Amendments to the Double Taxation Agreement with the United Arab Emirates (UAE) will shortly enter into force

Overview

By way of exchange of the instruments of ratification, the Protocol of Amendment to the double taxation agreement between Austria and the United Arab Emirates (“DTA Austria – UAE”) will soon enter into force. The initial DTA dates back to 2003 and does no longer fully meet the current international OECD-standards. In addition, the Austrian Ministry of Finance aimed at avoiding situations of a double non-taxation of income that have been common with regard to the UAE due to the absence of an income tax system there. The following article will provide an overview of the main changes.

General aspects

The Protocol of Amendment serves to implement the OECD standards on tax transparency, administrative assistance and combating the reduction and shifting of profits. Based on the legislative materials, Austria shall hereby comply with the obligation to implement the minimum standard developed by the OECD within the framework of the BEPS project.

Furthermore, the Protocol of Amendment introduced a withholding tax on dividends from portfolio holdings. A very significant change to the Protocol of Amendment also arises in the context of the method article.  

Objectives of the Protocol of Amendment

The objectives are explained in more detail below:

• Objective 1: Implementation of the OECD standard on tax transparency and mutual assistance. In the course of introducing the Protocol of Amendment, the previous Article of the DTA Austria-UAE on information exchange was redrafted and adapted to the current OECD standard. Accordingly, the redrafted provision on the exchange of information is now also intended to ensure the disclosure of information held by banks and other financial institutions. 
  
  
• Objective 2: Introduction of a withholding tax on dividends. The regulation on the taxation of dividends under the DTA Austria-UAE will be amended insofar as the amended Article now provides for a withholding tax on dividends at the rate of 10%. However, relating to shares held by corporate entities, this amendment only affects portfolio dividends, as substantial shareholdings of corporate entities (shareholding of at least 10%) continue to be exempt from withholding taxes under the DTA. 
  
  Taxpayers resident in Austria who receive dividend income from the UAE could thus be charged with a withholding tax rate of 10% in the UAE, provided that the UAE levies such a tax domestically (currently not the case). The withholding tax (if levied) can consequently be credited against Austrian income tax up to the maximum credit amount. Conversely, companies located in Austria must now withhold withholding tax on distributions to investors resident in the UAE under the amended DTA as far as the mentioned exemption for substantial shareholdings does not apply.  
• Objective 3: Change of the method article from the exemption to the credit method. Up to the Protocol of Amendment, the DTA Austria-UAE, which entered into force in 2003, provided for the exemption method subject to progression clause with regard to taxable persons being a tax treaty resident of Austria. In this respect, income from the UAE was previously exempt from Austrian taxation as far as the DTA allocated the taxation rights to the UAE for the specific income in question. Thus, employees could benefit from the 0 % income tax rate in the UAE as far as the DTA allocated the taxation rights on the employment income to the UAE.  

However, this will change for taxpayers resident in Austria in the future. The amendment of the method article will lead to a change from the exemption to the credit method. This, for example, means that the employment income of employees resident in Austria under the DTA will effectively become taxable in Austria. In order to avoid a double taxation, Austria would generally be obligated to credit income taxes paid in the UAE in accordance with the regulations of the DTA. However, since the UAE (at least under their current legislation) do not levy any income taxes, no effective tax credit takes place in Austria. As a result, the entry into force of the amendments to the DTA Austria-UAE might lead to a considerably higher income tax burden, inter alia for employees who are tax residents of Austria but working in the UAE. A different treatment would (only) apply if employees switch their tax treaty residency to the UAE, since Austria would generally not be entitled to tax the employment income generated in the UAE (anymore).

The switch to the credit method is also relevant for business profits attributable to permanent establishments situated in the UAE which have previously been exempt from Austrian (corporate) income tax but will now fully be subject to taxation in Austria.

Application and entry into force of the Protocol of Amendment

The Protocol of Amendment to the DTA Austria-UAE shall enter into force on the first day of the third month after the exchange of instruments of ratification takes place. Based on the information available, the instruments of ratification have not yet been exchanged, but will be exchanged soon. Therefore, it must be assumed that the Protocol of Amendment will, in respect of taxes withheld at source, apply to amounts paid after 31 December 2022, and, in respect of other taxes, to any fiscal year beginning after 31 December 2022.