A Contract Does What Accounting Can’t: How an Agreement Can Reduce Your Tax Burden

Recently, companies are becoming increasingly strategic about how they structure ownership of their intellectual property. While most businesses instinctively register their trademarks under the same entity that operates the business, a more sophisticated, and legally efficient, approach is to separate ownership and use.

Specifically, by registering the trademark under a holding company and licensing it to the operating company, businesses can achieve legitimate tax efficiencies, enhance asset protection, and ensure long-term brand control.

This structure is not a loophole. It is an established and legally recognized arrangement under UAE law, combining the principles of intellectual property protection and corporate tax planning within the country’s applicable laws.

1. The Legal Foundation of Trademark Licensing

Under Federal Decree-Law №36 of 2021 on Trademarks, the owner of a registered mark enjoys exclusive rights to use and authorize others to use that mark. Article 31 of the law expressly provides that the trademark owner may license another party to use the trademark, whether exclusively or non-exclusively. Furthermore, it requires that such a license be registered with the UAE Ministry of Economy to be effective against third parties.

This legal foundation allows a business group to distinguish between ownership and use of a trademark. A holding company can be the legal owner of the trademark, while an operating company, the entity that actually trades, markets, and provides goods or services, can use the mark pursuant to a recorded licensing agreement. In this way, the law itself enables businesses to create internal arrangements that align commercial use with corporate governance and financial efficiency.

2. Separating Ownership from Operation

Registering the trademark under a holding company serves several purposes. It ensures that the company’s most valuable intangible asset, its brand, remains legally insulated from operational risks. The operating entity, which engages in day-to-day transactions, customer contracts, and commercial activities, is naturally exposed to potential liabilities. By contrast, the holding company remains shielded, owning the intellectual property free from exposure to creditors, litigation, or regulatory claims that might arise against the operating arm.

This separation also reflects one of the fundamental principles under Federal Decree-Law №32 of 2021 on Commercial Companies, which recognizes that each legal entity has its own personality, assets, and liabilities. Therefore, a well-structured group can ensure that an adverse event affecting one company does not automatically endanger assets held by another within the same group.

3. The Tax Dimension: Structuring for Efficiency

Since the enactment of Federal Decree-Law №47 of 2022 on the Taxation of Corporations and Businesses, the UAE has introduced a federal corporate tax regime applicable to most business entities at a rate of 9%. The law, however, leaves room for tax optimization through legitimate structuring and proper intra-group arrangements.

The Corporate Tax Law permits transactions between related parties, provided they adhere to the arm’s length principle, and Article 34 mandates that such transactions be priced as if they were between independent entities. This means that if a holding company licenses a trademark to an operating company and charges a commercially reasonable royalty fee, the structure remains fully compliant with UAE tax law.

From a tax perspective, the operating company may deduct the royalty payments as legitimate business expenses, thereby reducing its taxable income. The holding company, in turn, receives royalty income, which can potentially qualify for preferential treatment if it operates as a Qualifying Free Zone Person. Under Cabinet Decision №55 of 2023 and Ministerial Decision №265 of 2023, qualifying income derived from transactions with non-mainland entities, such as royalties, may benefit from a 0% corporate tax rate.

In practice, this structure reallocates part of the operating profit to the holding entity in a legal manner, thereby optimizing the group’s overall tax position without breaching the anti-avoidance or transfer pricing provisions of UAE law.

4. Beyond Tax: Building Long-Term Asset Protection

The benefits of this model go beyond tax efficiency. By placing the intellectual property in a separate entity, the group effectively creates a ring-fence around its most valuable asset. In the event the operating company face financial distress, commercial disputes, or even liquidation, the trademark remains unaffected, continuing to be owned by the holding company.

Moreover, this structure enhances transparency and corporate governance. The operating entity merely holds a contractual right of use, not ownership, ensuring that the brand can be maintained, re-licensed, or franchised independently of the business operations. It also facilitates valuation, financing, and succession planning, as the IP asset sits clearly on the balance sheet of the holding company rather than being entangled within the trading accounts of a single operating entity.

5. Implementation and Compliance Considerations

To implement such a structure, the group should begin by incorporating a holding entity in a Free Zone jurisdiction that offers IP protection and clear tax benefits, such as the DIFC, ADGM, or RAKEZ. The trademark should then be registered in the name of the holding company before the UAE Ministry of Economy.

Once registered, the holding company can execute a Trademark License Agreement with the operating entity. This agreement should specify the scope of permitted use, duration, and territory, as well as set a commercially justifiable royalty rate. It is essential that the license be recorded with the Ministry of Economy, as required by the Trademark Law. In parallel, the group must maintain transfer pricing documentation to demonstrate that the royalty rate is consistent with market standards and supports the principles under the Corporate Tax Law (respecting the arm’s length principle).

6. A Practical Illustration

Consider an example where a Dubai mainland company generates annual profits of AED 5 million. If the company pays a royalty fee of AED 800,000 per year to its Free Zone holding company for the use of the trademark, the payment becomes a deductible expense. The result is that only AED 4.2 million of the income is subject to the 9% corporate tax rate.

Meanwhile, the holding company, if structured as a Qualifying Free Zone Person, may pay 0% corporate tax on its royalty income. This inter-group arrangement effectively reduces the overall tax burden while maintaining compliance with the UAE’s transfer pricing and related-party transaction regulations.

7. When a Foundation Owns the Intellectual Property

An even more advanced variation of this structure is when the trademark is owned not by a holding company, but by a UAE foundation, typically established in the DIFC or ADGM.

Foundations are recognized under DIFC Law №3 of 2018 and ADGM Foundations Regulations 2017, and they provide a powerful mechanism for asset protection, succession planning, and tax neutrality. You can see my previous article regarding foundations https://medium.com/@marounabouharb/a-vehicle-for-wealth-succession-and-asset-protection-for-uae-residents-and-european-individuals-78d3f5e6409a

When a foundation holds the trademark, it becomes the ultimate owner of the intellectual property, separate from any operating or holding entity. The foundation can then license the trademark to the commercial entities within the group in the same way a holding company would, through a recorded license agreement with defined royalty terms.

This structure offers unique benefits. First, it provides permanent separation between ownership and control: the foundation, being an orphan entity without shareholders, ensures that the brand remains insulated from personal or corporate disputes. Second, it facilitates intergenerational continuity, as the foundation’s charter and by-laws can define how the IP income is distributed to beneficiaries or reinvested. Third, from a tax perspective, a UAE foundation (especially one based in the DIFC or ADGM) is typically treated as a non-commercial entity, which may further optimize tax outcomes when combined with a licensing structure under the Corporate Tax regime.

In essence, a foundation can function as the intellectual and financial anchor of the group, holding, protecting, and monetizing the brand while maintaining long-term family or corporate governance continuity.

A licensing agreement is far more than a tool of commercial convenience. When properly structured, it can be the cornerstone of a group’s asset protection and tax efficiency strategy. Whether the trademark is held by a Free Zone holding company or a UAE foundation, the underlying principles remain the same: ownership should be separated from operation, income should flow through compliant intra-group arrangements, and the structure should be transparent under UAE law.

The existing UAE applicable laws provide the legal tools to implement these strategies with confidence.

Businesses can protect their intellectual assets and reduce their taxable exposure in a legitimate, sustainable, and forward-looking way.