The double taxation agreement between Austria and the UAE dating from 2004 (Federal Law Gazette III No. 88/2004, “DTA-UAE”), was modified on 1 July 2021 by a separate protocol (see https:// www.parlament.gv.at/gegenstand/XX-VII/I/1030). Pursuant to Article 9 (2), the Protocol shall enter into force on the first day of the third month immediately following the month of the exchange of instruments of ratification.
However, a distinction must be made between the temporal scope of application of the New DTA-UAE and the point at which it comes into effect. According to Article 9 of the Protocol, the new terms apply to withholding taxes (e.g. on dividends) on amounts paid after 31 December of the calendar year in which the exchange of instruments of ratification takes place. For all other taxes, the DTA applies to tax years beginning after 31 December of the calendar year in which the exchange of instruments of ratification takes place. De facto, the New DTA-UAE therefore applies from 1 January 2023.
OPERATING ACTIVITIES OF UAE-BASED CORPORATIONS
An important change applies to the permanent establishment of Austrian companies in the UAE. As before, the corresponding profit shares in Austria must be included in the corporate tax base of the corporation according to national tax law. The change is that the method for avoiding double taxation according to Art 24 New DTA-UAE has switched from the exemption to the credit method. Since there is currently no income tax burden on permanent establishments of foreign entities in the UAE, nothing can be credited either. Profits generated by UAE permanent establishments of Austrian companies will therefore now be subject to corporate income tax in Austria, as if it were a business based in Austria.
The effect of an income tax shield can thus only be achieved by a company domiciled in the UAE, but not by a permanent establishment. As before, UAE companies are taxable solely in the UAE if they are comparable to an Austrian corporation, do not constitute a sham company and have their corporate headquarters in the UAE and not in Austria. Dividends are tax-exempt in Austria for the receiving corporation according to the general requirements of § 10 KStG, unless they constitute passive income as per § 10a KStG. In the case of natural persons, the preferential tax rate according to § 27a EStG (still) applies.
It should be noted that a local corporate income tax will be introduced in the UAE as of 1 January 2024, set at 9% of taxable profits.
The only exceptions are “Qualified Free Zone Persons”, insofar as they have “Qualifying Income”. The tax rate for those special income components of qualified persons is 0%.
According to Article 18 of the UAE Corporate Tax Act, the following applies:
Article 18 – Qualifying Free Zone Person
A Qualifying Free Zone Person is a Free Zone Person that meets all of the following conditions:
Maintains adequate substance in the State.
Derives Qualifying Income as specified in a decision issued by the Cabinet at the suggestion of the Minister.
Has not elected to be subject to Corporate Tax under Article 19 of this Decree-Law.
Complies with Articles 34 and 55 of this Decree-Law.
Meets any other conditions as may be prescribed by the Minister.
The exact scope of corporate tax liability in the UAE is therefore still open, as the corresponding cabinet decision on the definition of “Qualifying Income” has not yet been issued. Rumours suggest this could include a time-limited exemption of offshore income, but whether this is actually the case remains to be seen.
The taxation method has also switched from exemption to the credit method for employees posted to the UAE (including those who are exclusively employed in the UAE). However, according to Art 24 New DTA-UAE, this only applies to those persons who are “resident” in Austria.
This is not the case for employees who move to the UAE entirely, spend the entire year there and are no longer resident in Austria. Such employees are (still) only taxable in the UAE, which means that the new regulation does not result in any changes for them.
Conversely, the amendments are highly relevant for those employees who remain resident in Austria and only occasionally work in the UAE. Such individuals will in future have to pay full personal income tax on their UAE income in Austria. Since there is no income tax liability in Dubai, nothing can be credited, resulting in a considerable tax increase as compared to 2022.
What is more complex to analyse under the new Treaty-provisions is the case of a person predominantly living and working in the UAE, who only occasionally returns to Austria and maintains a residence there.
According to Austrian law, a person holding a residence in Austria qualifies as tax resident in Austria. More specifically, any residential accommodation that can be used for overnight stays (even if it is not actually used for this purpose – see § 1 para 2 EStG) is considered sufficient to establish unlimited taxation in Austria.
