On May 31, 2021, Israel and the United Arab Emirates signed a tax treaty. This is the first tax treaty between the states. It is expected to go into effect on January 1, 2022, after passing the necessary ratification processes in the Knesset and the government.
The tax treaty is based primarily on the OECD’s model treaty and aims to encourage economic cooperation between the two states. Along with sections addressing non-discrimination, information exchanges, and prevention of exploitation, the treaty provides investors with certainty, including by granting lower tax rates. The treaty establishes, inter alia, withholding tax rates, as follows:
Dividends: The withholding tax rate in the state where the dividend-paying company resides is (a) 0% when the dividend is paid to the government of the other state or to a pension plan of the government (which holds less than 5% of the company), (b) 5% if the dividend is paid to the government of the other state (which holds at least 5% of the company throughout a 365 day period prior the payment of the dividend) (c) 5% if the dividend is paid to a company directly holding at least 10% of the company, or (d) 15% in all other cases.
Interest: The withholding tax rate in the state where the interest is arising shall be: (a) 0% if the interest is paid to the government of the other state or to a pension plan of the government, (b) 5% if the beneficial owner of the interest holds 50% or more of the capital of the company paying the interest or (c) 10% in any other case.
Royalties: The withholding tax rate in the state where the royalties are arising shall not exceed 12%
Capital Gains: Capital gains derived by a resident of a contracting state from the alienation of shares, other rights and comparable interests in a company, partnership, or trust resident of the other country (unless 50% of the value of the rights derives directly or indirectly from real estate in the same country or if the profits derive from real estate) that is not traded on a recognized stock exchange may be taxed in the other state, but the withholding tax rate shall not exceed:
- 0% if the transferor is the government’s state which owned, directly or indirectly, at any time during the 12 month period prior the sale less than 10% of the capital held by the company, partnership, or trust.
- 5% if transferor is the governments state which owned 10% or more of the voting power in the company, partnership, or trust.
- 10% if the transferor is a resident of the state that owned less than 10% of the voting power in the company, partnership, or trust. Please note that there is no reference on the withholding tax rate when the transferor is holding 10% or more. The assumption is that it will be in accordance with the domestic tax law of the other state.