefits. This would put at risk the Qualified status of the DMTT. While the authority to grant CIT incentives (including in free zones) is centralised under the Ministry of Finance,16 grants appear to be under the purview of each Emirate. For example, Abu Dhabi Investment Office grants bespoke cash grants to MNEs with revenues above USD 2 billion, on a case‑by-case basis. Improving reporting on grants available by different agencies could support co‑ordination and information sharing to the Ministry of Finance.
Under the GloBE Rules, when a tax credit functions more like a government grant – if it is refundable in cash or tradable at a market price – it is treated differently in calculating an MNE group’s ETR. If a tax credit meets the conditions of a Qualified Refundable Tax Credit (QRTC) or Marketable Transferable Tax Credit (MTTC), the amount of the credit is treated as income of the MNE rather than a reduction in taxes. This is in line with the financial accounting treatment of grants, as refundable and transferable tax credits imply a cash payment to firms that are not able to fully utilise the credit without going into a tax loss position. This may allow recipients of QRTCs or MTTCs to achieve relatively low average effective tax rates, yet pay less top-up tax under GloBE (OECD, 2022[29]).
QRTCs and MTTCs must meet several conditions to be treated as income. Most notably, QRTCs must be fully refundable – paid as cash or available as cash equivalents – within four years of a firm becoming eligible for them. MTTCs must be legally transferable within 15 months and tradable on a market at or above 80% of their net present value to unrelated parties. In addition, the credits cannot provide benefits to MNEs related to the top-up taxes paid since this would undermine the integrity of the rules (see above on Related Benefits). Tax credits that do not meet these conditions are treated as reductions in taxes in GloBE ETRs. (See Article 3.2.4 of the Consolidated Commentary to the GloBE Rules (OECD, 2025[31]).
Refundability can be a means of using the tax system to provide benefits for firms that do not have taxable income – for example because they are small, new or riskier – but can involve high costs. Like grants, refundable credits can alleviate cash flow constraints, often a barrier to investment for smaller, younger, or otherwise cash-constrained firms. However, refundable credits can involve substantial revenue costs for governments that are difficult to forecast, as they depend on the profitability of recipient firms. Refundability also might be less important for larger firms, that can often offset losses from specific projects (such as R&D) with other income streams. Refundable tax credits are sometimes designed with caps or ceilings to refundability to limit revenue costs. Under the GloBE rules, if only a fixed percentage or portion of the credit is refundable or transferable, the credit can be bifurcated, with the only the refundable portion potentially treated as a QRTC or MTTC (OECD, 2025[31]).
Offering transferable and marketable (instead of refundable) tax credits may reduce revenue costs, by leaving the financing to the private sector, but involves additional administrative burden. Sufficient capacity is required from tax authorities to ensure compliance with the marketability standard, including on price of the traded credit, and that a true competitive market exists.
Expenditure based and certain production-based incentives may qualify as Qualified Tax Incentives (QTIs). An expenditure based tax incentive is defined as one where the amount of relief is calculated based on a portion of the amount of qualifying expenditures incurred; i.e. tax relief is directly proportional to expenditure (e.g. tax credit equal to 30% of R&D costs). To qualify, tax benefits from an expenditure based tax incentive cannot exceed the amount invested by the firm.
Production-based tax incentives are those where tax benefits are based on the volume of production of tangible assets in the jurisdiction, or on the reduction in industrial byproducts created during production (e.g. a tax credit for each kilowatt hour of energy produced).
To meet the QTI definition, expenditure and production-based tax incentives need to meet other conditions. These include that the benefit must be based on expenditure incurred and output produced rather than planned. Tax incentives do not need to be fully utilised in the year accrued to be treated as eligible. Further, the incentive must be generally available (not directed to in-scope firms; and not granted on a discretionary basis).
QTIs are treated favourably under the GMT. For incentives that meet the QTI definition, a portion of the tax benefit arising from QTIs can be added back to covered taxes when calculating an MNE group’s ETR under the GMT, up to a cap based on the economic substance of the MNE in the jurisdiction. The cap is equal to the greater of 5.5% of the payroll costs or depreciation of tangible assets in the jurisdiction. The MNE Group can use an alternative cap equal to 1% of the carrying value of tangible assets in the jurisdiction on a 5 year elective basis.
