18. June 2024 Austria’s double taxation agreement (DTA) with the United Arab Emirates (UAE) was fundamentally amended. As it was considered outdated and no longer in line with developments in international tax law, negotiations to amend the existing agreement were started in 2019.
The protocol of amendment entered into force on 1 March 2023. However, the provisions in the protocol were already applicable from 1 January 2023 both with regard to taxes levied by way of deduction on amounts paid after 31 December 2022 and with regard to other taxes for tax years beginning after 31 December 2022.
The amendments essentially concern the implementation of the OECD standards on base erosion and profit shifting, tax transparency and administrative assistance as well as withholding tax on dividends.
The Protocol of Amendment is largely based on the OECD Model Tax Convention. The protocol has resulted in the following changes:
- The most significant change concerns the method for avoiding double taxation of taxpayers resident in Austria. The imputation method is now generally applied, so that at least a single taxation is guaranteed. This particularly affects taxpayers who have their centre of vital interests in Austria and are not self-employed in the UAE. This income would then be taxable in Austria, and any taxes paid in the UAE are to be credited. With a tax rate of 0%, however, the credit would be in vain.
- A general withholding tax law of 10% has been introduced for dividends (tax credit obligation by the country of residence). An exemption from withholding tax continues to exist for the contracting state itself, its local authorities, for qualified public bodies (listed in Art. 8 of the Protocol of Amendment) and for significant shareholdings (shareholdings of at least 10%) of corporations.
- The preamble and title were adapted to the OECD standard on profit allocation and profit shifting by Art. 1 and 2 of the Protocol of Amendment and are intended to exclude the possibility of low or non-taxation through tax avoidance or evasion.
- For the purposes of interpreting the agreement, only the OECD Model Tax Convention and the Model Commentary are to be used.
- Due to the provisions of Art 6 of the Protocol of Amendment, there is now an exchange of banking information (comprehensive exchange of information).
- The inclusion of an abuse provision (principle purpose test) means that treaty benefits are no longer granted if the main purpose of such arrangements and transactions is to obtain such benefits.
Corporate Taxation in the UAE
Interesting detail in passing: In 2023, a corporate tax liability was introduced in the UAE. The law applies for the first time to financial years beginning on or after 1 June 2023. If the financial year corresponds to the calendar year, these companies will be subject to corporation tax from 1 January 2024. Only income above AED 375,000 (approx. EUR 92,600) is taxed; no corporation tax is levied up to this amount. The tax rate is 9%. Companies that belong to a multinational group with a consolidated turnover of more than EUR 750 million are subject to 15% corporation tax.
VAT was already introduced in the UAE in 2018.
Under Austrian law, low-taxed passive income abroad (e.g. interest, dividends, licence fees) is (notionally) added for the purposes of income tax at the domestic controlling corporation (= intragroup taxation pursuant to Section 10a of the Austrian Corporate Income Tax Act). A country is deemed to have low taxation if the corporation tax rate in the respective country is less than 12.5%.
Until now, all UAE subsidiaries or permanent establishments of Austrian companies whose passive income accounted for more than one third of total income due to a lack of corporate tax liability in the UAE were affected by the add-back taxation pursuant to Section 10a KStG and the non-deductibility of certain payments pursuant to Section 12 (1) no. 10 KStG (in particular interest and licence fees).
For groups of companies with a turnover of more than EUR 750 million, the introduction of corporation tax liability may have a positive impact on the tax burden in future. In these cases, add-back taxation or non-deductibility of certain payments should no longer occur in Austria due to the lack of low taxation (because the tax rate is above 12.5%).
Conclusion: Taxpayers whose centre of life has remained in Austria (e.g. because the family has remained resident in Austria) but who also work in the UAE are particularly affected by the changes to the double taxation agreement. This can lead to unpleasant tax payments in Austria from the 2023 assessment year.
Companies with a permanent establishment or subsidiary in the UAE whose profits amount to more than approx. kEUR 93 have also been faced with increased tax payments since mid-2023.
We would be happy to advise you further in this context should you find yourself in such a situation. We are also happy to share contacts from our network of tax advisors and lawyers in the UAE with you (info@artus.at).
PS: Please note, that we are no native speakers and that our blogposts were translated with the help of AI.
