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UAE & Germany: The new DTAA and taxation addition – be increased cautious with UAE subsidiaries

(Dubai, 22/07/2013) Even two years after the new double taxation avoidance agreement (DTAA) between Germany and the United Arab Emirates (UAE) - ratified on May 6, 2011 – came into force with effect from January 1, 2009, frustration and insecurity amongst businessmen and taxpayers are still high with view to the change from an exemption to the credit method.
Concerning the general "tax debate" in Europe and Germany, it applies to every concerned person to review the legal and tax structuring of its foreign subsidiaries intensively.

With residence in Germany – means formal residency / centerpiece of life for individuals or principal place of business for corporations – income earned in the UAE is now subject to full taxation in Germany. A massive disadvantage for all taxpayers, in contrast to the previous exemption procedure!

A complete reproduction of the new DBA here would go beyond the scope, therefore here only a Link to the current version of the DTAA.

Low taxation on dividends from UAE subsidiaries

To avoid (world income) tax liability in Germany, one single pretty sure constellation in the bilateral relationship between the two countries remains: The subsidiary of a Germany-based capital corporation which is direct shareholder with at least 10%, is subject to income taxation in the UAE.
Only 5% of profit distributions as dividends are attributable to the income in Germany and taxed accordingly. 95% of the received dividends remain therefore tax-free.

The UAE subsidiaries have of course the right to adjust their dividend payment policies to the needs of its Germany partners, taxable there: They may distribute aggregated profits if the parent company needs these funds – but they are not forced to do so.

Foreign Taxation  
Pitfalls of German foreign taxation laws

Basically, the high requirements of German legislature regarding principal place of business, scope of operations, classification as intermediate company (see Art. 7 AStG - Foreign Tax Act) and the achievement of active income (see Art. 8, Par. 1, No. 1-6 AStG and Art. 24, Par. 1c of the DTAA) have to be considered!

While general and advanced requirements in permanent establishments should be well known meanwhile, special attention should be paid to the pitfall of Art. 7, Foreign Tax Act (“Außensteuergesetz”) – intermediate companies – which can lead to taxation addition quickly.

The basic requirement for an intermediate company – majority of ownership – is already not given for subsidiaries in legal form of domestic LLC’s: UAE Company Law requires here at least 51% of the shares in ownership of a “UAE Local”, so or so.

Caution in Free Zones!

However, there is a contrast to the majority of German subsidiaries in the numerous free trade zones in the UAE! In these cases, the common shares held by the parent companies are counting 100%, so it is essential to avoid any character of a free zone subsidiary as an intermediate company.


  • Are all requirements in the features of permanent establishments fulfilled, according to Art. 12 AO and Art. 5 of the Germany-UAE DTAA?
  • Does the subsidiary operate stand-alone business with active agreements, pursuant to Art. 8, Par. 1 AStG?
  • Has the subsidiary not been “pushed” between taxpayer and existing sources of income?
  • Does any passive income of the subsidiary not exceed 10% of its gross income and does also not exceed the amount of € 80,000 for each individual shareholder (see Art. 9 AStG)?

In any case, it is advisable to review the operational, legal and fiscal development of the UAE subsidiary accordingly. Of course, there is a very narrow frame of regulation. In worst cases, it can be levered very burdensome only – and without known precedents.

If all else fails – low taxation is not the case!

Here, the one or the other will now rub his eyes, though: According to the German Foreign Tax Act (“Außensteuergesetz”), a (malicious) intermediate company can exist only, if its income is subject to lower taxation. Only then the assumed sense can be met that German taxes will be saved. According to Art. 8 Par. II AStG, a low taxation is not the case if the tax burden is 25% or higher. Even if the tax is legally owed, but in fact actually not charged.

And that's in certain cases the proven status in the emirates of Abu Dhabi, Dubai and Sharjah! According to analog Income Tax Decrees of the individual emirates from the 1960ies, tax scale schemes exist which result in unison to a (nominal) tax burden of 25% at least, in case of profits of AED 4 million and more. However, income tax is actually collected only from banks, insurance companies and oil producing and processing companies.

But this should only be used as a worst case counter argument, when nothing else works. It is amongst other topics unclear if the (legally owed) tax doesn’t “bite” for example the tax exemption for x years, guaranteed in many free trade zones. Furthermore, the question remains whether the “legal liability” of tax doesn’t require necessarily a tax assessment with moratorium endorsement – instead of adoption of just a decree.


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