Media Centre

Client Update – Israel and the UAE Sign Tax Treaty

13 June 2021

Dear Clients, Colleagues and Friends,

On May 31, 2021, Israel and the United Arab Emirates (“UAE“) signed their first-ever bilateral tax treaty (the “Treaty”). The purpose of the Treaty is to eliminate double taxation with respect to taxes on income, without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance.

The Treaty was signed following the agreement between the UAE and Israel for normalizing relations which was signed last September. We believe the Treaty will encourage and strengthen transactions and cross-border investments between Israel and the UAE, and will deepen financial ties and cooperation between the two countries. Moreover, the Treaty will provide greater certainty to individuals and companies from both countries when planning their activities and will assist in preventing conflicts and inconsistencies between Israeli and UAE domestic rules on important matters such as tax residency and taxable presence (permanent establishment). Once ratified, the Treaty would supersede domestic law.

Key Issues covered by the Treaty

Unlike many countries around the world, in the UAE there are no withholding taxes applicable to payments of various types of income such as dividend, interest, or royalties. Israel, on the other hand, generally imposes 23-30% withholding tax on such items of income, subject to certain domestic exemptions or reduced rates of withholding under an applicable tax treaty. The Treaty is based on the OECD Model Convention and includes well-established provisions in international tax treaties such as residency tie-breaker rules, rules for the prevention of double-taxation, anti-avoidance and non-discrimination provisions, exchange of information and more. Interestingly, the withholding tax rates under the Treaty are relatively low compared to other tax treaties that Israel is party to.

As opposed to other treaties that Israel has signed, the Treaty includes very strict anti-avoidance and limitation on benefits provisions that significantly limit the ability of non-UAE residents to benefit from the Treaty.  For example, the treaty defines a UAE resident only as an individual who actually stays in the UAE for at least half a year and can demonstrate that his/her connection to the UAE is stronger than to any other country in the world.  In addition, a UAE company is entitled to the benefits of the Treaty only to the extent it is actually held by a UAE resident and is managed and controlled from the UAE. These provisions are targeted to prevent non-UAE residents to establish UAE companies in order to have access to, and benefit from, the Treaty. In addition, the Treaty limits the ability of Israeli individuals to relocate to the UAE and determines that such individuals will not be entitled to the Treaty benefits for a period of five years.

We highlight below a non-exhaustive list of key provisions of the Treaty.


Permanent Establishment:

  • The definition of “permanent establishment” (“PE”) adopted in the Treaty is based on a broader definition included in the Multilateral Instrument which was adopted following the OECD’s BEPS project, including expanding the concept of so-called “Agency PE” such that a dependent agent of an enterprise in one state who habitually plays the principal role leading to the conclusion of contracts that are routinely concluded without material modification by the enterprise (and not necessarily concludes the contract himself), will create a PE for such enterprise in the other state.



  • Where the beneficial owner of the dividends distributed from a company in one state is a pension plan of the other state or the Government of such other state, in each case holding less than 5% of the capital of the company distributing the dividends, the withholding tax rate is 0%, increased to 5% with respect to the Government of the other state, if it holds at least 5% the capital of the company distributing the dividends. For this purpose, and for purposes of the Article 11 of the Treaty (Interest), the “Government” of the UAE is deemed to include a “qualified government entity” as defined under the Treaty (which includes, for example, the Abu Dhabi Investment Authority, the Emirates Investment Authority and the Mubadala Investment Company).
  • Where the beneficial owner of the dividends is a company, the withholding tax rate is limited to 5%, provided that the recipient company holds at least 10% of the capital of the company distributing the dividends for a period of 365 days prior to the distribution date.
  • In all other cases, the withholding tax rate is limited to 15%.



  • The Treaty generally limits the withholding tax rate on interest to 10% of the gross amount of the interest, but exempts interest payments from withholding tax if paid to a pension plan of the other state or the Government of such other state. Said exemption will not apply if the pension plan of the other state or the Government of such other state hold 50% or more of the capital of the paying company, in which case a 5% withholding tax applies.



  • Under the Treaty, withholding tax imposed by either country is limited to 12% of the gross amount of the royalty.


Capital Gains:

  • Similar to the situation in other bilateral tax treaties, each state preserves its right to tax capital gains from the sale of real estate or rights in real estate entities (i.e., entities more than 50% of the value of which is derived, directly or indirectly, from local real estate) in accordance with domestic law. Capital gains derived by a resident of one state from the sale of shares or other interests in a non-public entity resident in the other state are subject to a 10% tax rate at source, if the seller of such shares or interests holds, at any time during the 12-month period preceding such sale, less than 10% of the voting power of the sold entity. Certain reduced rates and even exemptions are offered to capital gains derived by Governmental entities. The capital gains Article is not expected to subject UAE residents to capital gains tax on the disposition of shares of Israeli companies since Israeli law provides for an exemption from capital gains tax to non-Israeli residents, provided that the shares were acquired after January 1, 2009.


We note that according to Article 28 (“Entitlement to Benefits”) of the Treaty, and with respect Israeli taxation only, the benefits under Business Profits, International Shipping and Air Transport, Dividends, Interest, Royalties, Capital Gains and Branch Tax Articles, are only provided to the federal and local governments of the UAE, qualified government entities, a pension plan and certain other  companies the capital of which is at least 75% owned by the UAE or a qualified government entity, with the remainder of the capital held by individuals residing in the UAE. Notwithstanding, individuals residing in the UAE and companies that are owned exclusively by the UAE or qualified government entities or by individuals residing in the UAE may claim benefits under the International Shipping and Air Transport, Dividends, Interest, and Capital Gains Articles.

The Treaty is expected to enter into force at the beginning of 2022, following its ratification by both countries.

Our firm has extensive experience in dealing with the UAE and we would be happy to assist you with examining investment opportunities following the normalization of the relations between Israel and the UAE and in light of the Treaty.

Herzog Fox & Neeman


Meir Linzen | Chairman
Head of Tax Department
Guy Katz | Partner
Tax Department
Dr. Ehad Farah| Partner
Yuval Navot | Partner
Tax Department


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