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UAE, Israel sign treaty to avoid double taxation

Dubai - Experts said that the tax treaty between the UAE and Israel is a major development following the signing of the Abraham Accords in August last year.

The UAE and Israel on Monday signed a tax treaty on Monday to avoid double taxation that will help promote bilateral trade and investment in years to come.

Israeli Finance Minister Israel Katz broke the news on Twitter, describing the move as a spur to business development between the countries after they normalised relations last year.

“The agreement will accelerate the development of economic relations and contribute to prosperity in both countries,” Katz tweeted.

In a statement, Katz said the treaty is based primarily on the OECD model and it provides certainty and favourable conditions for business activity and will strengthen economic ties with the UAE.

There was no immediate official comment from the UAE.

“The treaty is subject to approval by Israel’s parliament and cabinet, and is expected to go into effect on January 1, 2022. Israel is party to 58 double taxation treaties,” the Israel’s Finance Ministry said.

Treaties for the avoidance of double taxation are bilateral agreements in which the contracting states establish rules that will apply to income and assets that are connected to the two countries, according to the Finance Ministry’s website.

UAE has 100+ tax deals

The UAE has around 100 double taxation agreements with most of its trade partners. Such tax treaties help prevent similar taxes being imposed by two countries on the same tax payer, and are aimed at encouraging the exchange of goods, services and capital.

The UAE finance ministry said in October that it had reached a preliminary agreement with Israel on avoiding double taxation. The Israel-UAE agreement also refers to the exchange of information between the two nations.

Israel and the UAE signed a normalisation deal on September 15, forging formal diplomatic ties. Several commercial agreements have been signed between the two countries since mid-August, when they agreed to normalise relations.

Deal to unlock investment potential

In the first five months since their historic peace treaty, the two countries have conducted around $280 million in bilateral trade while the UAE attracted around 130,000 tourists during the period, according to a global provider of credit insurance Atradius.

“The normalisation of diplomatic and trade relations between the UAE and Israel will unlock mutual trade opportunities, propelling bilateral trade in the medium-term to anywhere between $4 billion and $6.5 billion, equivalent to about one per cent to 1.5 per cent of each country’s GDP,” Atradius report said.

The UAE also announced that it was setting up a $10 billion investment fund aimed at strategic sectors in Israel. This is besides the $3 billion joint investment fund set up by the UAE, the US and Israel soon after the accord.

Experts hail tax treaty

Experts said tax treaty between the UAE and Israel is a major development following Abrahm Accord signing in August last year. They said the deal to avoid double taxation will pave the way to promote bilateral trade and investment relations in months to come.

“Under the agreement, tax deductions, dividends and royalties are capped. The double taxation treaty would make the two countries more competitive and boost economic activity. It will make the two nations more attractive to international investors,” according to an expert.

Anurag Chaturvedi, managing director of Chartered House, said tax treaties between the countries define the extent of foreign investment flow between the two countries. An investor invest money only after satisfying earnings after tax therefore taxes plays an important role in the foreign investments.

“Having treaty in place, UAE entities will be able to repatriate returns on investment with reduced rate of tax from Israel in form of dividend, interest or royalties whereas Israeli businesses will continue to enjoy tax exemptions on their investment in the UAE. This treary not only will boost investment into the UAE from Israel but also from the global players having investments in Israel to route investment into UAE,” Chaturvedi told Khaleej Times on Monday.

“We have a huge surge in investment into real estate from Israel whereas UAE outbound investment goes into Israel’s technology and defence sectors. Its a great initiative towards business harmonisation between both the countries,” he added.

No more double taxation

Saad Maniar, senior partner at Crowe, said taxation of income can be an issue for international workers who may be resident in more than one country.

“In countries that have worldwide taxation, a non-resident citizen who is working in UAE could be liable to pay tax on their income in their home country as well as in the country in which it is earned. UAE being part of an international tax framework, it provides important protection and benefits for UAE companies and expatriates,” he said.

To avoid the same income being taxed twice, he said the UAE has signed double taxation treaties with many countries, as the UAE Governments have recognised that this would be unfair and would discourage international trade and business. In some cases, the amount of tax paid in one country can be offset against what is due in another country and this should be factored into your tax planning, he said.

“The double taxation agreement can be complicated, therefore companies and individuals are advised to seek professional help. Those with dual residency will need to ensure that the correct amount of tax is paid, reclaimed or offset in each country,” Maniar told Khaleej Times on Monday.

— muzaffarrrizvi@khaleejtimes.com