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Investing in the Emirates?

not everything that shines is gold

Many Israelis are already considering investing in the Emirates, as some economic activities are not taxed.

And yet, that does not mean they will not pay it - here in Israel.

What to watch out for?

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• Dubai

Noa Lev Goldstein and Ohad Shilo

Tuesday, 27 October 2020, 12:53

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In the video: The government approves the agreement with the United Arab Emirates (Photo: GPO)

Following the recent normalization agreement between Israel and the United Arab Emirates, many Israelis are considering whether to carry out economic activities such as investing, buying properties or starting businesses in the principalities - given the tax laws there, according to which some economic activities in the principalities (especially in free trade areas) are not taxable. Any - a fact that may ostensibly allow the Israeli investor to generate more profits than those he will generate from the same activity, if he performs in Israel and is taxed in the garden.

Thus, for example, as a rule in Israel, an individual will be liable to tax on profit generated from the sale of real estate in Israel at a rate of 25%; and in the case of income of a business nature, he may be liable to tax up to 47% (before "surcharge" and social security); Whereas a company is taxable at a rate of 23% (and the aggregate tax, for the profits generated by the company, up to the level of the sole shareholder - reaches a similar rate of 46%). On the other hand, in the Emirates these profits may be taxed at zero (0). In addition, an emir corporation is generally not liable to tax (except for corporations that deal in a few areas, such as oil companies). Notwithstanding the aforesaid, an Israeli resident who has decided to invest or open a business in the Emirates may find that “no. All that shines - gold is. "

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Abu Dhabi (Photo: Ziv Reinstein)

The tax system used in Israel is "personal-territorial" - that is, a resident of Israel may be liable to tax in Israel for income he generated both in Israel and outside Israel.

This means that the fact that an Israeli resident generates income from activities abroad that is not taxable under the law of that foreign country does not mean that the same income will not be taxable in Israel - and so is the current law regarding income generated in the emirates.

Take the following two cases.

• An Israeli investor intended to invest in real estate in one of the principalities, as he was told that the price of real estate there was significantly lower than in Israel, and that according to local law, as long as he made a profit from the property, he would be tax-exempt.

• An Israeli businessman who intended to expand his business by establishing a local company in the principalities and carrying out business activities through this company.

  The businessman believed that the main advantage inherent in the establishment of this company was that no tax would be levied on its profits in the Emirates.

Collaboration - Yes.

Tax relief - not necessarily

Adv. Noa Lev Goldstein (Photo: Eyal Toag)

Although in the above two cases, the same resident of Israel may not pay any tax in the Emirates for his income (whether the activity is carried out in person or through a local company), this does not mean that the profits generated in the Emirates will not be taxed in Israel. Real Estate in the Emirates - will be liable to tax in Israel similar to any other capital investment made by a resident of Israel (ie at a tax rate of 25%). And profits generated by a corporation resident in the Emirates will not be taxed in Israel in the first instance, but with their distribution as a dividend to the Israeli shareholder. 30% tax in Israel. This is in addition to additional tax exposures that may be relevant in the case of activities in the Emirates through a local company, including possible exposure to the classification of the company as a resident of Israel for tax purposes, where control and management of the company's business is performed from Israel; A foreign controlled company "for tax purposes in Israel (where it is a company whose main profits are passive profits) Classification means imposing various tax liabilities in Israel.

In addition, it is important to note that the State of Israel has not yet signed (and there is no guarantee that it will sign) a double taxation agreement with the UAE (" Tax Convention "), as done with MSP

Many foreign countries, although (unofficial) reports have been published that contacts have begun for the signing of such an agreement.

In general, the purpose of a tax treaty is to regulate the manner of taxation of intergovernmental economic activity carried out between Israel and the other state in connection with the income and assets of the two countries to which it relates and to establish rules regarding tax liability of various types of income generated in connection with such economic activity.

Thus, for example, certain tax treaties set rules regarding the exclusive right to tax dividend income;

Capital gains;

Business income and more.

As of today, however, a tax treaty between Israel and the Emirates has not yet been signed, and therefore, in some cases, at least the "tax attractiveness" of investments in the Emirates may.

There is no denying that Israel's agreement with the UAE leads to many and varied business opportunities among the residents of the two countries, including cooperation between multinational corporations.

However, with regard to the tax benefits associated with economic activity in the Emirates - these do not necessarily exist in each case, and the nature of the investment or planned activity must be thoroughly examined and planned, in order to examine the tax consequences that may apply.

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