Corporate Tax Law of the United Arab Emirates
Part 1: The DTA between Switzerland and the United Arab Emirates
On October 6th, 2011, Switzerland and the United Arab Emirates (UAE) concluded an agreement in Dubai on the avoidance of double taxation with respect to taxes on income (DTA). In this first part of our blog posts on UAE corporate tax law, we would like to provide an overview of the provisions of the DTA that are relevant for legal entities.
Scope of the double taxation agreement
The DTA applies to all companies that are residents in one or both contracting states. It applies to both existing and future taxes levied on the income of companies.
Tax treatment of business profits, art. 7 DTA
Business profits are generally taxed in the state of residence unless an entrepreneur has a permanent establishment in the source state and carries on business through this permanent establishment. Permanent establishment means a fixed place of business, e.g., a place of management, a branch, an office, a factory, or a workshop. When filing their tax return, companies may deduct from the profits of the permanent establishment all expenses which are incurred for the purpose of the business, including executive and general administrative expenses. Note the provision inserted by the protocol of amendment of November 5th, 2022, according to which business profits of permanent establishments cannot be adjusted by a contracting state after five years, unless there is a case of abuse. Regarding associated enterprises (art. 9 DTA), all profits of one enterprise are included in the profits of the other associated enterprise and taxed accordingly. Thus, if a UAE enterprise participates directly or indirectly in the management, control, or capital of a Swiss enterprise, or if the same enterprises participate directly or indirectly in the management, control, or capital of enterprises in the UAE and Switzerland, then the mutual profits are considered in the taxation.
Tax treatment of dividends, art. 10 DTA
Dividends paid by a Swiss company to a legal entity in the UAE may be taxed both in the UAE and in Switzerland. The term dividends initially mean income from shares as well as those from founders’ shares with participating in profits. Insofar as other income derived from company shares is also to be included, the tax equivalence with income from shares under the law of the source state must be considered. The effective withholding tax rate for dividends is generally 15 per cent of the gross amount unless the dividends are paid to companies which hold directly at least 10 per cent of the capital of the company paying the dividends. In this case, the tax rate is reduced to 5 per cent. To avoid double taxation, art. 22 DTA stipulates that dividends paid by a company resident in the UAE to a Swiss company enjoy the same tax benefits as a company resident in Switzerland that is entitled to dividends. Furthermore, dividends taxed by the UAE may be subject to a tax deduction in Switzerland equal to the tax levied in the UAE, as well as a flat-rate reduction of Swiss tax or even a partial exemption of these dividends from Swiss tax.
Tax treatment of interest, art. 11 DTA
Interest is income from debt-claims of every kind, i.e., not only mortgage interest but also interest from government securities, bonds, and debentures. Interest that originates in a contracting state and whose beneficial owner is a resident of the other contracting state can only be taxed in that other contracting state. This means that interest arising in Switzerland and paid to legal entities in the UAE is also taxable only in the UAE and vice versa.
Tax treatment of royalties, art. 12 DTA
This rule also applies to royalties, i.e., remuneration paid for the rights to use copyrights and industrial property rights, such as patents and trademarks. In this context, royalties arising in Switzerland and due to a legal entity in the UAE can only be taxed in the UAE and vice versa.
Tax treatment of income from immovable property, art. 6 DTA, and capital gains, art. 13 DTA
In contrast, income from immovable property can be taxed in both the state of residence and the source state. Immovable property includes livestock and equipment used in agriculture and forestry as well as the usufruct of immovable property and rights to variable or fixed payments, mineral deposits, sources, and other natural resources. Immovable property does not include ships and aircraft. Gains from their disposal are taxed at the place of effective management of the enterprise in accordance with art. 13 DTA. Gains from the disposal of shares whose assets consist directly or indirectly mainly of immovable property situated in a contracting state may be taxed in that contracting state.
Conclusion and outlook
The taxation of internationally active companies is complex and can, under certain circumstances, become very costly. Our law firm has therefore specialised in the tax structuring options for legal entities in Switzerland and the UAE. We are at your disposal for specific legal advice at any time.
In Part 2 of our series “Corporate Tax Law in the United Arab Emirates”, we will discuss the background to the Protocol amending the DTA signed between Switzerland and the UAE on 5 November 2022.