June 14, 2021
Israel and United Arab Emirates sign tax treaty
Israel and the United Arab Emirates (the UAE) signed the first tax treaty between the two countries on 31 May 2021. If ratified during 2021, the tax treaty will be in force as of 1 January 2022.
Generally, the UAE does not impose taxes on companies (except on activities in the financial sectors and on activities related to oil and gas), and generally does not impose withholding tax. Therefore, the beneficiaries of the tax treaty are mainly residents of the UAE (and mainly governmental companies) who have investments or activities in Israel.
This Alert summarizes the main treaty benefits that apply to income in Israel (subject to the Limitation on Benefits (LOB) as detailed below).
The tax treaty provides for the following withholding tax rates on dividends:
The withholding tax rate which is applicable to royalties shall not exceed 12%.
The treaty expands the definition of "dependent agent" to cases where a person plays the principal role leading to the conclusion of contracts that are routinely concluded without a material modification by the enterprise.
The treaty includes alternatives for the taxation of foreign residents on capital gains, even though the domestic laws in the UAE and in Israel provide capital gains tax exemptions with respect to the sale of shares by foreign residents.
It is noted that beyond the standard limitations on treaty shopping and abuse (the Principle Purpose Test), the treaty includes an LOB article (Article 28) which includes unique restrictions for the use of its main benefits:
As the treaty is unique and complex, taxpayers should consider the application of the treaty articles, with careful attention to the parties to the transaction, whether they are Government or related entities, UAE residents or foreign residents, in order to determine whether treaty benefits can be granted.
For additional information with respect to this Alert, please contact the following:
EY Israel, Tel Aviv
Ernst & Young LLP (United States), Israel Tax Desk, New York