Under Treaty law, however, the following applies:
Article 4(1) New DTA-UAE: For the purposes of this Agreement, the expression “a resident of a Contracting State” means:
in Austria: a person who, under Austrian law, is liable to tax there on the basis of his domicile, permanent residence, place of management or other similar characteristic, and shall also include that State and its territorial authorities; the expression shall not, however, include a person who is liable to tax in Austria only on income derived from sources in Austria;
in the United Arab Emirates:(i) a natural person who is deemed to be a resident of the United Arab Emirates by virtue of his domicile, permanent residence or other similar characteristic under the laws of the United Arab Emirates;
If an employee has a UAE permanent residence permit and stays there for the majority of the year, this will in all likelihood establish residency in the UAE according to Art. 4(2)(b) New DTA-UAE. In addition, according to Art. 4(1) New DTA-UAE, residence would also exist in Austria (since a domicile is assumed to exist there).
In consequence, so-called “dual residence” exists, which means that the tiebreaker rule of Art. 4(2) New DTA-UAE must be observed:
Article 4(2) New DTA-UAE: If, in accordance with paragraph 1, an individual is a resident of both Contracting States, the following shall apply: a) The individual shall be deemed to be a resident only of the State in which he has a permanent home; if he has a permanent home in both States, he shall be deemed to be a resident only of the State with which he has the closer personal and economic ties (centre of vital interests);
Therefore, anyone who moves the centre of vital interests to, for example, Dubai, is (only) “resident” in the UAE according to Art 4(2) New DTA-UAE, and not in Austria. “Residence” in Austria according to Art 4(1) (a) New DTA-UAE is superseded by its Art 4(2), whereafter the DTA subsequently only refers to the concept of residence arbitrated under DTA. Under Austrian law, residence (and thus unlimited tax liability) continues to exist in Austria, but under DTA there is only one residence, namely in the UAE.
With regard to the allocation of employee income taxation, Article 15 provides as follows:
Article 15 (1) New DTA-UAE: Subject to Articles 16, 17, 18, 19 and 20, salaries, wages and similar remuneration received by a resident of a Contracting State from employment shall be taxable only in that State unless the work is performed in the other Contracting State. If the work is performed there, the remuneration received therefor may be taxed in the other State.
“Residence” according to Art. 15(1) New DTA-UAE refers to residency resulting from Art. 4(2) New DTA-UAE and not to national residency according to the Income Tax Act or Art. 4(1)(a) New DTA-UAE. The right of taxation for employment carried out in the UAE is thus (still) “only” attributed to the UAE.
In this case, the credit method of Art 24(2) New DTA-UAE introduced as of 1 January 2023 is not applicable, and therefore cannot have the negative effects of full taxation in Austria. This is so because the person in question is not “resident in Austria” according to New DTA-UAE, which, however, is a condition for the application of Art 24(2) New DTA-UAE. Article 24(1) New DTA-UAE does not lead any further either, since it concerns the allocation of the right of taxation for a resident of Dubai to Austria.
It therefore applies in this case that “only” the UAE may tax. The key word here is “only” in Art 15(1) New DTA-UAE, which ensures the exclusivity of taxation in the UAE. In contrast, Art 24(2) New DTA-UAE would apply if a person resident in Austria under New DTA-UAE worked in the UAE, which is not the case here.
In result, those employees who are resident in Dubai according to the tiebreaker rule of Art 4 New DTA-UAE continue to be exempt from personal taxation in Austria for employment carried out in Dubai according to Art 15(1) New DTA-UAE, even if they are resident in Austria and sometimes return to Austria. Only work performed in Austria remains subject to taxation in Austria.
It remains to be seen whether the Austrian tax authorities will challenge the non-taxation of the corresponding income on the basis of the revised preamble, which states, among other things, that the New DTA-UAE should not provide “opportunities for non-taxation or low-taxation through tax avoidance or evasion (inter alia, through abusive arrangements with the aim of obtaining relief provided for in this agreement for the indirect benefit of persons resident in third countries)”. In my view, such an approach would not be legal, since the DTA-UAE, including in its new version, clearly regulates that a resident of the UAE is only taxable in the UAE for employee income earned there. The fact that such taxation is not provided for in the UAE is an inherent part of the regulation of Art 15 New DTA-UAE and has nothing to do with “abusive arrangements”.