The United Arab Emirates indicators a double taxation settlement with Israel: Info briefly – Tax

On May 31, 2021, the United Arab Emirates signed a double taxation agreement (DTA) with Israel. The DTA between the United Arab Emirates and Israel (the “Contracting States”) is expected to come into force on January 1, 2022, once it has been ratified by both states and published in the Official Journal.

The DTA provides lower withholding tax rates compared to domestic tax law in Israel:

DVB-T items DTA rate Israeli domestic tax rate
Article number 10 Dividends

0% – in cases where a pension fund or government holds less than 5% of the capital

5% – in cases where the state holds 5% of the capital or a company holds 10%, for 365 days

fifteen% – in all other cases

30/25% – depending on the ownership share

Article number 11 interest

0% – in cases in which the beneficial owner of the interest is a pension fund or a state

5% – in cases where the beneficial owner of the participation holds 50% of the company’s capital

10% – in all other cases

23% – standard
Article number 12 License fees 12% – at the maximum price 23% – standard

Important points

1. Insured persons

All residents of the United Arab Emirates or Israel, including foreign nationals and corporations, can benefit from the DTA. A resident of one of the contracting states can be exempt from income tax or can be credited with the amount of income tax paid on income earned and taxed in the other contracting state.

2. Resident

With respect to the UAE, the DTA defines a Resident as: (1) an individual who resides in the UAE for one or more periods of at least 183 days in the relevant tax year and in the previous tax year; (2) a qualified government agency or corporation registered in the UAE and having its administrative headquarters in the UAE.

The DTA defines an Israeli resident as any person who would be subject to tax based on their place of residence, domicile, place of management or other similar criteria.

3. Permanent establishment (PE)

National law in Israel does not clearly define PE, while the DTA does. All non-residents are subject to taxation on accrued or inferred income in Israel, unless there are DTAs between Israel and the country in which the non-resident is resident. According to Article No. 5 DTA, the non-resident would have a permanent establishment if a construction, assembly or installation project in the other contracting state lasts longer than six months.

In addition, “service operation” only exists if services are provided by a company of a contracting state using essential mechanical or scientific devices or machines, or if this company installs these devices within the borders of the other contracting state for a period of more than six months.

4. Business Profits and Other Revenue Items

According to local law in Israel, banks are required to withhold 25% tax on all foreign transfers, except those related to the delivery of goods or services outside of Israel.

In addition, Article No. 7 DTA states that the profits of a company are not taxable in the other contracting state, unless the company carries out its business in the other contracting state through a permanent establishment.

The DTA provides that income that is not regulated separately in the DTA can also be taxed in the other contracting state in accordance with its law. Therefore, income from services provided within Israel by a non-permanent resident is subject to the 25% WHT and all other taxes.

5. International shipping and air transport

Article 8 states that profits of a company from the operation of ships and aircraft in international traffic are only taxable in the country in which the company is resident.

6. Capital Gains

The DTA does not exempt profits from the transfer of shares, other rights and comparable interest from taxation in the other contracting state if these profits are obtained from a resident or government of the first contracting state with a voting share of at least 10% of the company, partnership or the Trusts, at any time during the 12 month period prior to any such sale.

The transfer of shares in listed companies that belong to a resident of a contracting state is tax-free under the DTA if these shares come at any point during the 365 days less than 50% of their value from immovable property in the other contracting state prior to their sale Shares.

7. Branch tax

According to Article No. 14 of the DTA, transfers through a branch of a company in the United Arab Emirates are taxed at 5% in Israel.

8. Elimination of double taxation

The DTA provides for the elimination of double taxation by offsetting it against the tax to be paid. If a resident of a contracting state generates income that can be taxed in the other contracting state according to the provisions of the DTA, the first contracting state permits a deduction from the tax on the income of this resident at an amount equal to the tax paid in the other contracting state.

9. Entry into force

The DTA is expected to come into force on January 1, 2022, once it has been ratified by both states.

10. Multilateral OECD Agreement

The DTA is based on the model tax agreement of the Organization for Economic Cooperation and Development (OECD). The contract also contains clauses on the exchange of information, the prevention of abuse and discrimination.

The central theses

The DTA between Israel and the United Arab Emirates is the first DTA signed with a GCC member and an Arab country. It is expected to facilitate cross-border trade between the two countries and provide a significant boost to investment for the economies of both countries.

The DTA provides for significant tax reductions on payments such as interest, license fees and service fees. Both individuals and companies residing in the UAE and Israel have access to the DTA, and foreign nationals of both countries can also benefit from the DTA.

TMF Group’s accounting and tax teams, based in the Middle East, can help your business grow, guide you through local accounting compliance, and optimize your tax efficiency. If you need help with anything related to the UAE / Israel DTT, please contact us.

The content of this article is intended to provide general guidance on the subject. Expert advice should be sought regarding your specific circumstances.