09. January 2023 Austria’s double taxation agreement (DTA) with the United Arab Emirates (UAE) was fundamentally amended. As this was considered outdated and no longer in line with developments in international tax law, negotiations to amend the existing agreement were launched in 2019.
The revision protocol was finally signed on 1 July 2021. The instruments of ratification were exchanged on 20 December 2022. The revision protocol enters into force on 1 March 2023. However, the provisions of the Protocol will already apply as of 1 January 2023 with respect to taxes collected by deduction on amounts paid after 31 December 2022, as well as with respect to other taxes on tax years beginning after 31 December 2022.
The revision protocol is modelled on the OECD Model Convention to the greatest possible extent. The following changes are included:
- The most significant change concerns the method for avoiding double taxation of taxpayers resident in Austria (Art. 5 Revision Protocol). The credit method is now generally applied, so that at least one-time taxation is guaranteed. This would particularly affect those 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 UAE taxes would have to be credited. At a tax rate of 0%, however, the credit would lead nowhere.
- In contrast to the old convention, the revision protocol provides for a withholding tax right for dividends in the amount of 10%. An exemption from withholding tax shall only continue to apply to the Contracting State itself, its regional and local authorities, qualified state entities (listed in Art. 8 of the Revision Protocol), as well as to substantial participations (participations of at least 10%) held by corporations.
- The preamble and title are to be adapted to the OECD standard on profit distribution and profit shifting by Art. 1 and 2 of the revision protocol, so that in future there can no longer be any possibility of low or non-taxation through tax reduction or avoidance.
- 8 of the revision protocol stipulates that for the purpose of interpreting the agreement, only the OECD Model Convention or the Model Commentary shall be used.
- Based on the provisions in Art. 6 of the revision protocol, it should also be possible to exchange bank information bilaterally in the future.
- Inclusion of an anti-abuse provision in Art. 28A (principle purpose test). In future, no treaty benefits are to be granted if the main purpose of these arrangements and transactions is to obtain such benefits.
Interesting detail on the side: The UAE Minister of Finance also announced the introduction of a corporate income tax on 31 January 2022. The Emirati Ministry of Finance officially launched the introduction of the corporate income tax with a decision on 19 May 2022. The corporate income tax is to apply for the first time to financial years beginning on or after 1 June 2023. The general corporate tax rate is to be 9%, but companies with profits below AED 370,000 (approx. EUR 93,000) will continue to be exempt from corporate tax. Companies belonging to a multinational group with a group turnover of more than EUR 750 million are to be charged 15% corporate income tax.
Due to Austrian regulations, passive income that is taxed at a low rate abroad (e.g. interest, dividends, royalties) is (fictitiously) added to the income of the domestic controlling corporation for tax purposes (= additional taxation according to § 10a KStG). A country is considered low-taxed if the corporate tax rate in the respective country is less than 12.5%.
Until now, all UAE subsidiaries or permanent establishments of Austrian companies with passive income of more than one third of their total income were affected by the additional taxation pursuant to Section 10a of the Austrian Corporation Tax Act (KStG) or the non-deductibility of certain payments pursuant to Section 12 (1) Z 10 of the Austrian Corporation Tax Act (KStG) (in particular interest and royalties) due to the lack of corporate tax liability in the UAE. For groups of companies with a turnover of more than EUR 750 million, the introduction of corporate income tax liability may have a positive effect on the tax burden in the future. In the absence of low taxation, there should no longer be any additional taxation or non-deductibility of certain payments in Austria in these cases.
CONCLUSION: Particularly in situations where the taxpayers work in the UAE, but their families have remained resident in Austria (=centre of life of the taxpayer in Austria), caution is advised. This could lead to sensitive tax payments in Austria in the future.
Companies that have a permanent establishment or subsidiary in the UAE whose profits exceed approximately TEUR 93 will also be confronted with increased tax payments from mid-2023. Under certain circumstances, it could therefore still be advantageous to carry out certain planned transactions before that time.
We would be happy to provide you with further advice 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 google translate.
