To avoid double tax, the UAE and Egypt signed a Double Tax Treaty (DTT). This agreement extends the meaning of Permanent Establishment (PE) and permanently establish besides the provisions of article 5 to other arrangements that create a business presence in a contracting state. Whereas, the new Tax Treaty retains the basic components of the traditional PE definition it simultaneously includes new rules and exceptions relevant to the new forms of doing business and numerous illustrated tax avoidance schemes. replaces the 1994 tax treaty between the two countries.
Service Permanent Establishment (PE): - To achieve this, furnishing of services can create a PE where the conditions that accompany the creation of a PE are met. This way there is adequate taxation of service activities in the jurisdiction of where the service is being delivered.
Dependent Agent: The definition has thus been broadened to include addressing such things as commissionaire arrangements and other related tactics. A dependent agent who, in most cases, has the right to bind the enterprise when entering into a contract with another agent can contribute to the formation of a PE.
Anti-Avoidance Rule: Thus, the specific activity that is usually not caught by the PE creation mechanism has become subject to the anti-avoidance provisions. This is aimed at ensuring that enterprises do not engage in a process of ‘management manipulation’ that would involve breaking down activities in a manner that would allow the complex source of income to be circumvented by PE status.
Insurance Companies:- Insurance is another category that requires a special provision to determine their business activities’ taxation where they are carried out.
Closely Related Enterprises:- One firm is closely related to another if one owns this other firm or both firms are owned by the same owner. Thereby, the particulars of the closeness relationship of the enterprises belonging to the contracting states shall be released and coordinate their activities.
New TT has similar income types that were categorized in the old treaty such as income from immovable property, business profits, international shipping and air transport profits, dividends, interest, royalties, capital gains, employment income, director’s fees, pensions, remunerations for personal services especially in government services and scholarships, and other income. However, you bring some modifications in the way such items are taxed by the contracting states. Key changes include:
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| Income Category | Old TT | New TT |
| Business Profits (Article 7) | No taxation in the source country unless there is a Permanent Establishment (PE). | Same as the old TT but includes new rules on income attribution to the PE. |
| Dividends (Article 10) | Exclusive taxing rights to the state of residence. | Shared taxing rights; source state can tax under certain conditions with a 365-day holding period for a lower rate (5%). Branch profit tax allowed but capped at 5%. |
| Interest (Article 11) | Exemption for governmental entities; 10% withholding tax (WHT) in the source state. | Same 10% WHT. |
| Capital Gains (Article 13) | Exclusive taxing rights on capital gains from share transfers to the seller’s resident state. | Gains from share transfers taxed in the country where the entity resides, unless shares derive value from immovable property in the source state. |
| Other Income (Article 21) | Source state can generally tax. | Source state can tax, with new rules for immovable property connected to a PE. |
There is a newly added savings clause related to the income and profits out of the extraction of hydrocarbons in the new TT. This clause permits the contracting states to invoke their domestic laws and regulations regarding such income and profits, which would mean that the basic nature of the treaty does not tamper with domestic taxation legislation on hydrocarbon extraction.
The PPT is a substantial enhancement to the new TT since it positively impacts the principal purpose of TT, which is the transfer of knowledge. The PPT refuses treaty benefits if it is ascertained that one of the main objectives of any business relation or transaction was the receipt of those benefits. This provision is to curb on treaty abuse and also makes certain that the TT is not being used in the furtherance of avoiding taxes but for commercial value as intended.
The new TT also raises new special provisions relating to the determination of profits for PEs. Besides the key idea that no taxation can be done in the source country unless the non-resident conducts a business through a PE, the new rules discuss how the income should be related to the PE. This is done in an attempt to eliminate confusion and double taxation on business profits where such profits are taxed at the source of the economic activities that helped in generating such profits.
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This alone was a matter of state taxation within the old TT, whereby dividend sourcing was also a matter of the state. The new TT opened the way for source country to charge withholding taxes if certain conditions are met about the taxation of dividends and royalties. They have to hold the shares for 365 days to enjoy a lower withholding tax of 5%. In addition, branches are subjected to a new TT starting with a branch profit tax restricted to 5% for purposes of making branch operations to be taxed just like operations of a subsidiary.
There is a withdrawal of governmental entities’ exclusion in the new TT and a uniform 10% withholding tax for the source state. This adjustment seeks to remove the complexity of taxation in receipt of interest income and equitable tax treatment of entities.
They, however, alter the taxation rights on capital gains arising from share transfers under the new TT. As compared to the old TT, which provided that the seller’s resident state would be entitled to the exclusive right to tax gains from share transfers, it is now the source state’s right beside the said condition that the value of the shares derives from immovable property situated in the source state. This provision also stops legal loopholes, such as shifting of shares in companies that own valuable immovable assets, to minimise the question of taxation.
On this aspect, the new TT renders a precise definition on other income, especially on the taxation of immovable property used and/or used for immovable property business relating to a permanent establishment. In untaxed income, the source state is generally free to tax such income, but there is a provision that restricts income from being taxed, that is, income effectively connected with a PE, hence avoiding any form of tax evasion.
It is necessary to stress that each case shall be considered individually about the circumstances of separate transactions. Regarding taxation, much of the treaty’s provisions need to be scrutinized to understand how specific provisions govern various types of income. Further, the application of the TT by the concerned authorities might change over time and therefore the applicative package requires regular updates.
Some of the procedures that a taxpayer may be required to undertake include the TRC or satisfy substance requirements to take full advantage of the treaty. The above steps are crucial to observe compliance standards and this will help one to avoid conflicts with the authorities in cases of taxation.
The new Tax Treaty marked by such key developments as the introduction of the PPT a rule that directly impacts the approval of tax treaty benefits, is that arrangements and transactions of the taxpayers cannot be principally intended for obtaining the benefits under the treaty. In the case if it is proven that one of the main objectives was to obtain the benefits, the PPT can reject the application of the TT. This provision underlines the nature of the commercial intent and the concept of the economic reality in cross-border operations.
The UAE-Egypt tax treaty aims to improve the anti-avoidance rules and enforce fair taxation. This is achieved by the following measures; Permanent establishment is broadly defined, distributive rules have been changed, a saving clause which applies to hydrocarbons has been incorporated, and the Principal Purpose Test is another feature of a better tax treaty.
Parties and advisors on both the taxpayer and practice ends must proceed with greater consideration of the treaty’s terms and apply those analyses to cross-border acquisition activities. This means that it is crucial to always update the interpretations and any possible changes that might occur in the application of the treaty in compliance and tax planning. As long as taxpayers are following the provisions of the treaty and making sure their transactions meet the treaty’s business rationale, the biz taxpayers will be able to enjoy the benefits of the treaty while establishing conformity with the economically sound principle of international taxation.
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Mostafa is a seasoned Tax Consultant with over 5 years years of experience gained in diverse taxations matters. He has vast expertise in settling tax disputes with the Federal Tax Authority and handling of tax procedures in compliance with tax laws. He is adept in investigating underlying tax intricacies and offering expert tax advisory. He is also well-versed in conducting tax analysis’s and negotiations with the Tax Regulators, upon tax preparation and filing. Mostafa specializes in the areas of Tax law, Auditing, Accounting and Banking law.