The income tax treaty between Israel and the United Arab Emirates entered into force on 29 December 2021. The treaty, signed 31 May 2021, is the first of its kind between the two countries.
The treaty covers Israeli income tax and company tax (including tax on capital gains) and tax imposed on gains from the alienation of property according to the Real Estate Taxation Law. It covers UAE income tax and corporate tax.
If a person other than an individual is considered resident in both Contracting States, such person shall not be considered a resident of either State for the purposes of the treaty and shall not be entitled to any relief or exemption from tax provided by the treaty except to the extent and in such a manner as may be agreed upon by the competent authorities of the Contracting States.
The following capital gains derived by a resident of one Contracting State may be taxed by the other State:
Gains from the alienation of other property by a resident of a Contracting State may only be taxed by that State, unless the alienator is not the beneficial owner of the gains.
Article 14 (Branch Tax) provides that a UAE company may be subject in Israel to a tax in addition to the tax allowable under the other provisions of the treaty. Such tax may be imposed only on amounts sufficient to provide that a branch in Israel of a UAE company (or a company of the UAE otherwise taxable on net income in Israel) is taxed in a manner comparable to a similarly situated Israeli company and its UAE shareholder. Such taxes shall not be imposed at a rate in excess of 5%.
Both countries generally apply the credit method for the elimination of double taxation.
Article 28 (Entitlement to Benefits) includes several provisions that limit the benefits of the treaty with respect to taxation in Israel. This includes the provision that only the following residents of the UAE may invoke Articles 7 (Business Profits), 8 (International Shipping and Air Transport), and 10 to 14 (Dividends, Interest, Royalties, Capital Gains):
Notwithstanding the above, it is also provided that the following residents of the UAE may invoke Articles 8 (International Shipping and Air Transport), 10 (Dividends), 11 (Interest), and 13 (Capital Gains):
A further prerequisite for relief from Israeli taxes according to the above is that the person has to prove that more than 50% of its gross income is not used, directly or indirectly, to meet liabilities (including liabilities for interest or royalties) of persons not entitled to benefits of the treaty.
Article 28 also includes the general provision that where:
the benefits of the treaty shall not apply to any item of income on which the tax in the third jurisdiction is less than 15% of the amount of that item of income. In such a case, any income subject to this provision shall remain taxable according to the domestic law of the other State. However, this will not apply if the income derived from the other State emanates from, or is incidental to, the active conduct of a business carried on through the permanent establishment (other than the business of making, managing, or simply holding investments for the enterprise's own account, unless these activities are banking, insurance or securities activities carried on by a bank, insurance enterprise or registered securities dealer, respectively).
Lastly, Article 28 includes the general provision that a benefit under the treaty shall not be granted in respect of an item of income if it is reasonable to conclude, having regard to all relevant facts and circumstances, that obtaining that benefit was one of the principal purposes of any arrangement or transaction that resulted directly or indirectly in that benefit, unless it is established that granting that benefit in these circumstances would be in accordance with the object and purpose of the relevant provisions of the treaty.
The treaty applies from 1 January 2022.