S
SysOp
The double tax treaty signed by Spain and the United Arab Emirates in Abu Dhabi on March 5 2006 was published in the Official Gazette on January 23 2007. The treaty and its protocol will enter into force on April 2 2007.
Provisions of the Treaty
As with all double tax treaties concluded by Spain, most of the provisions of the treaty follow those of the Organization for Economic Cooperation and Development (OECD) model. However, some exceptions exist, such as that contained in Article 4 on the concept of residence for the purpose of the treaty. Under Article 4, individuals and companies need not be subject to tax in the United Arab Emirates to be considered tax residents for the purpose of the treaty. The provision requires only that individuals be citizens of and domiciled in the United Arab Emirates, and that companies be incorporated and have their effective place of management in the United Arab Emirates.
Practice has evolved in the United Arab Emirates; nowadays, only foreign oil-producing companies operating in the United Arab Emirates and branches of foreign banks carrying out banking activities under a licence granted by the Central Bank pay income tax. Further, free trade zones already grant temporary (eg, for a 50-year period) full corporate income tax exemptions (in addition to privileges with regard to other taxes, including custom duties).
Although the treaty provides for a maximum dividend withholding tax of 5% for shareholdings of 10% or more (a 15% withholding applies in all other cases), interest and royalties can be taxed only in the country of residence of the beneficial owner of such income (ie, a 0% withholding tax may apply in the country of source). Specific and concrete provisions are contained in Articles 10, 11 and 12 to avoid treaty-shopping transactions. While Spanish domestic rules impose (with some exceptions) an 18% withholding tax rate on non-residents with Spanish-source dividends and interest income, or a 24% withholding tax rate on royalties, the United Arab Emirates imposes no withholding tax on this type of income.
In line with the OECD model, capital gains are taxable in the country of residence of the transferor. Capital gains can be taxed in the other state only if they are derived from:
the transfer of real property situated in that other state;
assets of a permanent establishment located in that state; or
shares of a company whose assets mainly consist, directly or indirectly, of real property located in that state.
With regard to the methods for the avoidance of double taxation, the limited tax credit system applies to both countries; in Spain, this includes a tax credit for the underlying corporate taxes paid by a subsidiary distributing a dividend. Further, the 'exemption with progression' method is also contemplated in Spain.
Exchange of Information Clause
The treaty contains an exhaustive exchange of information clause in line with that of the double tax treaty signed by Malta and Spain (which entered into force in September 2006) and the amended double tax treaty concluded by Switzerland and Spain (which is expected to enter into force in the near future).
In this respect, since 2003 any listed tax havens in Spain have been automatically removed from the list as of the date of entry into force of an exchange of information agreement or a tax treaty containing an exchange of information clause signed by Spain. Hence (as was the case with Malta recently), the United Arab Emirates will no longer be considered a listed tax haven in Spain.
Other Benefits
The removal of the United Arab Emirates from the Spanish list, coupled with the entry into force of the treaty, should benefit both jurisdictions and increase commercial transactions and cross-border investments between the two countries. Restrictive tax rules on operations with tax havens will not apply to the United Arab Emirates from April 2007 and certain benefits will apply to UAE residents. For example, the Spanish 'subject-to-tax' requirement to apply the participation exemption regime to dividends and capital gains received by Spanish companies holding shares of UAE subsidiaries will be considered to be met when the subsidiary is a resident of the United Arab Emirates within the meaning of the treaty (ie, where it is incorporated and has its effective place of management in the United Arab Emirates). This test will also be deemed to be met for the purpose of the Spanish corporate income tax exemption applicable to income generated by a 'permanent establishment' (as defined by the treaty) situated in the United Arab Emirates.
