On April 1, the Israeli and UAE governments announced they had completed negotiations on a free-trade agreement.
This is reported to be a comprehensive agreement that includes issues regarding trade in goods, such as regulation and standards, customs, trade in services, cooperation, government procurement, electronic trade and maintaining trademarks.
Ninety-five percent of the goods traded between the two countries are included in the agreement and will be exempt from customs either immediately or gradually, including food products, agriculture, cosmetics, medical equipment and drugs.
The agreement should also advance bilateral trade in services by assuring regulatory certainty in fields such as electronic trade, professional and business services, distribution services (wholesale and retail) and computers.
The agreement is expected to take effect after signature by the economy and industry ministers and ratification in the two countries.
This agreement follows the Abraham Accords, signed in September 2020, which are the basis for diplomatic relations between Israel and the UAE
Since the advent of the Abraham Accords, trade between the UAE and Israel has grown significantly and reached almost $900 million in 2021.
The potential for trade between the two economies is considered much greater in many fields, including energy, health, digitization, medical equipment, water (desalination, purification, conservation and smart management), agriculture, cyber, fintech and diamond exports.
The UAE has the second-largest economy in the Arab world after Saudi Arabia.
Israel-UAE Income Tax Treaty
The above free-trade agreement deals with import taxes. On January 1, 2022, an income-tax treaty also became effective between Israel and the UAE.
Currently, the UAE generally does not enforce income-tax collection except in the oil and financial sectors, so double taxation may not be an issue. But from June 1, 2023, the UAE is due to start imposing 9% corporate income tax on profits over 375,000 United Arab Emirates dirham (about $102,000),
Persons covered: The treaty generally applies to persons who are residents of one or both countries.
Taxes covered: The treaty applies to income tax and corporate tax in the two countries, Israeli real-estate taxes and the petroleum profits levy of up to 50%, which applies to Israel’s Mediterranean gas.
How is Israel defined?
The term “Israel” means the territory in which the government of Israel has taxation rights, including its territorial sea and adjacent maritime areas.
Who is a resident?
An Israeli resident is any person liable to tax in Israel by reason of his domicile (not defined), residence, place of management or place of incorporation.
A UAE resident individual is someone present in the UAE 183 days or more in each tax year concerned and the previous tax year, provided such individual can prove that he or she is a domicile of the UAE and his or her personal and economic relations are closer to the UAE than to any other state.
This means it may be hard for ex-Israelis to become UAE residents for treaty purposes. If they succeed, Israel is expressly allowed to impose its exit tax (really a capital-gains tax up to 33%). Israel may also tax their Israeli pensions. And they are not entitled to benefits under the treaty for at least five years!
Partnership, trust or controlled foreign affiliate (not defined): Israel may impose tax “on amounts included in the income of a resident of Israel with respect to a partnership, trust or controlled foreign affiliate in which that resident has an interest.”
Permanent establishment (branch): Detailed rules will apply, e.g., Israel can tax a UAE company that has in Israel: a fixed place of business, an installation project or substantial equipment for more than six months; a warehouse that is more than preparatory or auxiliary in character; a cohesive business operation split among closely related enterprises; a person in Israel who plays a principal role in concluding contracts; or a closely related agency company (over 50% control). All this may hamper e-commerce.
Withholding taxes: Israel generally withholds 20%-25% tax at source. The treaty should reduce these rates to: 0%-15% for dividends and interest; 12% for royalties.
Capital gains: Detailed rules are prescribed. Capital gains from real estate may be taxed.
Employment: Relocated employees present under 183 days in any 12-month period in the other country may be exempted by the other country if certain conditions are met.
Avoiding double taxation: A foreign tax credit is prescribed.
As always, consult experienced tax advisers in each country at an early stage in specific cases.
The writer is a certified public accountant and tax specialist at Harris Horoviz Consulting & Tax Ltd.