The UAE: international tax treaties and investment opportunities

What is double tax treaty? Let’s start from the definition of a tax treaty. It is widely agreed that a double tax treaty is an international agreement between two countries that is concluded for the avoidance of double taxation. As for the United Arab Emirates (UAE), the government of this country has signed and ratified a number of international tax treaties. Here are some of the countries from the list, where double tax treaties have come in force: Austria, France, Belgium, Germany, Spain, Italy, Finland, and Luxembourg. As for the US, the double tax treaty between these countries has not yet been signed, but they actively work on this issue. It should be noted that the tax treaties are signed by almost all the biggest countries of the European Union. In total, the country has already signed more than 70 double tax treaties by this time.

Taxation in the UAE, double tax treaties with other countries

The taxation system of the United Arab Emirates fully eliminates the withholding of the income taxes both from the private persons and companies. Corporate taxation in UAE is applied in only two economic sectors, in particular, in the banking sector and the oil and gas industry. The companies, which are registered on the territory of the United Arab Emirates and which are engaged in the investment activities in the countries of the EU, pay only the taxes which are provided by due in that countries. Thus, the international agreements help to minimize the tax burden in the country, where the income was received.

In this article we analyze the following indicators of tax treaties:

• Requirements for private business;
• Possible limitations in the tax treaties and the current legislation;
• Corporate taxation of the dividends, which are paid to the residents of the UAE;
• Taxation of the interests, capitalization of the profits and royalties of the UAE residents.

1. France

A tax Treaty between the UAE and France was signed at the beginning of 1989 with subsequent amendments and additions. This double tax treaty agreement applies to the legal and natural entities which have the status of a resident of the UAE and provides for that all the incomes received by a resident in the UAE are not taxed.

Provided that the recipient is the ultimate beneficiary and possesses the status of a resident of the UAE, the following payments are not taxed in France:

• Dividends;
• Income generated as interest;
• Capital income from the sale of securities;
• Royalties.

All the natural persons, who have the status of a tax resident of the UAE and own the premises on the territory of France, are exempted from the income taxes, which are calculated on the basis of the rental fees.

2. Italy

A tax treaty between the Governments of the United Arab Emirates and Italy was signed and ratified in 1995. The provisions of this tax treaty indicate that the legal and physical entities, which have the status of a tax resident of the UAE and are liable to taxation according to the different characteristics (place of residence, company management or permanent residence) in the UAE, are exempted from paying taxes.

The tax treaty provides the following rates of taxation for the residents of the UAE:

• Intracorporate dividends – 5%;
• Other dividends – 15%;
• Royalties – 10%.

The interest incomes, which are received in Italy and are paid the residents of the Emirates, are not taxed. But in this case, according to the treaty, a resident must be the ultimate beneficiary of the income. Besides, the Italian fiscal system eliminates taxation of the capital income from the sale of securities.

3. Germany

The double tax treaty between the two countries was signed in the mid-1995. The treaty approves the resident status of the company in the following situations: if the company is managed from the territory of the Emirates, or if the company was established in the UAE. For individuals, obtaining this status it suggests the availability of the permanent residence in the UAE.

A tax treaty between the UAE and Germany provides the following tax rates:

• Intracorporate dividends – 5%;
• Other forms of dividends – 15%.

Provided that the resident of the UAE is the ultimate beneficiary, the royalties and the interest incomes, which are received by a resident of the UAE in Germany, are not taxed. The income received from the sale of securities of the company is also tax-exempted.

4. Austria

A relevant tax treaty between the UAE and Austria was signed in 2003. In accordance with the provisions of this tax treaty, a legal entity which is registered or incorporated in accordance with the current legislation and which is not contrary to it is considered a resident company. Similar requirements are applicable to natural persons having the status of a resident of the UAE.

On the basis of the tax treaty, the UAE residents are exempted from the following types of state taxation:

• Dividends, including the intracorporate one;
• Royalties and interest income;
• Capital income from the sale of securities.

To receive the benefits and opportunities, which are provided by the tax treaty, the recipient of the income, and respectively a resident of the UAE should be the ultimate beneficiary of the incoming profits.

Taxation at the source of the income, which can also be excluded when providing the statement certified by the taxation authority of the UAE, is possible.

5. Spain

The international double tax treaty between the UAE and the government of Spain was signed in the mid-2006. The provisions of the tax treaty provide for that the resident status for the private persons and companies in the UAE is admitted on the following bases:

• For companies: incorporation and company management in the territory of the Emirates;
• For individuals: citizenship and permanent residence in the Emirates.

The following tax rates are applied for the UAE residents, which carry out the investment activity on the territory of Spain:

• Intracorporate dividends – 5%;
• Other types of dividends – 15%.

Royalties, interest incomes and capital income from the sale of securities, which are received by a resident of the UAE in Spain, are not taxed.

In the case when the tax optimization is the main purpose of the investment and other economic activities of the company, the Government of Spain reserves the right to refuse the tax incentives for the resident of the UAE.

6. Belgium

The tax treaty between the Emirates and Belgium has been in force since 1996, it provides the status of a resident of the UAE on the following grounds:

• For the legal entities: management of the company or institution on the territory of the Emirates;
• For the physical persons: the permanent residence in the UAE.

The following tax rates are applicable to the residents of the Emirates in Belgium according to the tax treaty:

• Intracorporate dividends – 5%;
• Other dividend payments – 10%;
• Royalties and interest income – 5%.

To obtain the tax advantages a resident of the UAE must be the ultimate beneficiary of the incomes which are transferred into the UAE. The capital income, which is received from the sale of securities of the company, are not taxed.

The United Arab Emirates is not included in the «black list» of tax havens, which was published by the Belgian government.

7. Finland

The International tax treaty between the United Arab Emirates and the government of Finland was signed in 1996. For the individual persons, the resident status is confirmed by the citizenship of the UAE and permanent residence in the UAE. As to the legal entities, they must be established, incorporated or managed from the territory of the Emirates.

The following types of budget payments are excluded in Finland according to the tax treaty:

• Dividends and interest income;
• Royalties;
• Income from the sale of securities of the company.

An obligatory condition for obtaining tax benefits is the fact that the recipient must be a resident of the UAE and the ultimate beneficiary of the transferred income.

8. Luxembourg

The tax treaty between the UAE and Luxembourg was signed in the mid-2005. There are similar requirements for confirming the resident status, in particular in this tax treaty:

• Physical persons must obtain the UAE residency;
• Companies and enterprises must be established or managed from the territory of the Emirates.

The following tax rates are applied for the UAE residents, both for the private individuals and companies:

• Intracorporate dividends – 5%;
• Other dividend payments – 10%.

Royalties, interest incomes and capital income from the sale of securities are not taxed in Luxembourg. But the resident-recipient must be the ultimate beneficiary of the incoming revenues and profits.

Dear readers, it is necessary to examine all the existing conditions and requirements carefully before using the various international tax treaties. Besides, it is important to pay attention to the numerous protocols which complement such tax treaties.