Interesting facts:
Full versionApplying royalties in the UAE requires understanding not only the legal intricacies but also the current tax regulations. Essentially, they are payments for the use of someone else's intellectual capital: brands, software, or unique technologies. In the Emirates, this model has long been the standard for franchising and large international groups operating both in free zones and on the mainland.
Any payments are based on a licensing agreement. It's important to remember that royalties are not the purchase of a business but merely the lease of the right to use IP assets. The owner remains the same, but you are paying for the opportunity to use their developments.
For companies in free zones, royalties can be a primary source of income. Having a physical office and management, the aforementioned "economic substance," is critical in this case. Companies on the mainland are more likely to act as payers, transferring royalties to their parent companies. In this case, the market justification for each transaction comes first.
With the introduction of a 9% corporate tax, the approach to royalties in the UAE has become more stringent. The belief that these payments are tax-exempt is erroneous. Royalties generate income for the recipient, and for the payer, they can reduce the tax base, but only under strict conditions.
Clarify the cost of opening company, corporate or personal bank account, obtaining a residence visa, or another question regarding business in Dubai, UAE:
The tax authority expects the royalty rate to be consistent with market conditions—the "arm's length" principle. If a payment appears inflated for the sake of profit-sharing, this will raise questions. Therefore, each payment must be supported by documentation (Master File or Local File reports) and have a clear economic justification.
Typically, parties choose one of three models: a percentage of revenue (most often in franchises), a percentage of profit, or a fixed payment. Each model has its own accounting nuances.
Today the main challenge is compliance. A substance and clear income structure would ensure a smooth passage without claims. Structuring through royalties, especially when done with proper legal structuring in place is still a good tool that can help protect business interests. It tries to adapt itself to all international frameworks and laws.
We know how intimidating it may sound requiring royalty procedures in such a dynamic legal environment in the UAE. Our team is here to guide you every step of the way. We will tell you in detail about all legal and tax nuances, help you create the necessary documentation and develop an optimal model for them that will guarantee the safety and stability of your business.
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