MNEs with QRTCs and MTTCs that meet the definition of QTIs may elect to treat all or part of their QRTCs or MTTCs as a QTI, performing the appropriate adjustments to the ETR calculation.
Source: (OECD, 2026[30]).
Planned new expenditure‑based tax incentives appear to be more targeted than tax holidays. The UAE is considering introducing two new tax incentives for investors, a tax credit to support R&D and innovation and a tax credit for high value‑added employees.17 As it prepares draft legislation, it is pertinent to consider how to maximise the intended benefits of these incentives and minimise their risks. As the government intends that these incentives are QRTCs or QTIs under the GloBE rules, it is also pertinent to forecast their costs in terms of government revenue, and monitor outcomes to inform assessments of their value for money.
7.5.1. Considerations for R&D tax incentives
Evidence highlights the positive impacts of tax incentives to support R&D and innovation. Innovation is a key driver of productivity and long-term growth. However, the risky nature of R&D and inability to fully appropriate returns (due to knowledge spillovers to other firms), means private companies tend to invest less in R&D than is socially optimal (Hall, 2019[27]; OECD, 2015[32]). Many governments therefore subsidise business R&D, often through a mix of direct government funding and tax incentives targeted at either R&D expenditures or to the income derived from R&D and innovation (OECD, 2025[33]).18 As discussed below, depending on the innovation landscape, fiscal space and policy goals, a mix of different tools may be appropriate.
There is broad evidence that expenditure‑based R&D incentives can increase R&D investment, but the magnitude of this additional investment varies. There is evidence that R&D tax incentives can support new and additional R&D investment.19 This investment response appears to be strongest among smaller and younger firms, firms that are less R&D intensive, and firms that are more likely to be financially constrained (Appelt et al., 2025[34]; Dechezleprêtre et al., 2023[35]). In contrast, large firms that are already R&D intensive seem to respond less to these tax incentives – in terms of additional investment that they would not have otherwise undertaken (Appelt et al., 2025[34]). This suggests that while large and R&D-intensive firms are important for the innovation landscape, tax incentives may be more cost-effective at supporting innovation among smaller firms.
R&D tax incentives are one of multiple policy tools and should be complemented by wider reforms to encourage innovation. On their own, tax incentives can encourage R&D investment, but other elements are crucial to create an environment that is favourable to growth of R&D and innovation, including a skilled workforce and well-functioning product, labour and capital markets (Bloom, Van Reenen and Williams, 2019[36]; OECD, 2015[32]; OECD, 2022[37]). Governments can also weigh how tax incentives compare to or can complement other targeted policies to support R&D investment, such as grants. Studies suggest that direct financial support may be more effective for projects that are riskier and further from market, such as basic research (OECD, 2020[38]; Akcigit, Hanley and Serrano-Velarde, 2021[39]). However, grants tend to involve discretionary decisions by authorities, which can have high administrative costs and other risks involved with “picking winners” (González Cabral, Appelt and Hanappi, 2021[40]). Depending on the profile of firms and R&D sought, a mix of policies might be appropriate (OECD, 2025[33]).
R&D tax incentives also require sufficient administrative capacity. While tax incentives for R&D can be effective, they also involve high compliance and administrative costs on the part of firms and tax authorities. This includes, for the government, monitoring whether R&D expenditures are indeed classified as R&D to ensure firms do not relabel non-R&D expenses as R&D. For firms, it requires identifying and structuring eligible R&D projects (which can disadvantage firms with lower capacity or experience in R&D) (Yanchao Li et al., 2024[41]).
Public information on the UAE’s planned R&D tax credit suggests consideration for international standards. The planned tax credit would allow eligible taxpayers to deduct 30‑50% of qualifying R&D activities from their tax liability. The credit will reportedly apply broadly across firms that are subject to the 9% CIT rate (companies that benefit from the free zone regime, including the IP regime, will not be eligible). The Ministry of Finance held a public consultation to inform the design of the tax credit in April 2024, with a questionnaire for businesses and a “Guidance Paper on the Foundations of R&D”. The guidance paper outlined R&D concepts in line with the OECD’s Frascati Manual, which sets internationally recognised definitions of R&D. This included defining the key characteristics of R&D, common and excluded activities, and methods of identifying R&D projects (UAE Ministry of Finance, 2024[42]; OECD, 2015[43]). These definitions are key for compliance and monitoring.