Moreover, UAE investors will benefit from the advantageous Spanish holding company (entidad de tenencia de valores extranjeros) regime. In addition to a full tax exemption for dividends and capital gains derived from qualifying non-Spanish subsidiaries and several other benefits, UAE-resident shareholders of a Spanish holding company may now be able to receive profits from the holding company free of withholding tax where the relevant requirements are met. Finally, the application of EU directives and Spain's extensive double tax treaty network should be of relevance for residents of the United Arab Emirates in order to structure their investments abroad, especially in Europe and Latin America
source
Provisions of the Treaty
As with all double tax treaties concluded by Spain, most of the provisions of the treaty follow those of the Organization for Economic Cooperation and Development (OECD) model. However, some exceptions exist, such as that contained in Article 4 on the concept of residence for the purpose of the treaty. Under Article 4, individuals and companies need not be subject to tax in the United Arab Emirates to be considered tax residents for the purpose of the treaty. The provision requires only that individuals be citizens of and domiciled in the United Arab Emirates, and that companies be incorporated and have their effective place of management in the United Arab Emirates.
Practice has evolved in the United Arab Emirates; nowadays, only foreign oil-producing companies operating in the United Arab Emirates and branches of foreign banks carrying out banking activities under a licence granted by the Central Bank pay income tax. Further, free trade zones already grant temporary (eg, for a 50-year period) full corporate income tax exemptions (in addition to privileges with regard to other taxes, including custom duties).
Although the treaty provides for a maximum dividend withholding tax of 5% for shareholdings of 10% or more (a 15% withholding applies in all other cases), interest and royalties can be taxed only in the country of residence of the beneficial owner of such income (ie, a 0% withholding tax may apply in the country of source). Specific and concrete provisions are contained in Articles 10, 11 and 12 to avoid treaty-shopping transactions. While Spanish domestic rules impose (with some exceptions) an 18% withholding tax rate on non-residents with Spanish-source dividends and interest income, or a 24% withholding tax rate on royalties, the United Arab Emirates imposes no withholding tax on this type of income.
In line with the OECD model, capital gains are taxable in the country of residence of the transferor. Capital gains can be taxed in the other state only if they are derived from:
the transfer of real property situated in that other state;
assets of a permanent establishment located in that state; or
shares of a company whose assets mainly consist, directly or indirectly, of real property located in that state.
With regard to the methods for the avoidance of double taxation, the limited tax credit system applies to both countries; in Spain, this includes a tax credit for the underlying corporate taxes paid by a subsidiary distributing a dividend. Further, the 'exemption with progression' method is also contemplated in Spain.
Exchange of Information Clause
The treaty contains an exhaustive exchange of information clause in line with that of the double tax treaty signed by Malta and Spain (which entered into force in September 2006) and the amended double tax treaty concluded by Switzerland and Spain (which is expected to enter into force in the near future).
In this respect, since 2003 any listed tax havens in Spain have been automatically removed from the list as of the date of entry into force of an exchange of information agreement or a tax treaty containing an exchange of information clause signed by Spain. Hence (as was the case with Malta recently), the United Arab Emirates will no longer be considered a listed tax haven in Spain.
Other Benefits
The removal of the United Arab Emirates from the Spanish list, coupled with the entry into force of the treaty, should benefit both jurisdictions and increase commercial transactions and cross-border investments between the two countries. Restrictive tax rules on operations with tax havens will not apply to the United Arab Emirates from April 2007 and certain benefits will apply to UAE residents. For example, the Spanish 'subject-to-tax' requirement to apply the participation exemption regime to dividends and capital gains received by Spanish companies holding shares of UAE subsidiaries will be considered to be met when the subsidiary is a resident of the United Arab Emirates within the meaning of the treaty (ie, where it is incorporated and has its effective place of management in the United Arab Emirates). This test will also be deemed to be met for the purpose of the Spanish corporate income tax exemption applicable to income generated by a 'permanent establishment' (as defined by the treaty) situated in the United Arab Emirates.
Moreover, UAE investors will benefit from the advantageous Spanish holding company (entidad de tenencia de valores extranjeros) regime. In addition to a full tax exemption for dividends and capital gains derived from qualifying non-Spanish subsidiaries and several other benefits, UAE-resident shareholders of a Spanish holding company may now be able to receive profits from the holding company free of withholding tax where the relevant requirements are met. Finally, the application of EU directives and Spain's extensive double tax treaty network should be of relevance for residents of the United Arab Emirates in order to structure their investments abroad, especially in Europe and Latin America
source
