Whether you are doing business, considering an investment, or are a resident of UAE you must be well-versed with double taxation provisions. Double taxation occurs when the same income is taxed by two different countries at personal and corporate levels. If you are a business that operates internationally, double taxation can have a huge impact.
The UAE stands as a pioneering leader in the global effort to prevent double taxation through international treaties. The intricacies of the UAE’s tax system and Double Taxation Treaties (DTTs) can be daunting, making this synopsis a valuable resource to clarify the impact of DTTs on businesses and investors. It also sheds light on the various double taxation agreements and provisions that the UAE has established with different nations.
What is Double Taxation?
In simpler words, double taxation is defined as when one source of income is taxed twice from both countries – the home country and the one you invest or operate in. Though many individuals misinterpret that double taxation is implied to business alone, one income source can be taxed at corporate and personal levels.
When similar taxes are imposed by two different countries on the same taxpayer on the same tax base. This can negatively affect the exchange of goods, capital, transfer of technology, and trade across borders.
Additionally, public and private organizations, air transport-based companies, investment firms, and other companies that operate in the UAE enjoy the perks of Double Taxation Treaties (DTT) effectively.
Double Taxation Agreement in UAE
To promote global strategic partnerships and to improve the competitiveness of the United Arab Emirates (UAE), over the years the Ministry of this country has introduced Double Taxation Agreements (DTA) and Bilateral Investment Treaties (BIT) network wherein UAE included 193 DTAs and BITs.
The UAE introduced this policy to either eliminate or lower taxes on the profits earned by its residents and international businesses, whether through direct or indirect taxes. Additionally, the UAE seeks to protect all types of investments and safeguard against non-business-related risks, ensuring that these profits can be easily transferred using freely convertible currency.
Purpose of Enacting a Double Taxation Avoidance System
While the avoidance of double taxation has indeed been beneficial for many individuals and businesses operating internationally, the UAE had specific and significant intentions when implementing Double Taxation Treaties (DTTs). Here are some key factors that underline this purpose:
- Promoting UAE Development Objectives: The UAE aimed to advance its development goals and diversify its national income sources through the use of DTTs.
- Eliminating Double Taxation and Fiscal Evasion: DTTs were established to eradicate instances of double taxation, fiscal evasion, as well as additional and indirect taxes.
- Ensuring Comprehensive Protection and Removing Barriers to International Trade and Investment: These treaties aimed to provide comprehensive protection against double taxation, whether it was through direct or indirect means. This also sought to prevent any hindrance to free trade and investment, thereby contributing to development goals and increasing investment inflows.
- Adapting to Changing Financial and Economic Landscapes: Recognizing the complexities of taxation, global changes in the financial and economic sectors, the emergence of new financial instruments, and the dynamics of transfer pricing, DTTs were tailored to address these evolving challenges effectively.
Benefits of DTT
Thanks to the Double Tax Treaties (DTTs) signed by the UAE, individuals and businesses can avoid paying taxes twice on the same income. This is especially advantageous for UAE citizens earning income in a country that has a DTT with the UAE. The DTT allows for the utilization of tax credits, which means that taxes paid in one country can be offset against taxes owed in another. Furthermore, this holds significant relevance for multinational corporations operating within the UAE’s free zones and for UAE citizens or residents who are earning income abroad.
Double Tax Treaties (DTTs) can provide specific tax benefits. For example, certain DTTs may reduce tax rates for specific types of payments or entirely exempt certain types of income from taxation. This can encompass income derived from activities like shipping, air transportation of goods, real estate, and personal services. The availability of these exemptions depends on the provisions outlined in each individual DTT.
Enhanced Trade and Investment
DTTs are essential in fostering trade and investment between the UAE and its treaty partners in addition to the direct tax advantages. DTTs make it more appealing for businesses to conduct trade with or make investments in international markets by lowering the tax burden on cross-border economic activities.
This may boost foreign direct investment (FDI), promoting the growth and development of the economy. DTTs can also assist in strengthening international ties and economic alliances between nations, which helps create a more favourable business environment.
Double Taxation Treaties of the UAE are signed with many countries like Singapore, Albania, Hong Kong, Japan, Russia, India, Saudi Arabia, the United Kingdom, and more. In this blog, we will discuss the DTA – Double Taxation Avoidance Agreement of UAE with India, and the UK.
DTA between India and UAE
UAE and India signed DTA in 1993, which commenced in 1994. The prime goal of this agreement includes offering significant clarity and certainty about taxation on income and capital gains earned by individuals and businesses in both countries. Furthermore, DTA offers an equal and supportive environment for businesses to prosper and promotes bilateral investment flows by preventing the duplication of taxes.
