UAE | change of treaty brings withholding tax for UAE shareholders

1 March 2023 saw the amended protocol to the double taxation agreement between the United Arab Emirates and Austria (DTA UAE – AUT) enter into force (the amended protocol applies to all covered transactions carried out after 1 January 2023). Whilst the protocol has various implications for residents of Austria (e.g. the credit method is now used instead of the exemption method to avoid the double taxation in Austria), the changes regarding withholding tax (WHT) on dividends mainly affect residents of the UAE. 

Before the amended protocol became effective, the following provision was included in Art. 10 (1) DTA UAE – AUT:

“Dividends paid by a company which is a resident of a contracting state to a resident of the other contracting state shall be taxable only in that other contracting state.”

The new provision in Art. 10 (1) DTA UAE – AUT reads as follows:

“a) Dividends paid by a company which is a resident of a contracting state to a resident of the other contracting state may be taxed in that other state.

b) However, dividends paid by a company which is a resident of a contracting state may also be taxed in that state according to the laws of that state, but if the beneficial owner of the dividends is a resident of the other contracting state, the tax so charged shall not exceed 10 per cent of the gross amount of the dividends.

c) Notwithstanding the provisions of sub-paragraph b), dividends paid by a company which is a resident of a contracting state shall be taxable only in the other contracting state if the beneficial owner is:

1. that other state itself, a political subdivision or local authority thereof or a qualified government entity, or
2. a company (other than a partnership) which holds directly at least 10 per cent of the capital of the company paying the dividends.”

Before the amended protocol came into effect, all dividend payments from companies resident in Austria to those resident in the UAE were exempt from Austrian WHT.  Due to the protocol, dividend payments from Austrian companies to individuals, who are tax residents of the UAE, are now subject to 10% WHT. The state itself, UAE authorities and qualified UAE government entities as well as UAE corporate shareholders holding at least 10% of the shares of the distributing Austrian entity are still exempt from Austrian WHT on dividends. Hence, corporate shareholders holding less than 10% in the Austrian company are also subject to WHT.

On the one hand, individuals resident in the UAE holding at least 10% of the shares of an Austrian company should therefore consider the set-up of a holding structure to still apply the tax treaty benefits . On the other hand, Austrian companies need to carefully monitor their UAE shareholders to determine the proper tax treatment of the dividend payments. Formal requirements stipulated in Austrian law must be obeyed. In this context, it must be noted that the foreign holding company must fulfil substance requirements in order to obtain a WHT reduction.

As long as the UAE corporate tax law, which will be effective from 1 June 2023, does not introduce a WHT on dividends, the new Art. 10 (1) DTA UAE – AUT itself does not affect dividends paid by companies that are resident in the UAE to Austrian shareholders. However, as long as Austrian shareholders cannot exempt the dividends received (e.g. by applying the participation exemption regime), the UAE dividends will still be fully taxable in Austria in any case.