On June 28, 2016 the UK HM Revenue & Customs (HMRC) released the text of the Convention between the Government of the United Kingdom of Great Britain and Northern Ireland and the Government of the United Arab Emirates for the Avoidance of Double Taxation and the Prevention of Tax Evasion and Avoidance with respect to Taxes on Income and on Capital Gains, which was signed on April 12, 2016 (Hereafter: the DTA).
Although the DTA has been signed, it has not entered into force yet. For the DTA to enter into force, the respective ratification procedures have to have been finalized in both countries.
Below we will discuss a selection of provisions included in the DTA of which we think they might interest our readers.
Taxes covered
Based on Article 2, Paragraph 3 of the DTA (“Taxes covered”), the existing taxes to which the Convention shall apply are in particular:
(a) in the case of the United Arab Emirates:
(i) the income tax;
(ii) the corporate tax;
(b) in the case of the United Kingdom:
(i) the income tax;
(ii) the corporation tax; and
(iii) the capital gains tax;
Article 2, Paragraph 4 subsequently arranges that the DTA shall apply also to any identical or substantially similar taxes that are imposed after the date of signature of the Convention in addition to, or in place of, the existing taxes.
Resident
Article 4, Paragraph 4 of the DTA (“Resident”) arranges that where by reason of the provisions of paragraph 1 a person other than an individual is a resident of both Contracting States, then the competent authorities of the Contracting States shall endeavour to determine by mutual agreement the Contracting State of which that person shall be deemed to be a resident for the purposes of this Convention. In the absence of a mutual agreement by the competent authorities of the Contracting States, the person shall not be considered a resident of either Contracting State for the purposes of claiming any benefits provided by the Convention, except those provided by Articles 21 (Elimination of Double Taxation), 22 (Non-Discrimination) and 23 (Mutual Agreement Procedure).
Permanent establishment
Article 5, Paragraph 3 of the DTA (“Permanent establishment”) arranges that a building site or construction or installation project constitutes a permanent establishment only if it lasts more than 12 months.
Immovable property
Article 6, Paragraph 1 of the DTA (“Income from Immovable Property”) arranges that income derived by a resident of a Contracting State from immovable property (including income from agriculture or forestry) situated in the other Contracting State may be taxed in that other State.
With respect to immovable property Article 13, Paragraph 1 of the DTA (“Capital Gains”) arranges that gains derived by a resident of a Contracting State from the alienation of immovable property referred to in Article 6 and situated in the other Contracting State may be taxed in that other State.
Article 13, Paragraph 2 of the DTA subsequently arranges that gains derived by a resident of a Contracting State from the alienation of shares, other than shares in which there is substantial and regular trading on a Stock Exchange, or comparable interests, deriving their value or the greater part of their value directly or indirectly from immovable property situated in the other Contracting State may be taxed in that other State.
Please note that Article of the DTA (Dividends) also contains regulations regarding dividend income stemming from immovable property.
Associated enterprises
Article 9, Paragraph 2 of the DTA (“Associated Enterprises”) contains a so-called appropriate adjustment clause.
Dividends
With respect to the dividend withholding tax a Source State is allowed to withhold if the beneficial owner of the dividends is a resident of the other Contracting State, Article 10, Paragraph 2 of the DTA (“Dividends”) arranges the following:
(a) except as provided in sub-paragraph (b) such dividends shall be exempt from tax in the Contracting State of which the company paying the dividends is a resident;
(b) where dividends are paid out of income (including gains) derived directly or indirectly from immovable property within the meaning of Article 6 by an investment vehicle which distributes most of this income annually and whose income from such immovable property is exempted from tax, the tax charged by the Contracting State of which the company paying the dividends is a resident shall not exceed 15 per cent of the gross amount of the dividends other than where the beneficial owner of the dividends is a pension scheme established in the other Contracting State, where the exemption provided in sub-paragraph (a) shall apply.
Article 10, Paragraph 6 contains an anti-abuse regulation which reads as follows:
“No relief shall be available under this Article if it was the main purpose or one of the main purposes of any person concerned with the creation or assignment of the shares or other rights in respect of which the dividend is paid to take advantage of this Article by means of that creation or assignment.”
Interest
With respect to the withholding tax that a Source State is allowed to withhold over interest payments made to a beneficial owner that is a resident of the other Contracting State, Article 11, Paragraph 2 and Article 11, Paragraph 3 of the DTA (“Interest”) arrange the following:
Paragraph 2
However, such interest may also be taxed in the Contracting State in which it arises and according to the laws of that State, but if the beneficial owner of the interest is a resident of the other Contracting State and at least one of the conditions mentioned in paragraph 3 is met, that interest shall be taxable only in that other State.
Paragraph 3
The conditions mentioned in paragraph 2. are that:
(a) the interest is beneficially owned by:
(i) that other State itself, one of its political subdivisions, local governments, local authorities, its Central Bank, or its statutory bodies;
(ii) an individual;
(i) a company in whose principal class of shares there is substantial and regular trading on a recognised stock exchange;
(iii) a pension scheme; or
(iv) a financial institution which is unrelated to and dealing wholly independently with the payer (the term “financial institution” here means a bank or other enterprise substantially deriving its profits by raising debt finance in the financial markets or by taking deposits at interest and using those funds in carrying on a business of providing finance);
(v) a company other than a company mentioned under sub-paragraphs (iii), (iv) or (v) provided that the competent authority of the Contracting Party which has to grant the benefits determines that the establishment, acquisition or maintenance of the company does not have as its main purpose or one of its main purposes to secure the benefits of this Article; or
(b) the interest is paid by a Contracting State, one of its political subdivisions, local governments, local authorities or statutory bodies.
Article 11, Paragraph 8 contains an anti-abuse regulation which reads as follows:
“No relief shall be available under this Article if it was the main purpose or one of the main purposes of any person concerned with the creation or assignment of the debt-claim in respect of which the interest is paid to take advantage of this Article by means of that creation or assignment.”
Royalties
Article 12 of the DTA (“Royalties”) arranges that the Source State is not allowed to withhold withholding taxes over royalty payments if the beneficial owner of the royalties is a resident of the other Contracting State.
Article 12, Paragraph 5 contains an anti-abuse regulation which reads as follows:
“No relief shall be available under this Article if it was the main purpose or one of the main purposes of any person concerned with the creation or assignment of the rights in respect of which the royalties are paid to take advantage of this Article by means of that creation or assignment.”
Other
Furthermore the DTA contains a.o. provisions regarding a Mutual Agreement Procedure (Article 23) and regarding the Exchange of Information (Article 24).
Click here to be forwarded to the text of the DTA as available on GOV.UK.
Are you looking for other DTAs? Then check our section DTAs & TIEAs, a very efficient way to locate numerous DTAs.
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