The public consultation carried out by UAE asked relevant questions that can improve the effectiveness of the credit. According to discussions with representatives from the Ministry of Finance, the consultation was intended in part to learn more about the R&D activities of firms in the country, of which the Ministry of Finance does not have much visibility. The questionnaire included queries on whether activities beyond the Frascati Manual should also be considered eligible, on incentivising current and/or capital expenditures, on limiting outsourced R&D activities, and on factors that influence R&D location decisions. The questionnaire also asked about most appropriate treatment of unutilised benefits for UAE firms – i.e. through carry-forward or cash refunds – and for input on how the incentive should be administered.20 These are all relevant questions that can influence take‑up, costs, and outcomes of the incentive. Better understanding the types of R&D already conducted in the UAE and the barriers to additional R&D investment, as well as information about the firms the credit seeks to target, can inform a more relevant tax credit. The results of the questionnaire are not public, but the ministry reported that it received 21 responses, and that the feedback would assist in the tax incentive design (UAE Ministry of Finance, 2024[44]).
The UAE should carefully consider if outsourced R&D is covered in eligible expenses and its extent to maximise domestic spillovers. One of the key design questions for R&D tax support – and included in the public consultation – is what expenditure should be eligible for tax relief. Policymakers should consider appropriate restrictions to encourage that R&D activities occur in the UAE, while also allowing innovation that can develop from tapping into global value chains. There might be reasons to allow firms tax relief on spending on certain R&D that is outsourced to a foreign firm; for example, if the domestic market for a certain service is not yet developed. However, this can also be a conduit for subsidising R&D that is conducted elsewhere, weakening the link with local R&D activities. As a result, governments can allow outsourcing of R&D to foreign unrelated parties with limitations, and impose stricter rules on outsourcing to foreign related parties, which are associated with greater profit shifting risks (González Cabral et al., 2023[45]).
Policymakers can also carefully consider the cost-effectiveness of refundability, depending on the investors targeted. The Ministry of Finance has reported that the credit will be refundable depending on the revenue and number of employees of the taxpayer in the UAE. In discussions, representatives noted the intent that the credit is a QRTC under GloBE rules. The design of these credits is discussed further in Box 7.2. As the government considers how to treat unused claims for tax credit, it could consider whether the incentive is more likely to benefit larger or smaller firms, and the importance of refundability in this case. As noted above, in some cases grants for R&D can be alternative or complementary policy tools, depending on the R&D sought. The government should also consider whether its choices in terms of incentives should be affected by the recent developments in the GMT rules regarding qualifying tax incentives (QTIs) (Box 7.3).
Many governments use both expenditure‑ and income‑based tax incentives to support R&D (OECD, 2023[46]; Appelt et al., 2024[47]). Expenditure‑based tax incentives (such as tax credits) target the inputs of the innovation process – the R&D activity. Income‑based tax incentives (like IP boxes, tax regimes that offer reduced rates on income from qualifying IP) provide tax support for the outputs of innovation (such as the profits from patents). As opposed to expenditure‑based tax incentives, relief for IP regimes is conditional on success of the innovation (González Cabral et al., 2023[45]). Despite widespread use, evidence on effectiveness of innovation boxes is mixed (Appelt et al., 2016[48]; Hall, 2019[27]; Gaessler, Hall and Harhoff, 2018[49]).
