The Swiss federal Council and the Government of the United Arab Emirates decided to conclude a Convention in regard to the avoidance of double taxation with respect to taxes on income. The UAE is one of Switzerland’s most important economic partners in the Middle East, therefore a double taxation convention is meant to enhance bilateral economic relations between the two countries.
The convention was ratified in 2012 and applies to withholding taxes and taxes on amounts paid or credited since 1 January 2012.
Taxes covered by the Convention
In Switzerland, the Convention covers federal, cantonal and communal taxes applied on income: total income, earned income, income from capital, commercial and industrial profits, and capital gains.
In the UAE, the Convention covers the income and the corporation tax.
This convention also applies to identical or similar taxes imposed after the date of the signature of the Convention, in addition to, or in place of existing taxes. However, the Convention does not apply to taxes withheld at source or on prizes obtained in a lottery.
Any person resident of the UAE who owns a place of management for a company in Switzerland, a branch, an office, a factory, a workshop, a place of extraction of natural resources or a building site or a construction or installation project is considered to have a permanent establishment in Switzerland and can benefit from the provisions established by the convention.
Income from immovable property
Income derived by a resident of a contracting state from immovable property, including income from agriculture or forestry, situated in the other contracting state, may be taxed in the other state.
Immovable property includes livestock and equipment used in agriculture and forestry, usufruct of immovable property and rights to variable or fixed payments, mineral deposits, sources and other natural resources. Ships and aircrafts are not considered as immovable property.
The profits of a company or other type of legal entity are taxed only in one of the states, unless the entity carries on business in the other state, through a permanent establishment situated therein. The profits are taxed by the other state, only as much of them as attributed to the respective permanent establishment.
Deducted expenses are allowed, as long as they’re incurred for the purpose of the permanent establishment, including executive and general administrative expenses.
Shipping and air transport
Profits obtained from the operation of ships or aircraft in international traffic are taxable only in the contracting state in which the place of the effective management is situated. If the management place is located on a ship, than the home harbor of the ship is considered as effective management place.
If a UAE company participates directly or indirectly in the management, control or capital of a Swiss company, or if the same persons participate directly or indirectly in the management, control or capital of companies located both in the UAE and Switzerland, any profits made by one of the companies may be included in the profits of the other related company and taxed accordingly.
Taxes on dividends
Dividends paid by a Swiss company to an UAE resident may be taxed in the UAE. However, such dividends may also be taxed in Switzerland and the tax charged from the beneficial shall not exceed 5% of the gross amount of the dividends if the beneficial owner is a company that holds at least 10% of the capital of the company paying the dividends, or 15% of the gross amount of the dividends in all other cases.
Taxes on interest
Interest arising in Switzerland and paid to an UAE resident is taxable only in the UAE and vice versa.
Taxes on royalties
Royalties arising in Switzerland and beneficially owned by an UAE resident are taxable only in the UAE and vice versa.
Gains derived by an UAE resident from the alienation of immovable property situated in Switzerland may be taxed Switzerland. This includes ships and aircrafts, shares of the capital stock and gains from alienation of properties.
Taxes on other income
Items of income of a resident in one of the contracting states, wherever arising, not dealt with in the Articles of the Convention, is taxable only in the respective contracting state.
Elimination of double taxation
In the case of Switzerland, double taxation is avoided as follows:
- On income derived by a Swiss resident taxed by the United Arab Emirates, according to the provisions of the Convention.
- On dividends taxed by the UAE, a tax deduction equal to the tax levied in the UAE is possible in Switzerland, as well as a lump sum reduction of the Swiss tax or a partial exemption of such dividends from Swiss tax, under certain conditions.
- Dividends received by a Swiss company from a UAE company are granted the same tax relief if the company paying the dividends would be a resident of Switzerland
In the case of UAE, double taxation is avoided as follows:
If a UAE resident derives income which, in accordance with the provisions of the Convention is taxed in Switzerland, the UAE allows a deduction from the tax on income for that person in an amount equal to the tax on income paid in Switzerland.
Download the Double Taxation Convention between Switzerland and UAE below: