On May 31, 2020, the governments of Israel and the United Arab Emirates (UAE) signed an income tax treaty for the avoidance of double taxation and prevention of fiscal evasion.
This follows on from the Abraham Accords including the “Treaty of Peace, Diplomatic Relations and Full Normalization between the UAE and State of Israel signed in Abu Dhabi on September 1, 2020 and the Mutual Economic Cooperation Memorandum, of Understanding signed in Tel Aviv on October 20, 2020.
The Treaty must still be ratified by the Knesset and in the UAE. It is assumed the Treaty may perhaps become effective from the beginning of 2022. Watch for confirmation of this.
The UAE generally does not enforce income tax collection except in the oil and financial sectors, so double taxation may not be an issue. But there are other aspects to consider. Following is a brief overview.
The treaty generally applies to persons who are residents of one or both countries.
The Treaty applies to income tax and corporate tax in the two countries, Israeli real estate taxes and the petroleum profits levy of up to 50% which applies to Israel’s Mediterranean gas.
How is Israel defined?
The term “Israel” means the territory in which the Government of Israel has taxation rights, including its territorial sea and adjacent maritime areas.
Who is a resident?
An Israeli resident is any person liable to tax in Israel by reason of his domicile (not defined), residence, place of management or place of incorporation.
A UAE resident individual is someone present in the UAE 183 days or more in each tax year concerned and the previous tax year, provided such individual can prove that he is a domicile of the UAE and his personal and economic relations are closer to the UAE than to any other State.
This means it may be hard for ex-Israelis to become UAE residents for treaty purposes. If they succeed, Israel is expressly allowed to impose its exit tax (really capital gains tax up to 33%). Israel may also tax their Israeli pensions. And they are not entitled to benefits under the treaty for at least 5 years!
Partnership, trust or controlled foreign affiliate (not defined):
Israel may impose tax “on amounts included in the income of a resident of Israel with respect to a partnership, trust or controlled foreign affiliate in which that resident has an interest”. This is vague – can Israel tax all income of such a body, or only the percentage interest of Israeli residents? What about discretionary trusts where nobody yet has an interest?
Permanent establishment (branch):
Detailed rules will apply e.g. Israel can tax a UAE company which has in Israel: a fixed place of business, an installation project or substantial equipment for more than 6 months; a warehouse that is more than preparatory or auxiliary in character; a cohesive business operation split among closely related enterprises; a person in Israel who plays a principal role in concluding contracts without material modification by the UAE enterprise; or a closely related agency company (over 50% control). All this may hamper e-commerce.
The prescribed withholding tax rate for dividends is generally 15%, but only 5% for dividends paid to a corporate shareholder that held at least 10% of the payor throughout the preceding 365 days. The rate is generally 0% for governmental or pension bodies. Before the treaty, the Israeli withholding tax rate for outbound dividend payments was generally 20%-25%.
The prescribed withholding tax rate for dividends is generally 15%, but only 5% for interest paid to a corporate or individual shareholder holding at least 50% of the payor.
The rate is 0% for governmental or pension bodies. Before the treaty, the Israeli withholding tax rate for outbound interest payments was generally 25%.
The prescribed withholding tax rate for royalties is generally 12%.
Capital gain from real estate held directly or via a partnership or trust any time in the 365 days preceding the sale may be taxed in the country where the real estate is situated. Other capital gains from shares may also be taxed, but it seems neither country generally does so.
Relocated employees present under 183 days in any 12 month period in the other country may be exempted by the other country if certain conditions are met.
Avoiding double taxation:
A foreign tax credit is prescribed.
There are detailed rules to stop Israeli residents or non-UAE residents setting up UAE companies to avoid Israeli taxes.
The UAE is a promising location and hopefully a stepping stone to peace. If you have any interest in the UAE, please contact us for advice and assistance from us and our UAE accountancy colleagues.