The bilateral income and capital tax treaty, which came into effect on December 25, 2016, marks a significant development in the relationship between the United Arab Emirates (UAE) and the United Kingdom (UK). The treaty officially signed on April 12, 2016, represents a pioneering agreement between these two nations and encompasses a comprehensive range of crucial provisions.
UK UAE Double Tax Treaty Scope
The double tax treaty between the UAE and UK covers the corporate tax, capital gain and income tax. This broad coverage ensures that a wide spectrum of financial activities and entities fall under the purview of this treaty.
Residency Determination for Double Tax Treaty
In scenarios where a company is considered a resident in both contracting states, the competent authorities from both sides will engage in mutual consultation to ascertain the company's residency status for treaty purposes.
What are the UK-UAE Double Tax Treaty advantages?
The corporate entities are entitled to specific benefits as outlined in Double Tax Elimination (Article 21), Non-Discrimination (Article 22), and Mutual Agreement Procedure Article 23, advantages of the treaty are given below
Mitigation of Double Taxation
Article 21 explains the UAE Tax Credit, Dividends, Permanent Establishment Profits, Taxable Profits, Income, and Gains as stated below: -
- UAE residents liable for UK tax payments due to income profits, or chargeable gains sourced in the UAE can utilize a credit mechanism.
- UAE tax is paid in accordance with its laws and the Convention can offset UK tax on the same income.
- This credit applies unless the UK has specific laws on foreign tax credits or exemptions for dividends and profits from foreign permanent establishments.
Exemption for Dividends
- Dividends from UAE resident companies to UK resident companies may be exempt from UK tax.
- Exemption is subject to conditions outlined in UK law.
- Royalties also enjoy a 0% withholding tax rate under the treaty.
Taxation of Capital Gains
The treaty addresses the taxation of capital gains in detail. It specifies that a citizen of one of the Contracting States might be liable to pay taxes in the other State for certain capital gains, including:
- Profits gained from selling real estate located in the other States.
However, profits derived from selling other property by a resident of one Contracting State will only be subject to taxation in that specific State. It establishes that a resident of one of the Contracting States may potentially face taxation from the other State on specific capital gains
Waiver of Tax on Permanent Establishment Profits
- Profits from a UAE-based permanent establishment owned by a UK company may be exempt from UK taxation.
- Exemption is subject to compliance with UK legal conditions.
Special Treatment for Significant Shareholdings
- Dividends paid by UAE resident companies to UK resident companies with ≥10% voting power in the paying company may have UK tax implications.
- UAE tax paid by the paying company on these profits may be considered.
Attribution of Taxable Profits, Income, and Gains to UAE Source for UK Resident:
- Profits, income, and gains of UK residents subject to UAE taxation are considered to arise from a UAE source under the Convention.
- Fundamental principle guiding tax treatment of these financial elements.
Deemed Source of Gains, Profits, and Income:
- Designated Source of Profits, Income, and Gains: Any profits, income, or gains held by a resident of the United Kingdom, which are subject to taxation in the United Arab Emirates under the provisions of this Convention, will be designated as having arisen from a source within the United Arab Emirates.
Limitation on Benefits
To prevent the misuse of the treaty's provisions, Articles 10 (Dividends), 11 (Interest), and 12 (Royalties) include a limitation on the benefits clause. This provision of the treaty specifies that these clauses will not be applicable in case the main objective or primary intention of any relevant party involved in the debt claims, assignment or creation of shares, or other rights pertaining to the income was to exploit the advantages provided by the clauses of this treaty. This limitation is explicitly incorporated within each of the aforementioned articles.
Relief from Double Taxation
Both the UAE and the UK generally adopt the credit method to alleviate double taxation. However, the UK incorporates specific provisions for exemptions. On the satisfaction of conditions prescribed by UK law, the dividends will be exempted by the UK if paid by a UAE company to a UK-resident company. Additionally, exemptions may apply to the profits generated by a permanent establishment of a UK company in the UAE, again contingent upon satisfying the conditions outlined in UK law. If a dividend from a UAE company doesn't meet the UK exemption criteria, the UK's credit mechanism will fact or in the UAE tax paid on the profits used to pay out the dividend.
This bilateral treaty officially took effect on January 1, 2017, marking a milestone in the collaborative efforts between the United Arab Emirates and the United Kingdom to facilitate fair and efficient tax practices while fostering economic cooperation and trade between the two nations.
The article within the tax treaty between the United Arab Emirates and the United Kingdom outlines the mechanisms for eliminating double taxation, ensuring that taxpayers are not unduly burdened by overlapping tax liabilities in both countries. It establishes rules for deductions, credits, and exemptions, as well as the determination of the source of income, profits, and gains for tax purposes. These provisions contribute to the prevention of double taxation and the promotion of international economic cooperation between the two nations. For more details consult Tax Consultants in Dubai