After establishing formal diplomatic ties by signing the Abraham Accords on the 15 September 2020, the United Arab Emirates and Israel have now further strengthened their relationship by signing a double tax treaty (the Treaty) to eliminate certain fiscal restrictions and situations where double taxation arises between the states.
The Treaty also aims to stimulate economic growth and foreign investment between the two countries and to provide greater certainty and stability across the two states in terms of investments and business opportunities. The Treaty will have positive implications for both Israeli and UAE residents and will help to strengthen financial ties, improve diplomatic relations and facilitate trade between the two states.
The Treaty is based on the Organisation for Economic Cooperation and Development’s (OECD) Model Tax Convention (MTC) and, as stipulated by the Finance Ministry, the bilateral agreement primarily focuses on avoiding double taxation of income and assets connected to the UAE and Israel. The Treaty deals with both Israeli and UAE income tax and corporate tax, as well as Israeli tax that is imposed on the profits made from the sale of property. The Treaty also includes provisions regarding residency tie-breaker rules, rules for the prevention of double-taxation, anti-avoidance and non-discrimination provisions, exchange of information and more.
What are the withholding tax rates under the Treaty?
Dividends
- 0% if the beneficial owner of the dividends distributed from a company in one contracting state is a pension plan of the other contracting state or the government of that state and holds less than 5% of the capital of the company distributing the dividends.
- 5% if the beneficial owner is the government of the other contracting state, provided it holds at least 5% of the capital of the company distributing the dividends.
- 5% if the beneficial owner of the dividends is a company, provided it holds at least 10% of the capital of the distributing company for a period of 365 days prior to the distribution date.
- 15% in all other cases.
Interest
- Interest payments paid by a company in one contracting state to a pension plan of the other contracting state or the government that contracting state will be exempt from withholding tax, provided that the pension plan or government hold less than 50% of the capital of the paying company.
- 5% of the gross amount of the interest if the pension plan or government hold 50% or more of the capital of the paying company.
- 10% of the gross amount of the interest in all other cases.
Royalties
- 12% of the gross amount of the royalty in all cases.
Capital gains
Each state preserves its right to tax capital gains from the sale of real estate or rights in entities in which more than 50% of the value is derived, directly or indirectly, from local real estate, in accordance with domestic law.
If the capital gains derived from the sale of shares or other interests in entities which are not traded in a recognised stock exchange, resident in one contracting state, the withholding tax rates are as follows:
- 0% if the capital gains derived by a government of the other state, provided that the government holds – at any time during the 12-month period preceding the sale – less than 10% of the voting power of the sold entity.
- 5% if the capital gains derived by a government of the other state, which holds – at any time during the 12-month period preceding the sale – 10% or more of the voting power of the sold entity.
- 10% if the capital gains are derived by a resident the other state, provided they hold – at any time during the 12-month period preceding the sale – less than 10% of the voting power of the sold entity.
Otherwise, capital gains will be taxable only in the contracting state where the seller resides.
Note that Israeli law provides for an exemption from capital gains tax to non-Israeli residents on capital gain generated from a sale of shares in a company under certain circumstances, and provided that the shares were acquired after 1 January 2009.
What about corporate tax?
The UAE only imposes corporate taxes on branches of foreign banks, and companies that produce oil and gas, so the Treaty clearly favours those investing in Israel. That said, the Treaty includes strict anti-avoidance and limitation on benefits provisions designed to limit the ability of non-UAE residents to benefit from it. For example, a UAE resident is defined as an individual who is present in the UAE for at least 183 days and can prove that they are a domicile of the UAE, and that their personal and economic relationships with the UAE are closer than with any other country in the world.
A company incorporated in the UAE is also entitled to the benefits of the Treaty only to the extent it is actually held and controlled by a UAE resident and its place of effective management is the UAE. The Treaty limits the applicability of the benefits under the Treaty regarding Israeli taxation on business profits, international shipping and air transport, dividends, interest, royalties, capital gains and branch tax, to the federal and local governments of the UAE, qualified government entities, a pension plan and companies where at least 75% of their capital is owned by the UAE or a qualified government entity (with the remainder of the capital held by individuals residing in the UAE).
Even so, individuals residing in the UAE and companies that are owned exclusively by the UAE or qualified government entities or by individuals residing in the UAE may claim benefits under the International Shipping and air transport, dividends, interest, and capital gains. The UAE has over 100 double tax treaties with other states, however, as well as multiple free zones and a sophisticated business infrastructure – all of which make it an ideal place for Israeli corporations to invest.
Though the agreement still needs to be ratified in both countries, this is one of the first steps to effectively facilitating business between the UAE and Israel. It is expected to come into effect on 1 January 2022.
Here to help
Double taxation agreements can be complex and unclear, so we recommend you consult a legal professional when trying to make sense of them. If you have any questions regarding the UAE and Israel's treaty (or any other double tax treaties), please reach out to a member of our Tax team.
We would like to thank Daniel Paserman, Partner and Head of Tax at Gornitzky & Co, for his assistance with the preparation of this article.
