DTT provides reduced withholding tax (WHT) and a tax relief from non-resident taxation on the transfer of shares listed in the stock exchange.
On 31 May 2021, the United Arab Emirates signed a double taxation treaty (DTT) with Israel. The DTT between the UAE and Israel (the "contracting states"), is expected to go into effect on 1 January 2022, once ratified by both states and published in the Official Gazette.
The DTT provides lower withholding tax rates compared to domestic tax law in Israel, as follows:
|DTT||Item||DTA rate||Israel Domestic Tax Rate|
0% - in cases where a pension fund or government holds less than 5% of capital
5% - in cases where the government holds 5% of the capital, or a company holds 10%, for 365 days
15% - in all other cases
30 / 25% - depending on the percentage of ownership
0% - in cases where the beneficial owner of the interest is a pension fund or government
5% - in cases where the beneficial owner of the interest holds 50% of the capital of the company
10% - in all other cases
|23% - standard|
|Article No.12||Royalties||12% - at maximum rate||23% - standard|
1. Persons covered
All residents in the UAE or Israel, including foreign national individuals and companies, can benefit from the DTT. A resident in one of the contracting states may be exempted from income tax or obtain a credit equal to the income tax paid with respect to income derived and taxed in the other contracting state.
With regard to the UAE, the DTT defines a resident as: (1) an individual who is present in the UAE for a period, or periods, amounting to 183 days or more in the tax year concerned and the previous tax year; (2) a qualified government entity or corporate body which incorporated in the UAE with its place of management in the UAE.
The DTT defines a resident in Israel as any person who would be liable to tax by reasons of domicile, residence, place of management or any other criteria of a similar nature.
3. Permanent establishment (PE)
Domestic legislation in Israel does not clearly define PE, whereas the DTT does. All non-residents are subject to tax on income accrued or derived in Israel, unless there is DTT between Israel and the country where the non-resident is domiciled. According to Article No. 5 of the DTT, the non-resident would have PE in those instances where a building site, construction, assembly or installation project in the other contracting state lasts for a period of more than six months.
In addition, "service PE" will exist only if services are carried out by an enterprise of a contracting state through using substantial mechanical or scientific equipment or machinery, or that enterprise installing this equipment within the borders of the other contracting state, for a period of more than six months.
4. Business profits and other revenue items
Under local legislation in Israel, banks must withhold tax at 25% from all overseas remittance, except those related to the supply of goods or services rendered outside Israel.
In addition, Article No.7 of the DTT states that profits of a company are not subject to tax in the other contracting state unless the company carries out its business in the other contracting state through a PE.
The DTT provides that items of income that are not specifically dealt with in the DTT may also be taxed in the other contracting state, according to the laws of that state. As such, income from services performed inside Israel by a non-resident without a PE will be subject to WHT at 25%, as well as any other taxes.
5. International shipping and air transport
Article No. 8 states that profits derived by a company from the operation of ships and aircraft in international traffic are only taxable in the state in which the company is resident.
6. Capital gains
The DTT does not exempt gains arising on the transfer of shares, other rights and comparable interest from taxation in the other contracting state, if such gains are derived by a resident or government of the first contracting state owning 10% or more of the voting power of the company, partnership or trust, at any time during the 12 month period preceding such a sale.
The transfer of shares in listed companies owned by a resident in a contracting state is exempt from tax under the DTT, if such shares derive less than 50% of their value from immovable property in the other contracting state, at any time during the 365 days preceding the alienation of those shares.
7. Branch Tax
According to Article No. 14 of the DTT, remittance made by a branch in Israel of a United Arab Emirates company will be taxed at 5%.
8. Elimination of double taxation
The DTT provides for the elimination of double taxation by way of a credit against tax payable. As such, if a resident of contracting state derives income which, in accordance with the provisions of the DTT, may be taxed in the other contracting state, the first contracting state shall allow a deduction from the tax on the income of that resident with an amount equal to the tax paid in the other contracting state.
9. Entry into force
It is expected that the DTT will go into effect on 1 January 2022, once ratified by the both states.
10. OECD Multilateral Convention
The DTT is based on the Organization for Economic Co-operation and Development's (OECD) Model Tax Convention. The treaty also includes clauses relating to the exchange of information, prevention of abuse and discrimination.
The DTT between Israel and UAE is the first DTT signed with a GCC member and an Arab Country. It is expected to facilitate further cross-border trade between the two countries and enable significant promotion of investment for both countries' economies.
The DTT provides for significant tax reductions on payments, such as interest, royalties and service fees. Both UAE and Israel resident individuals and companies have access to the DTT, and foreign national residents of both countries can also benefit from the DTT.
Talk to us
TMF Group's accounting and tax teams based in the Middle East can support your business growth, guide you through local accounting compliance and optimise your tax efficiency. If you need assistance with any aspects linked to the UAE/Israel DTT, talk to us.
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.