Significant changes to the income tax treaty between Austria and the UAE as of 2023

By Iris Burgstaller, Transfer Pricing Partner TPA Austria and Transfer Pricing Leader Baker Tilly, Vienna and Fanni Deak, Senior tax consultant, TPA, Vienna

At the end of 2021, Austria’s National Council adopted a protocol to amend the income tax treaty with the United Arab Emirates (UAE). After the exchange of the instruments of ratification, the amendments will be applicable for tax years after December 31, 2022.

Background

The aim of the amendments was to implement the OECD standards on base erosion and profit shifting (BEPS standards). In addition, reference was made to a report of the Austrian Rechnungshof regarding withholding tax refunds after dividend distributions and an amendment was made to the article on dividend taxation.

There was no complete revision in the form of a full double taxation agreement, but only a partial revision in the form of a protocol of amendment.

The importance of the UAE as an economic partner for Austria can be seen in an analysis of the economic data: While the UAE is not among Austria´s most important trading partners, exports from Austria are significant and five times higher than imports. Austrian companies have approximately 150 established branches in the UAE; a further 300 or so companies are active through agents.

Changes enter into force parallel to introduction of corporate income tax in UAE

The amendment to the agreement will come into force practically at the same time as the planned introduction of a corporate income tax in the UAE from 2023. It is currently planned to introduce a corporate income tax of 0% (up to income of around EUR 90,000) and 9% for income above around EUR 90,000. A different (minimum) tax rate (presumably 15%) is to apply to large multinational companies with a group turnover of more than EUR 750 million that fall under the second pillar of the OECD project to combat base erosion and profit shifting (global minimum tax).

Major changes to the UAE-Austria income tax treaty

Probably the most significant change is the change in the method of avoiding double taxation: Previously, the exemption method was to be applied, whereby tax residents in Austria could effectively benefit from tax exemptions in the UAE. Now the credit method will be applied and income from the UAE of persons resident in Austria for tax purposes may, in principle, be taxed in Austria with credit of the foreign tax.

The following are further significant changes to the treaty with the UAE:

A new source taxation right for dividends in the amount of 10% will be introduced. However, this change only affects portfolio holdings (Article 4 of the protocol). Substantial participation of at least 10% held by corporations, however, continue to benefit from a 0% withholding tax rate. This necessary minimum holding amount of 10% corresponds to that of the domestic international participation exemption in Article 10 of the Austrian corporate income tax code. There still will be an exemption from withholding tax for dividends contracting states, local authorities and qualified state entities receive (Article 4 of the protocol).

Another noteworthy change will be the introduction of a principal-purpose test to avoid treaty abuse (Article 7 of the protocol).

Also, an extensive exchange of information will be provided for comprehensive administrative assistance. The current income tax treaty contains an outdated provision on the exchange of information (Article 27), which no longer corresponds to the OECD standard. It was, therefore, necessary to adapt Article 27 to the latest OECD standard (Article 26 of the 2017 OECD Model Tax Convention). The newly worded provision on the exchange of information ensures that information held by banks and other financial institutions will also be exchanged (Article 6 of the protocol).

With these amendments, the income tax treaty with the UAE will be basically brought up to the new OECD standards.

• Iris Burgstaller is Transfer Pricing Partner TPA Austria and Transfer Pricing Leader Baker Tilly, Vienna

• Fanni Deak is Senior tax consultant, TPA, Vienna