Double Tax Treaty with the UAE: new rules of the game for old players

The Government of the Russian Federation announced the publication of an order on its signing of a new Double Tax Treaty (DTT) between Russia and the United Arab Emirates (UAE).

According to the published document, the draft treaty was prepared by the Ministry of Finance of the Russian Federation and is awaiting approval from the Emirati side as well as its signing by the relevant Russian state authorities.

Previously, Russia and the UAE already had a DTT in place, but the effects of its provisions did not actually extend to the average company. However, the new treaty establishes specific, detailed mechanisms that will impact individuals and commercial companies alike.

The published text significantly expands the DTT’s regulatory effects, offering clearer and more practical conditions for the taxpayers of both countries. According to the proposed text of the treaty, a single rate of 10% will be applied to passive income, including dividends, interest and royalties.

The tax system known as “10-10-10” entails withholding tax being levied at a fixed rate which makes paying taxes more predictable and convenient for businesses, foregoing the need to pass additional checks as well as minimizing the amount of claims from tax authorities.

This approach has become Russia’s standard for most of the tax treaties it has signed after 2020 since it is aimed at providing tax relief in relation to international financial flows and improving the investment climate.

Whereas Russia’s withholding tax rate on dividends stands at 15% and imposes up to 25% on loan interest and royalties, the UAE has no withholding tax. Setting a flat rate of 10% makes the new tax program extremely attractive to investors, deters the use of offshore schemes and increases transparency in the tax system.

Furthermore, it promotes tax transparency between the two countries, creating favorable conditions for bilateral investment and economic cooperation. Companies in the UAE are now further incentivized to be recognized as holding companies due to the number of significant changes in the country's legislation and tax policy.

• Firstly, the recent reforms allow foreign investors to fully own companies on the UAE mainland who were previously limited to owning 49%. This makes the structure of holdings more flexible and attractive to international investors.
• Secondly, the UAE offers a zero corporate tax rate in free economic zones (FEZs) where registering holding companies is permitted which greatly reduces their tax burden. In addition, the new tax treaty with Russia eliminating double taxation provides further opportunities to optimize taxes and manage assets.

Particularly noteworthy is the fact that, unlike the offset mechanism widely used in Russian tax agreements as the method for eliminating double taxation, the new agreement with the UAE operates using the tax deduction method.

We would like to briefly point out that the foreign tax credit mechanism allows the amount of foreign tax paid to be offset against the tax liability calculated under national law with respect to foreign income, whereas the tax deduction method entails that the foreign tax is not offset against the worldwide tax but is deducted as an “expense”. This method bypasses the shortcomings inherent in the tax credit method, for example, when the taxpayer is in a situation where there is no national tax base, which may be typical for the UAE as a jurisdiction with known tax preferences.

Article 13 of the tax treaty stipulates that income from the sale of real estate is subject to taxation in the state where said real estate is located, including income from the sale of shares or interests in a company, whose value is 50% or more derived from real estate. It is also worth noting that the treaty operates on an annual period in which this rule is valid after such threshold has changed and the threshold of 50% has been exceeded.

However, the fact that certain tax benefits and advantages depend not only on the DTT being in place but also on whether the country in question is included in the so-called “offshore list” (established in the Order of the Ministry of Finance of Russia dated 28 March 2024 No. 35n) is important to keep in mind.

The Ministry of Finance previously indicated that the main obstacle to excluding the UAE from this list was precisely the lack of a DTT.

If the UAE is excluded from the Russian "blacklist" of offshore zones after the signing and entry into force of the DTT (or even earlier, and we predict that this will most likely happen), this will lead to a number of significant tax breaks for Russian companies and individuals. In particular:

• dividends received by Russian companies from Emirati sources may be eligible for the participation exemption provided for in subparagraph 1 of paragraph 3 of Article 284 of the Tax Code of the Russian Federation and Article 284.2 of the Tax Code of the Russian Federation. This means exemption from income tax if the ownership conditions are met
• transactions with UAE residents will be subject to control for compliance with the arm's length rule (transfer pricing rules) only if they are recognized as controlled on the basis of interdependence or if they concern certain commodity groups in foreign trade transactions (subparagraph 3 of paragraph 1 of Article 105.4 of the Tax Code of the Russian Federation)
• property received free of charge from an Emirati company in which a Russian legal entity owns a share of at least 50% will not be included in the taxable base for income tax of the receiving party (subparagraph 11 of paragraph 1 of Article 251 of the Tax Code of the Russian Federation)

In this manner, the exclusion of the UAE from the offshore list may significantly improve the tax conditions for Russian businesses working with Emirati partners, irrespective of the DTT.

This will create a promising environment for investment, international cooperation and economic exchange between Russia and the UAE, facilitating enduring economic growth and the strengthening of international relations.

According to the latest information, the DTT between Russia and the UAE is expected to come into force on 1 January 2026 after its ratification by both parties.