25 January 2017

UK – UAE double tax treaty now in force – what you need to know

The signing of a double taxation agreement between the UK and the UAE in April 2016 was undoubtedly much anticipated and marks a new milestone in the successful expansion of the UAE’s international tax treaty network.

Following ratification of the agreement by the two countries reacting parties, it came into force on 25 December 2016 and here we look at the key points and most relevant treaty provisions. The latest publications on this were made on the UK Government website on 18 January 2017.

The agreement appears to provide effective support to UK – UAE cross-border investments, and more generally, would contribute to the establishment of a more solid framework for the development of business relationship between the UK and the UAE.

Provisions are applicable from 1 January 2017 for taxes withheld at source in respect of amounts paid or credited as from this date, while other taxes will take effect for taxable periods (for individuals) and financial years (for corporations) beginning on or after 1 January 2017.

The provisions largely reflect the standard wording of the current OECD Model and UAE individuals and businesses do not seem to be disadvantaged as a consequence of their de facto tax exempt status in the UAE. The fact that the UAE in practice does not impose any form of direct taxation on individuals and (most) businesses is not an objective obstacle for them to claim benefits from the agreement.

A summary of the most relevant treaty provisions is provided below:

|Relevant provision|Comments| |Definition of ‘resident of a Contracting State’ (Article 4) |For UAE resident persons the wording on ‘personal scope’ of the agreement has been adapted compared to the standard OECD Model and no reference is made to the concept of ‘liability to tax’.

The following shall be considered as UAE resident for the purposes of the agreement, i.e. eligible to treaty benefits:
• Individuals having their domicile, habitual abode or center of vital interest in the UAE (according to UAE law);
• Legal entities incorporated or ‘otherwise recognized’ under the laws of the UAE, including local authorities and local governments;
• State and political subdivisions;
• Pensions schemes established in the UAE;
• Certain recognized non-profit organizations.|

Dividends (Article 10) 15% dividend withholding tax may apply only in case of distributions paid out by certain exempt real estate investment vehicle (e.g. UK REITs)
Interest (Article 11) No interest withholding tax should be levied, inter alia, to the extent the structure / arrangement does not have as its main purpose of one of its main purposes to secure treaty benefits.
Royalties (Article 12) No withholding tax on royalties
Main purpose test (Article 10, 11, 12) The agreement provisions on dividends, interest and royalties contain a main purpose test denying reduced withholding tax rates in abusive circumstances
Capital Gains (Article 13) Consistent with current OECD wording (e.g. includes also standard clause for sale of shares in so called ‘real estate rich’ company)
Exchange of information (Article 24) The agreement contains an OECD compliant provision for the exchange of information between the two countries

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