The R&D tax credit could be a more powerful tool to promote R&D and innovation activity than the current IP regime. The UAE offers a 0% CIT rate for qualifying income from qualifying IP for firms in free zones.21 Under Action 5, the share of qualifying income eligible for this rate is based on the amount of R&D expenditure in the UAE, or outsourced to unrelated parties (in or outside of the country).22 Given the introduction of an R&D tax credit outside the FTZ and the IP regime inside (that provides relief to qualifying IP according to the nexus ratio), it is important that any future reform of the IP regime takes into account the interaction of both incentives. At present, domestic related party outsourcing is not a qualifying expenditure in the IP regime. This is an important feature that can avoid the strategic use of related parties to conduct R&D outside the zone to benefit from the tax credit, while locating the IP within the zone to benefit from the zero tax rate.23 The existence of both types of R&D incentives means firms conducting R&D in UAE face different effective tax rates on their investments in or outside the zone, which can cause distortions on where to locate R&D activity. The expenditure‑based tax incentive outside the zone may be more effective in generating additional R&D than the IP regime as it provides an ex-ante tax break to the investor.
The investment climate in UAE will also depend on a variety of tax policy factors. This section briefly outlines how the baseline CIT system in the UAE can support striking this balance between competitiveness for investment and stable government revenue. Key tax factors beyond tax incentives include the design of the baseline tax system as well as its administration. In these areas, as well as for tax and non-tax incentives, policymakers should look to support certainty, stability, clarity and good governance in terms of the design of the system and policies and how it is administered. Frequent or unpredictable changes to tax rules or administrative practices can undermine investor confidence and compliance.
The introduction of CIT supports long-term fiscal sustainability. The UAE’s substantial natural resource wealth and sovereign financial assets continue to provide the government with large fiscal space. The UAE has run a government budget surplus since 2021 (between 4‑10% of GDP), due in large part to high oil revenue. General government debt increased in 2020 to around 40% of GDP, but has declined in recent years and is projected to decline further to under 30% by 2027 (IMF, 2024[50]). Total taxes – including from the oil and gas sector and foreign banks – were 17% of GDP in 2023 (Figure 7.5). This is well below the OECD tax-to-GDP average of around 34%. Tax revenue as a share of total government revenue increased between 2020-2022 (driven in part by high oil prices), but the CIT is not projected to meaningfully change the tax share in general government revenue (ibid).
There is space to diversify away from non-hydrocarbon tax revenue. Government financing is dependent on the hydrocarbon sector; hydrocarbon revenue currently makes up around half of total general government revenue (UAE Ministry of Finance, 2024[51]). In the context of global decarbonisation efforts, and uncertainty about long-term demand for fossil fuels, as well as strategic goals to diversify the economy, the government views taxation as an important component of long-term fiscal sustainability.24 In addition to CIT, the UAE introduced a VAT in 2018. Notably, non-hydrocarbon revenue has been fairly flat since 2021, despite strong non-hydrocarbon GDP growth (Figure 7.5, right panel) (IMF, 2024[50]).
Note: Left panel shows breakdown of general government revenue: taxes include taxes on oil and gas producers, taxes on foreign banks operating in the country, value‑added tax (VAT), excise taxes, hotel taxes, tobacco taxes, customs duties, and some licenses and fees; taxes from 2024 include estimated CIT collection; Other revenue includes from properties income (including revenues receivable in exchange for placing financial assets or natural resources at the disposal of another unit (such as interest, distributed profits, and royalties)), sales of goods and services, fines and penalties. Right panel shows hydrocarbon and nonhydrocarbon revenue as a percentage of GDP. IMF staff estimates for 2023 and projections from 2024.
Ensuring tax compliance will be key for the effectiveness of the tax. This will require sufficient capacity of the Federal Tax Authority (FTA) to enforce filing, which will be new for domestic firms in particular, as well as to conduct audits. The Ministry of Finance and FTA have taken notable steps to increase public awareness around the CIT and DMTT and facilitate payments (including through an online CIT registration), and these efforts should continue (IMF, 2024[50]).
Investors seek a clear and predicable baseline tax system. The knowledge‑based sectors the UAE is targeting in its investment promotion and economic development strategy are heavily populated by large multinational firms that value clarity, low compliance costs, and ease in cross-border operations decisions (Edmiston, Mudd and Valev, 2003[52]; Edmiston, 2004[53]; Gulen and Ion, 2016[54]). The UAE has a wide network of tax treaties (with most of its trade partners) (Figure 7.6), which can support cross-border investment (Blonigen, Oldenski and Sly, 2014[55]; Lejour, 2014[56]). The government has also taken key steps to strengthen cross-border co‑operation on taxation as a member of the OECD Global Forum on Transparency and Exchange of Information for Tax Purposes. A 2019 peer review rated the UAE as largely compliant with the international standard, improving from its prior peer review due in part to improved exchange of information infrastructure and obligations for reporting across free zones (OECD, 2019[57]). Alliance with these international standards provides greater certainty to investors that tax rules will be applied in a predictable and consistent manner across countries.
