Amendment of the Austria-UAE tax treaty

Last summer, Austria signed a Protocol amending the Double Taxation Treaty (DTT) with the United Arab Emirates (UAE) of 2003. The document provides for significant changes in certain areas.

The Protocol was ratified in Austria at the end of 2021. In the UAE, government approval for the Protocol has been granted, although final ratification has not yet taken place.

If the Protocol is ratified in the UAE in the near future, and the instruments of ratification are exchanged by the end of 2022 (as currently expected), the planned amendments will enter into force from 2023.

Below, we have summarised the most significant changes to the existing DTT of 2003:

Withholding tax rates for profit distributions

The existing Article 10 of the DTT (taxation of dividends) did not include any withholding tax for dividends.  The Protocol introduces a general right to a withholding tax on dividends in the amount of 10%. However, for certain beneficial owners, a withholding tax exemption will apply:

• for substantial participations, which are held by corporations (participation of 10%)
• for the Contracting State itself, for its political subdivisions or local authorities, and for qualifying state entities (such as, in particular, the UAE state investment companies, e.g. Mubadala).

Method for prevention of double taxation

The most significant amendment from an Austrian perspective is the amendment of the article regarding the method for elimination of double taxation. In the future, it is planned that the exemption method will be replaced by the credit method, which envisages the taxation of income of persons resident in Austria while deducting any tax paid in the UAE. This will lead to an increase to Austrian levels of taxation.

This could have significant implications for Austrian taxpayers, such as those who carry out activities via a permanent establishment in the UAE, or employees who are tax-resident in Austria and receive employment income from the UAE (including international employee assignments) – as the previously applicable rules envisaged an exemption with progression for employment income.

Further significant changes

The DTT will also be brought into line with OECD standards in other areas:

• Amendment of the interpretation clause. It is planned that the OECD Model and the Commentaries on the OECD Model, and not the UN Model, will apply for the purposes of interpretation of the Convention.
• Introduction of comprehensive exchange of information. This will ensure the future exchange of banking data on a bilateral level. Moreover, the Contracting State will be permitted to use the data received for other purposes, provided that approval has been received from the competent authority in the other Contracting State.
• An anti-treaty abuse rule will be introduced in the form of the principal purpose test. Accordingly, no treaty benefits will be granted for arrangements and transactions whose main purpose is to obtain such benefits.
• Adjustment of the definition of tax residency from the Austrian perspective. It is planned that a Contracting State and its political subdivisions or local authorities shall also be deemed to be tax resident.

Conclusion

The amendment of the DTT could lead to significant changes to taxation linked to the UAE from as early as 2023 – for example, for activities carried out by permanent establishments or international employee assignments. Furthermore, it is also planned that a general corporate income tax obligation will be introduced in the UAE in 2023. Due to these changes, it is advisable to prepare in advance for the new tax environment in relation to the UAE to avoid any surprises in the year 2023.