IN446 - United Kingdom and United Arab Emirates Double Taxation Agreement - Potential Action to Consider

On 12 April 2016 the United Kingdom (UK) and the United Arab Emirates (UAE) signed a Double Tax Agreement (DTA).  This is the first DTA to be signed between these two countries. The agreement is yet to come into force and requires ratification by both countries. 

The DTA contains provisions regarding the location of corporate residence which may have important implications for a number of companies.

Key Taxation Provisions

With regard to withholding tax, the provisions will come into effect from the 1 January, after the DTA has come into force. Other taxes will take effect for taxable years (or financial years) beginning on or after 1 January, after the DTA has come into force.

The DTA provides that generally there will be no withholding tax on dividends paid by a company resident in one contracting state to a company resident in the other contracting state.

Potential Change to the Location of Corporate Residence

One area of specific interest relates to corporate residence.  Currently, in the absence of a DTA, it is possible to have a UK incorporated company with UAE resident directors, and for it to remain UK tax resident. 

However, once the DTA comes into force, this could cause uncertainty over the residency position as the company could be deemed to be resident in both the UK and the UAE. 

  • Where a company is resident in both countries there is a tie-breaker in the DTA whereby the competent authorities in the UK/UAE will seek to determine residency by mutual agreement, using the following provisions set out in the Protocol to the Agreement.

The determining factors in this agreement are as follows:

  • Where the senior management of the company is carried out.
  • Where the meetings of the board of directors are held.
  • Where the company's headquarters are located.
  • The extent and nature of the economic nexus of the company within each state.
  • Whether allocating residency to a particular state carries a risk of an improper use of the treaty or inappropriate application of the domestic law in either state.

What are the Implications if a Company is Considered to be Non-UK Resident?

Should the above factors determine that a company is under the DTA, in fact resident in the UAE and not the UK, as was the case before the treaty came into force, this would mean that the company could be treated as emigrating for tax purposes. 

In such a situation, the UK could impose an exit charge on the emigrating company losing its UK residency.

The company would be treated as if it had disposed of its assets at the date of changing its residence, and to have reacquired them at their market value, crystallising any unrealised gains for corporation tax purposes.  This could cause significant problems for companies holding UK real estate or other assets such as Intellectual Property.

Additional Information

Where there is a UK resident company with UAE resident directors it is important that professional advice is taken.

For further information of advice, please contact the Dixcart office in Esher: advice.uk@dixcart.com or to your usual Dixcart contact.

Categories: United Kingdom, Multi-Jurisdiction, 2016