The UK and UAE signed a double tax treaty on 12th April 2016. It needs to be ratified by both countries' Parliaments before it comes into effect. Once the ratification procedures have been completed, the treaty will take effect from the following 1st January for taxes withheld at source, and from the following 6th April for all other taxes.
The treaty aims to enhance bilateral trading relations between the UK and the UAE, attracting UK companies to the UAE and vice versa. It also includes provisions on the prevention of tax evasion and allows for exchange of information between the two jurisdictions.
Key provisions
Residence
For treaty purposes, a resident of the UAE is any individual who is domiciled in the UAE under UAE laws or has his habitual abode or centre of vital interests in the UAE. For companies, a resident of the UAE is any company incorporated or otherwise recognised under UAE law.
The residency 'tie-breaker' test for dual resident individuals follows the standard OECD model and looks firstly at where the individual has a permanent home, then where his centre of vital interests are located if he has a permanent home if both states. If his residency cannot be determined under the centre of vital interests test, the next test is where he has his habitual abode and finally, the country of which he is a national.
For companies resident in both jurisdictions under domestic laws, residency is determined by mutual agreement but with regard to the following provisions, as set out in the Protocol to the Agreement:
1) Where the senior management of the company is carried on
2) Where the meetings of the board of directors are held
3) Where the company's headquarters are located
4) The extent and nature of the economic nexus of the company to each state
5) Whether allocating residency to a particular state carries a risk of an improper use of the treaty or inappropriate application of the domestic law in either state
Earnings
Earnings of individuals who come to work in the UK on short term business visits can be exempt from UK tax provided the individual spends less than 183 days in the UK in any 12 month period, the remuneration is paid by an employer not resident in the UK and is not borne by a permanent establishment in the UAE.
UK company directors resident in the UAE will, however, remain taxable in the UK on any fees earned in the UK, by reference to the number of days spent in the UK performing directors' duties.
Dividends
Dividends paid by a UAE company to a UK resident company will be taxable in the UK and not in Dubai. The dividends are unlikely to be taxed in the UK under UK domestic rules that exempt most foreign dividends from UK corporation tax (which differs from the current position whereby small and medium sized UK groups are taxable on dividends received from the UAE due to a lack of treaty).
Dividends paid by a UK company to a parent company resident in Dubai will not suffer withholding tax as the UK does not levy withholding tax on dividends.
Pensions
This article allocates full taxing rights over pension income to the country where the individual is resident. This may provide an opportunity for individuals resident in the UAE to take their pension pots completely free of tax whilst resident in the UAE (and subject to remaining non-UK resident for five years).
Personal Allowance
No UK personal allowance is available to non UK/EU nationals resident in the UAE.
Summary of main provisions
|
Nature of income |
Taxing rights given to: |
| Income from immovable property | Source state, including properties held in a company |
| Business profits | State of residence unless business carried on through a Permanent Establishment in the other state |
| Dividends | Solely taxable in the state of residence and exempt in the source state.* |
| Interest | State of residence unless arises in a business carried on through a permanent establishment in the other state.* |
| Royalties | Taxable only in the state of residence unless arises in a business carried on through a permanent establishment in the other state.* |
| Capital Gains: Immovable property Share gains |
Source state (including
gains on shares in property holding companies) State of residence only |
| Earnings | State where the duties are performed, subject to the standard OECD clause for short-term business visitors |
| Pensions | State of residence only, unless government service pension |
| Other income | Both source state and state of residence |
*Anti-avoidance provisions for conduit companies
The Treaty includes anti-avoidance provisions in the articles on dividends, interest and royalties. Under these provisions, where the main purpose or one of the main purposes of the creation of the royalty, dividend or interest rights was to take advantage of the provisions of the treaty, no tax relief shall be due in the source state. The anti-avoidance provisions are aimed at preventing conduit companies from being set up in the UAE purely to take advantage of the treaty provisions that provide relief from UK withholding tax on these sources of income.
Summary
The treaty provides benefits for UK companies operating in the UAE, and to short-term business visitors based in the UAE coming to the UK. Individuals resident in the UAE with large UK pensions will be able to receive payments from their pension fund free of tax whilst resident in the UAE, subject to UK anti-avoidance rules.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
