The new UK-UAE Double Taxation Convention (the UK-UAE DTC) entered into force on 25 December 2016 and took effect (broadly) on 1 January 2017. It represents another welcome addition to the UAE's burgeoning network of bilateral tax treaties.
The key points are as follows:
Although the availability of relief is subject to a number of anti-abuse provisions, and the future application of the OECD Multilateral Instrument implementing the tax treaty-related measures to prevent Base Erosion and Profit Shifting has not yet been determined, the UK-UAE DTC will be welcomed by UAE businesses and individuals, as it gives rise to new tax-efficient investment planning opportunities; it is a game changer for the UAE.
Background
The first ever comprehensive Double Taxation Convention (DTC) between the United Kingdom (UK) and the United Arab Emirates (UAE) was signed on 12 April 2016 in Dubai.
Having completed the formal parliamentary ratification procedures in each country, and the exchange of diplomatic niceties, the UKUAE DTC entered into force on 25 December 2016. It takes effect:
The UK-UAE DTC represents a noteworthy step forward in the recent, remarkably rapid, expansion of the UAE's portfolio of DTCs. The UAE now has more than seventy DTCs in force (with a significant number of other DTCs at various stages of negotiation and ratification). For a country that does not have generally applicable corporation, income or withholding taxes, this is impressive and is in part due to its worldwide financial clout and the pre-eminent role of Emirates and Etihad in global aviation.
The DTC with the UK is consistent with the UAE's efforts to align its tax framework with the wider, global tax framework, including:
From the UK's perspective, the UK-UAE DTC is advantageous because it:
Residence and Employment Income
Article 4 (Residence)
The term "resident of a Contracting State", as defined in Article 4, differs for the UAE and the UK.
An individual will be resident in the UAE if that individual either:
This is noteworthy because of the absence of any "liability to tax in the UAE" requirement, which causes problems in relation to, for example, persons who are domiciled in Oman, a country without income tax, for the purposes of the UK-Oman DTC. It also makes no requirement that an individual spends a certain number of days in the UAE unlike, for example, the UK-Kuwait DTC. Conversely, the residency requirements applied to the UK for the purposes of the UK-UAE DTC apply a "liable to tax in the UK" test.
This means that it will not be definite, although it will certainly not be impossible, that non-UAE nationals who spend the majority of time in the UAE will be treated as resident in the UAE under the UKUAE DTC.
This is because they may have insufficient ties to demonstrate that their domicile, habitual abode or centre of vital interests lie there. UAE-based individuals and businesses will need to review the position of each individual on a case-by-case basis.
Where, under the UK-UAE DTC, an individual is a resident of both the UAE and the UK, the country that can claim exclusive residence is determined in accordance with a tiebreaker. The determinative factors are (in order of priority) where the individual's:
Again, this is helpful for UAE residents who spend a significant amount of time in the UK because, in many cases, it will disapply the day counts in the UK's statutory residence test, which can trigger UK tax residence after a surprisingly short period of time in the UK. This is encouraging for wealthy UAE nationals who wish to spend more time in the UK.
Article 14 (Employment)
The UK-UAE DTC ensures that a UAE-resident individual's employment income earned in the UK will nonetheless be exempt from UK income tax (and, therefore, exempt from tax altogether) provided:
Again, the provisions in the UK-UAE DTC ensure that UAE-based businesses can, from 6 April 2017, be more relaxed about seconding UAE nationals and certain expats to the UK without prompting UK tax liabilities and compliance obligations. This should afford UAE businesses and certain employees greater flexibility in building their UK commercial operations, and exploring investment opportunities.
Dividends, Interest and Royalties
Subject to the imposition of targeted anti-abuse provisions that will limit relief in circumstances where the main purpose is to obtain the benefit of the DTC, cross-border investment by UAE entities in the UK should be dramatically eased and enhanced by the combination of Articles 10, 11 and 12 addressing withholding taxes on the payment of dividends, interest and royalties.
Article 10 (Dividends)
Generally speaking, the UK-UAE DTC provides that dividends will not be subject to withholding taxes in the state of source.
The UK does not, as a matter of domestic law, generally withhold taxes on dividends but there is an important exception relating to distributions paid by real estate investment trusts (REITs).
In the case of UK REITS, distributions of income profits and capital gains are treated as UK property income in the hands of shareholders and subject to withholding tax equal to the basic rate of income tax (currently 20%).
Under the UK-UAE DTC, however, the UK is only allowed to withhold tax at 15%. Where available, therefore, the UK-UAE DTC operates materially to reduce the tax leakage incurred by UAE investors on distributions received from their investments in UK REITs. This reduction, representing an immediate 5% uplift in the return on an investment, will make UK REITS more attractive to, for example, sovereign wealth funds.
The position is even better for UAE pension schemes, which will be entitled to receive distributions from UK REITS without any withholding tax.
Article 12 (Royalties)
Under the provisions of the UK-UAE DTC, intellectual property royalties payable by a UK business to the UAE will only be taxable in the UAE.
Again, this represents a significant development for UAE businesses that own intellectual property and wish to licence it into the UK, which previously gave rise to UK withholding tax at the rate of 20%.
Article 11 (Interest)
The treatment of interest (defined broadly to cover income from debt-claims of every kind, including sharia-compliant financial products) is less straightforward but should, in most cases, lead to a similar position; namely no withholding tax at source in the UK rather than 20%, as previously.
This is of huge benefit to UAE-based Islamic banks lending to customers buying UK property, who have often been advised that customers should withhold tax even if they themselves are not based in the UK.
It is also of benefit to UAE investors who may have previously only considered equity rather than debt investments, due to the absence of withholding tax on dividends.
The UK will not be entitled to impose a withholding tax if the UAE lender is either:
This means that interest or equivalent finance return paid to the UAE from the UK should be exempt from withholding tax in the majority of cases.
Conclusion
The new UK-UAE DTC both:
The relative certainty provided by the UK-UAE DTC to existing, and future (the DTC expressly covers any identical or substantially similar future taxes), cross-border transactions will be widely welcomed by the investment community.
All that said, a couple of final notes of caution:
With the UK set to be first in line to sign the MLI in June 2017, its position in relation to the impact of the MLI on its portfolio of DTCs, including the UK-UAE DTC will need to be carefully considered.
