On 17 February 2025, a new Double Taxation Avoidance Agreement («the Agreement») was signed between Russia and the United Arab Emirates (UAE), intended to replace the 2011 version, which applied only to the public sector. For the first time, the Agreement will provide tax benefits to both private businesses and individuals. The expected date of entry into force is 1 January 2026.

Taxation of Passive Income

The Agreement sets a preferential rate of 10% on passive income, including dividends, interest, and royalties, and expands the list of income types qualifying as passive income.

For example, dividends include not only income from shares and equity interests but also income from the distribution of additional capital, reduction of charter capital, income from other profit participation rights, and payments on units of collective investment structures (except real estate investment structures).

For Russian companies paying passive income to UAE companies, the Agreement will significantly reduce withholding tax rates:

• Dividends: from 15% to 10% (a 1.5-fold reduction)
• Interest and royalties: from 25% to 10% (a 2.5-fold reduction)

Currently, the UAE imposes a 0% withholding tax. As a result, UAE companies paying income to Russian holding companies will not withhold any tax in the UAE. At the same time, Russian holdings will gain access to additional benefits in Russia that were previously unavailable due to the UAE’s inclusion in the Ministry of Finance’s «blacklist»:

• 0% tax on dividends from a UAE company if the Russian company’s shareholding is at least 50% for at least one year (subparagraph 1, paragraph 3, Article 284 of the Tax Code)
• 0% tax on income from the sale of shares (equity interests) in a UAE company if held for more than five years (paragraph 1, Article 284.2 of the Tax Code)
• Exemption from taxation for active holding and sub-holding controlled foreign companies (subparagraph 4, paragraph 1, Article 25.13-1 of the Tax Code)
• Exemption from taxation on gratuitous transfers of property and property rights from a UAE company to a Russian company (subparagraph 11, paragraph 1, Article 251 of the Tax Code)

Ratification and entry into force of the Agreement will logically lead to the UAE’s removal from the list of offshore jurisdictions.

Taxation of Active Income

Since 2024, income of foreign companies from services provided to related Russian entities has been subject to Russian tax at 15% (subparagraph 9.4, paragraph 1, Article 309; subparagraph 4, paragraph 2, Article 284 of the Tax Code). Under the Agreement, Russian companies will not have to withhold this tax when paying income to related UAE service providers, as, under the general rule, business income is taxable only in the country of the service provider (in this case, the UAE).

Also since 2024, income of individuals working remotely for Russian companies has been subject to personal income tax (PIT) in Russia (subparagraph 6.2, paragraph 1, Article 208 of the Tax Code). The Agreement reflects this regulation and will not prevent the taxation of salaries paid to UAE tax residents working remotely for Russian companies (Article 14 of the Agreement, paragraph 4 of the Protocol to the Agreement).

Taxation of Other Income

Interestingly, «other income» not expressly listed in the Agreement will be taxable exclusively in the state of source.

This is unusual for Russian tax treaties, which generally grant taxing rights exclusively to the state of residence (the “residual rule”) or to both states. Alongside the UAE, exclusive source-state taxation of “other income” is found only in Russia’s treaties with Azerbaijan, Algeria, and Sri Lanka.

In practice, this means that any income not expressly covered by other provisions of the Agreement (dividends, interest, royalties, capital gains from shares or real estate) will be taxed in Russia if paid to a UAE resident, unless otherwise provided by the Russian Tax Code. For example, if a Russian company forgives a debt owed by a UAE borrower, it will be obliged to withhold Russian tax at 25%. By contrast, under most other Russian treaties, such income would be exempt from Russian taxation.

Who Can Benefit?

On the UAE side, the Agreement can be applied by all residents, including companies registered in free economic zones that apply a zero corporate tax rate, as well as individuals holding a UAE tax residency certificate (requiring a minimum of 90 days spent in the country). On the Russian side, the Agreement may be applied by any persons subject to taxation in Russia (“subject to tax” rule).

Practical Recommendations

The combination of low UAE corporate tax rates (9% and 0%) with the ability to apply treaty benefits may further enhance the jurisdiction’s attractiveness for structuring Russian holding companies. Timely consideration of the opportunities offered by the UAE for establishing foreign trading and/or sub-holding companies could enable UAE companies, by the time the Agreement comes into effect, to distribute dividends to Russia tax-free and to enjoy other benefits.

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This material has been prepared solely for informational and/or educational purposes and does not constitute legal advice or a legal opinion. EPAM Law, its management, lawyers, and staff cannot guarantee the applicability of such information to your specific circumstances and accept no liability for any decisions you make, or for any direct or indirect losses and/or damages arising from the use of the information contained in these materials, in whole or in part.