Efforts to support tax certainty are important to build investor trust in tax authorities, particularly as the CIT is relatively recent in UAE. In addition to capacity for enforcement, stable and predictable tax rules, combined with clear dispute prevention and resolution mechanisms, can reduce investment risk by minimising uncertainties for taxpayers. In an increasingly globalised tax environment, both national policy choices and international co‑ordination play a critical role in ensuring tax certainty. Positively, the UAE’s corporate income tax law and related ministerial decisions set comprehensive transfer pricing rules, which increase transparency and certainty for investors regarding transactions between related parties, reducing the risk of audits, tax disputes and double taxation. This includes requiring that transactions are priced according to the arm’s-length principle (setting prices between related parties as if they were unrelated). Accepted transfer pricing methods are broadly aligned with the OECD Transfer Pricing Guidelines. The law also allows for Advanced Pricing Agreements (APA) – regarding pricing future related-party transactions – which can support predictability for investors. Documentation requirements (including TP disclosures and Country-by-Country Reporting) also supports transparency and certainty (Federal Tax Authority, 2023[58]; PwC, 2025[59]).25
Good governance is also essential to support investor trust in tax authorities. As the government begins to collect CIT revenue, investors will look for consistent enforcement of tax rules. Clarity on decisions, based on clear criteria, also extends to granting of tax incentives. For example, if investors are required to apply for the R&D tax credit (or other incentives), any decision to not grant the benefit should be based on clear and identifiable criteria set in the law or regulation. When authorities have wide discretion to select incentive beneficiaries or other conditions, it may create opportunities for disputes or privilege‑seeking behaviour on the part of certain firms, leading to an uneven playing field or perceptions thereof, which can hinder the investment climate (OECD, forthcoming[13]).
CIT should be monitored to ensure a sufficiently broad base. As the government begins to collect CIT revenue, it will be important to monitor the breadth the tax base. If in practice, most corporate profits are exempt from CIT, this will limit the revenue potential of the tax and create potentially significant distortions. For example, if free zones attract more profitable firms, that continue to pay 0% tax, this will reduce the revenue raising capacity of the CIT. Further, while free zones are open to both foreign and domestic firms, if there are more foreign investors in free zones, this could mean that domestic companies pay a majority of the CIT, creating an uneven playing field for domestic firms and potentially hindering local productivity growth. Preliminary evidence on tax reforms across the GCC suggest that smaller firms are more affected by recently introduced CITs (Baum, Nampewo and Polo, 2025[60]).26 It is advisable to carefully monitor the implementation of the CIT and its impacts, including revenue gains and profile of the tax base.
Bilateral tax treaties 1993-2023 (left panel), FDI inflows 2023 (right panel)
Source: Left panel: Corporate Tax Statistics Bilateral Tax Treaty Database; right panel: IMF CDIS, Corporate Tax Statistics Bilateral Tax Treaties Database.
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← 1. Federal Decree‑Law No. (47) of 2022 on the Taxation of Corporations and Businesses “Corporate Tax Law”, issued on 9 December 2022. Businesses will be subject to CIT from the beginning of their first financial year that starts on or after 1 June 2023.
← 2. Defined as “separating, treating, refining, processing, storing, transporting, marketing or distributing the Natural Resources of the State”.
← 3. Foreign banks in Dubai are subject to CIT at 20% (Law No. 1 of 2024 Concerning Tax on Foreign Banks Operating in the Emirate of Dubai).
← 4. free zones are defined geographic areas set by a decision issued by the cabinet.
← 5. The duration of the 0% rate is set by the applicable legislation of the specific free zone; this period can be extended by Cabinet decision, and one period can not exceed 50 years (Article 18, Federal Decree‑Law 47 of 2022). Many free zones offer 50 year exemptions.
