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.

Taxes Covered

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.

Residence

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.

Withholding Tax Rates

• Dividends -
  • 0% if the beneficial owner is a pension plan or the government of a Contracting State, which holds less than 5% of the paying company's capital;
  • 5% if the beneficial owner is the government of a Contracting State holding at least 5% of the paying company's capital;
  • 5% if the beneficial owner is a company that has directly held at least 10% of the paying company's capital throughout a 365-day period that includes the day of payment;
  • otherwise, 15%
• Interest - 10%, with an exemption if the beneficial owner is a pension plan or the government of a Contracting State, although the rate is increased to 5% for such beneficial owners if holding 50% or more of the paying company's capital
• Royalties - 12%

Capital Gains

The following capital gains derived by a resident of one Contracting State may be taxed by the other State:

• Gains from the alienation of immovable property situated in the other State;
• Gains from the alienation of movable property forming part of the business property of a permanent establishment in the other State;
• Gains from the alienation of shares or comparable interests if, at any time during the 365 days preceding the alienation, the shares or comparable interest derived more than 50% of their value directly or indirectly from immovable property situated in the other State; and
• Gains from the alienation shares, other rights, and comparable interests, other than the above, in a company, partnership, or trust (not listed on a recognized stock exchange) that is a resident in the other State, but the tax so charged is limited to:
  • 0% if the gains are derived by the government of a Contracting State that owned, directly or indirectly, at any time during the 12-month period preceding such alienation, interests granting less than 10% of the voting power of the company, partnership, or trust;
  • 5% if the gains are derived by the government of a Contracting State that owned, directly or indirectly, at any time during the 12-month period preceding such alienation, interests granting 10% or more of the voting power of the company, partnership, or trust; and
  • 10% if the gains are derived by a resident that owned, directly or indirectly, at any time during the 12-month period preceding such alienation, interests granting less than 10% of the voting power of the company, partnership, or trust.

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.

Branch Tax

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%.

Double Taxation Relief

Both countries generally apply the credit method for the elimination of double taxation.

Entitlement to Benefits

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):

• the Federal and the local governments of the UAE;
• a qualified government entity of the UAE;
• a company, provided that such company can prove that at least 75% of its capital is beneficially owned, directly or indirectly, by the UAE or by a qualified government entity, the remaining capital is beneficially owned by individuals that are residents of the UAE, and the company is controlled by the aforementioned residents; and
• a pension plan.

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):

• an individual; and
• a company, provided that such company can give substantial evidence that its capital is beneficially owned exclusively by the UAE or by a qualified government entity of the UAE, or by individuals that are residents of the UAE, and the company is controlled by the aforementioned residents.

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:

• an enterprise of a Contracting State derives income from the other Contracting State and the first-mentioned State treats such income as attributable to a permanent establishment of the enterprise situated in a third jurisdiction, and
• the profits attributable to that permanent establishment are exempt from tax in the first-mentioned Contracting State,

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.

Effective Date

The treaty applies from 1 January 2022.