There are a few provisions and benefits involved in DTA signed between India and UAE, that one must be aware of.
Taxation based on residence
Residents of either nation who receive income from the other nation will only pay taxes once in their home nation. For instance, a UAE citizen who lives in India shall pay their taxes in the UAE, and vice versa.
Types of covered income
Double Taxation Agreements (DTA) encompass a wide range of income types, including dividends, royalties, business profits, capital gains, and interests. When an individual or entity residing in one country earns any of these income types in countries that are bound by the provisions of a Double Taxation Agreement, specific tax regulations and agreements come into play.
To combat tax avoidance and evasion, Double Taxation Agreements (DTA) include clauses that facilitate the exchange of information between the tax authorities of two countries. In order to assess whether taxpayers are adhering to their substantial tax obligations, the tax authority of one nation may request access to information held by the tax authorities of another country.
Double Taxation Agreements (DTA) incorporate clauses centered on non-discrimination, ensuring that residents of one country are not subjected to discriminatory taxation practices in the other country.
Mutual agreement between UAE and India
A mutual agreement provision provides a predefined framework for resolving disputes that may arise between taxpayers and tax authorities. In this scenario, if a taxpayer disagrees with the decisions of one country’s tax authority, they have the option to seek a mutually agreeable resolution by involving the tax authorities of both nations in a discussion.
Limitation to the perks of DTA
Double Taxation Treaties impose certain restrictions to prevent individuals or businesses from exploiting them for improper purposes.
Income Coverage under DTAA signed between UAE and India
DTA between UAE and UK
The Double Taxation Agreement (DTA) between the United Arab Emirates (UAE) and the United Kingdom, signed in 2016 and effective in 2017, primarily aims to provide clear and predictable taxation rules for individuals and businesses operating in both countries. This agreement seeks to reduce tax complexities and the risk of double taxation, thereby fostering economic collaboration, enhancing bilateral relations, and encouraging investment between the UAE and the UK.
It’s worth noting that this DTA includes specific provisions and benefits, and we will outline a few key factors below for better understanding.
The Double Taxation Agreement (DTA) defines the concept of a Permanent Establishment (PE), which is crucial for determining the taxation of corporate earnings. A Permanent Establishment represents a place where a business is conducted either fully or to a significant extent. When a corporation has a Permanent Establishment in another country, the profits associated with that PE will be subject to taxation in that country.
Reduction in withholding taxation
Under the Double Taxation Agreement (DTA), there are provisions for reduced withholding tax rates on certain types of income, including interest, dividends, and royalties. When dividends are paid by a company resident in one country to shareholders residing in another country, the maximum withholding tax rate applied is 5%. Likewise, interest payments are subject to a maximum withholding tax rate of 5%. However, when it comes to royalty payments, they are subject to a maximum withholding tax rate of 10%.
Cross border agreement
The Double Taxation Agreement (DTA) between the United Kingdom (UK) and the United Arab Emirates (UAE) serves the dual purpose of safeguarding cross-border investments and trade while also incorporating measures to prevent tax evasion.
The Double Taxation Agreement (DTA) includes mechanisms for mutual agreement procedures, allowing taxpayers to resolve disputes related to the interpretation and application of the DTA. Additionally, it facilitates the exchange of information between the tax authorities of the two nations to combat tax evasion and avoidance.
Provisions on Royalties
Royalties for intellectual property owed by a UK company to the UAE are solely subject to taxation in the UAE. This change is significant for UAE companies seeking to license their intellectual property in the UK, as it eliminates the previous 20% UK withholding tax on such transactions.
Opportunity for investment
Taxation for international direct investments from the UAE to the UK has become more favourable. This has expanded tax-efficient investment options for UAE investors. Additionally, extended time can be spent in the UK without triggering UK tax residency, making it accessible for UAE nationals and select non-UAE nationals residing in the UAE.
Read about everything about taxation in UAE
In conclusion, Double Tax Treaties (DTTs) play a pivotal role in preventing double taxation of income for both individuals and businesses. These agreements offer significant benefits, including tax relief, lowered withholding taxes, and the possibility of exemptions. The extensive network of DTTs maintained by the UAE underscores its commitment to fostering favourable business environments, nurturing international relationships, and promoting global trade. To further explore the intricacies of double taxation in the UAE, we invite you to visit NR Doshi or reach out to us on +971 4 352 8001 or firstname.lastname@example.org for additional information and guidance.