No Substance, No 0% — Can Transitional Relief Rescue Your IP?

Many UAE business owners are now discovering a challenge they hadn’t expected: not all intellectual property (IP) income qualifies for the 0% Free Zone corporate tax rate. The difference between qualifying and non-qualifying IP is more than just a technical detail it can mean the difference between paying 0% tax or facing the standard 9% corporate tax, including on a future sale.

What Counts as Qualifying IP?

Under UAE Corporate Tax rules, only certain types of IP can benefit from the Free Zone’s 0% regime:

• Patents

• Copyrighted software

• Functionally equivalent assets that are novel, useful, and legally protected

What’s excluded? Trademarks, logos, brands, customer lists and goodwill, essentially, marketing-related intangibles. These are treated as non-qualifying IP and taxed at 9%.

But classification is only half the story, to actually access the 0% rate, the entity holding the IP must also demonstrate sufficient substance. That means carrying out Core Income-Generating Activities (CIGA) like R&D, exploitation, and decision-making inside the Free Zone.

Without that substance, even “qualifying” IP risks being taxed at 9%.

A Case in Point

In this example, the group had developed valuable intellectual property entirely in-house. At first glance, everything appeared to be in order the IP itself qualified as the “right type.”

However, the IP-holding entity lacked real substance. It wasn’t carrying out the necessary core income-generating activities (CIGA), and the structure hadn’t been properly planned from the outset.

The outcome? The income from the IP didn’t qualify for the 0% tax regime, leaving the company subject to 9% tax on royalties and potentially facing a significant tax charge on any future sale.

Transitional Relief: A Window of Opportunity

Here’s where the UAE’s transitional rules offer some relief. If you make the election in your first corporate tax return, you can “step up” the tax base of pre-CT assets (including IP) to their fair market value.

In practice, this means:

• Built-in gains up to the day before your first CT period began are ring-fenced

• Only growth in value during or after your first CT period is subject to 9%

For business owners, this opens a planning window. Transitional relief can make it possible to transfer IP to another jurisdiction — sometimes without triggering a UAE tax charge.

Is the UAE the Best Place to Hold Non-Qualifying IP?

This raises an important strategic question: if your IP doesn’t qualify in the UAE, is this the right place to hold it long-term?

Other international hubs such as Cyprus, Ireland, Malta, and Luxembourg have long-standing preferential IP regimes and disposal exemptions. For businesses expecting significant gains on a future sale, these can sometimes provide a better long-term home for their IP.

The Key Takeaway for UAE Business Owners

• Substance matters: If your IP is held in a Free Zone entity, make sure the CIGA sits in the right company with real activities in the UAE.

• Timing matters: Transitional relief is a one-off opportunity that can only be claimed in your first corporate tax return.

• Planning matters: Choosing where to hold IP is a strategic decision that can have major tax consequences on both annual income and a future exit.

💡 If you own IP in the UAE, now is the time to review whether it qualifies for 0%, whether the holding entity has enough substance, and whether transitional relief could give you more options. Waiting until the rules are tested in practice may be too late.

📩 Please get in touch if you would like us to review your IP position, assess whether it qualifies, and discuss restructuring or relocation options that could protect you from unnecessary tax in the future.

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