On May 31st 2020, the governments of United Arab Emirates (UAE) and Israel signed a tax treaty for the avoidance of double taxation.
The tax treaty aims to boost economic conditions and relations between the two countries and promote bilateral trade and future investments. In addition, the tax treaty will assist in removing barriers linked to cross-border trade and make the two nations more attractive to international investors. UAE has signed around 100 double taxation agreements and such agreements aim to encourage exchange of goods, services and capital.
It is expected that the tax convention will go into effect on the 1st of January 2022, once ratified by the Knesset and in the UAE.
The tax treaty is primarily based on the Organisation for Economic Co-operation and Development Model Tax Convention on Income and on Capital (OECD Model). The treaty also includes clauses relating to exchange of information, prevention of abuse and discrimination.
Who is a resident under the Double Tax Treaty?
Israeli Resident: Any person liable to pay taxes in Israel by reason of his/her domicile, residence, place of management or place of incorporation.
UAE Resident: Any individual who is present in the UAE for at least 183 days in each tax year concerned and the previous tax year provided that the particular individual may prove this.
It is understood that the below will apply:
- INTEREST: Withholding tax of 0%-10%, rate depends on the identity of recipient of interest payment. A 5% rate will be applicable on interest paid to an individual or a corporate shareholder that holds at least 50% of the payer;
- DIVIDENDS: Withholding tax of 0% - 15%, rate depends on identity of recipient of dividend payment. A 5% rate for dividends paid will be applicable to a corporate shareholder that holds at least 10% of payer during the last 365 days;
- ROYALTIES: Withholding tax of 12%;
- CAPITAL GAINS: Capital gain from the disposal of a real estate held directly or indirectly through a trust may be taxed in the country where the real estate is situated anytime within 365 days preceding the sale.
- AVOIDING DOUBLE TAXATION: A foreign tax credit will apply.
Zero (0%) tax rate is applicable to government entities and pension funds on dividends and interest income.
Before the treaty, Israeli withholding tax rate for outbound interest payments was around 25%. Similarly, Israeli withholding tax rate for outbound dividend payments was around 20%-25%.
The above treaty applies to residents of one or both countries.
We will be following up all the developments on this particular matter and shall be updating you accordingly.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.