← 6. The full list of qualifying activities is set in Article 2(1) of Ministerial Decision No. 265 of 2023.
← 7. Cabinet Decision No. 55 of 2023 on Determining Qualifying Income and Ministerial Decision No. 139 of 2023 on Qualifying Activities and Excluded Activities.
← 8. There is evidence that low tax rates and tax incentives do not increase investment in cases of economic or policy uncertainty, including high inflation, or other investment climate challenges, such as legal uncertainty (Guceri and Albinowski, 2021[14]; Edgerton, 2010[70]; Klemm and Van Parys, 2012[15]; van Parys and James, 2010[64]; Fan and Liu, 2020[69]; Beer, Griffiths and Klemm, 2023[71]).
← 9. National strategies include the UAE Centennial Plan 2071, UAE Vision 2021 National Agenda, We the UAE 2031, Operation 300bn.
← 10. For example, firms may reclassify or channel income into the entity benefiting from the tax incentive, or incorporate a new entity to continue to benefit (Zee, Stotsky and Ley, 2002[61]; IMF, 2021[68]).
← 11. Action 5 restricts which IP assets can qualify for tax benefits, and sets specific substantial activities requirements under the “nexus approach”, which limits tax relief to the proportion of income derived from qualifying R&D expenditures incurred by the taxpayer or outsourced to unrelated parties. The larger the contribution of the taxpayer to developing the IP, the larger the share of income is eligible for tax benefits.
← 12. The Forum on Harmful Tax Practices, which implements and monitors Action 5, reviewed the UAE’s free zone regime as “not harmful” (OECD, 2025[67]).
← 13. The various advantages zones offer – including improved infrastructure, eased business procedures and tax and non-tax incentives – can attract FDI, promote exports and support industry specialisation (agglomeration effects) (Wang, 2013[63]). But zones can also generate dual economies, where the zone thrives with little spillovers (or at the expense of) the domestic economy (Wong and Buba, 2017[62]).
← 14. There is also some evidence that the economic returns from zones declines over time (Wong and Buba, 2017[62]).
← 15. Simplified CIT filing exists for small firms.
← 16. With the exception of taxation of natural resources and foreign banks, set by each Emirate.
← 17. At the time of writing draft legislation has not yet been prepared, and details on much of the specifics are not known. As such, the planned tax credit for high value‑added employees is not covered in the analysis. The following assessment is based on public information on the plans published by the government and tax advisories, and consultations with the Ministry of Finance held in February 2025 (UAE Ministry of Finance, 2024[65]; UAE Ministry of Finance, 2024[44]; Andersen, 2024[73]).
← 18. For more on the design of income‑ and expenditure‑based R&D tax incentives, their costs and uptake see: (González Cabral et al., 2023[45]; Appelt et al., 2023[72]; González Cabral, Appelt and Hanappi, 2021[40]).
← 19. For a literature review on effectiveness of R&D incentives, see (Appelt et al., 2025[34]; Appelt et al., 2016[48]).
← 20. This included asking firms to share their experience with pre‑approval processes in other countries, and feedback on reporting requirements to verify R&D claims (Andersen, 2024[73]).
← 21. Qualifying income specified in Ministerial Decision 265 of 2023 (Article 4), includes royalties or any other income from qualifying IP, including embedded IP income from the sale of products and use of processes directly related to the qualifying IP as determined according the arm’s length principle.
← 22. See footnote 10 for more on Action 5 and the nexus approach.
← 23. If domestic related outsourcing was a qualifying expenditure, it would increase the nexus ratio of the IP, increasing tax benefits at the reduced tax rate.
← 24. As outlined in the Ministry of Finance Strategic Plan 2023-2026, and in line with the UAE Centennial 2071.
← 25. For more on bilateral and multilateral tools to promote tax certainty see (OECD, 2025[66]).
← 26. The study finds CIT as having a larger negative affect on return on assets and equity for smaller foreign firms than larger foreign firms, which likely reflects larger firms’ ability to absorb the cost of the tax, but the study suggests that larger firms may also primarily benefit from CIT exemptions (Baum, Nampewo and Polo, 2025[60]).