On 31 May 2021, the United Arab Emirates (UAE) and Israel signed a Double Tax Treaty (DTT). According to Israel’s Ministry of Finance, the DTT incentivises business development between the countries after they normalised relations in 2020.
Based on the Organisation for Economic Cooperation and Development Model Tax Convention (OECD MTC), the DTT’s primary focus is to avoid situations of double taxation. Because the UAE currently does not levy corporate tax (except from oil and gas producing companies and branches of foreign banks) or any withholding tax, the DTT will primarily be effective for Israeli inbound investments. It is our understanding that the applicable withholding tax rates under the DTT will be as follows:
- Dividends: 0% – 15% (Israeli domestic standard rate 25%);
- Interest: 0% – 10% (Israeli domestic rate 23%); and
- Royalties: 12% (Israeli domestic rate 23%).
As is the case for most DTT’s based on the OECD MTC, access to the UAE/Israeli DTT, and application of reduced withholding taxes, will depend on aspects such as: (i) tax residency, (ii) identity of the income’s recipient, and (iii) beneficial ownership. Because the DTT’s content is currently not publicly known, no details are available on aspects such the attribution of taxing rights in case of (i) a permanent establishment and (ii) capital gains, among others. The DTT still needs to be ratified by both countries later this year and it is expected to enter into force as per 1 January 2022.
Government officials indicated the DTT will enable significant promotion of investment and trade that will help both countries’ economies. For internationally operating businesses, the new DTT means that cross-border investments and activities may benefit from advantageous tax treatment. Given the substantial investment potential from UAE sovereign wealth funds, business conglomerates and family offices, the UAE/Israeli DTT will definitely give a strong boost to Israeli inbound investments in sectors such as hi-tech, agriculture / food safety, security, among others. With over 130 DTT’s and over 90 Bilateral Investment Treaties (providing investor protection) with other jurisdictions, the UAE has created an unprecedented holding platform location for internationally active businesses, combining a well-established and easy-to-set-up business infrastructure with a very efficient tax regime. This could be very beneficial for Israeli businesses looking for a reliable and efficient hub to centralise their overseas holdings and investments.
Once the DTT’s content is made public, we will report on the full scope and benefits available under it. In the meantime, feel free to reach out to us to discuss how the UAE/Israeli DTT may benefit your business.