INDIA-UNITED ARAB EMIRATES DOUBLE TAXATION AVOIDANCE AGREEMENT

The government of India and the government of the United Arab Emirates (“UAE”) signed a Double Taxation Avoidance Agreement (“DTAA”) by India in June, 2017 and by UAE in 27 June, 2018 which was ratified in pursuance of the Organisation for Economic Co-operation and Development (“OECD”) on 25 June, 2019. In a situation where a taxpayer is resident in one country but has a source of income situated in another country it gives rise to possible double taxation and to address the same, DTAA has been entered into between India and UAE.

Applicability

The incomes that are protected by the DTAA signed between UAE and India are:

1. personal services and revenues from sources;
2. revenues derived from shipping and air transportation;
3. interests, dividends and royalties registered in both countries; and
4. incomes from property alienation or immovable properties.

Broadly, DTAA covers the following in each country:

a. In UAE:

• income-tax;
• corporation tax; and
• wealth-tax.

b. In India:

• income-tax including any surcharge thereon ;
• the surtax; and
• the wealth-tax.

Key highlights

1. Income from immovable property may be taxed in India in which such property is situated.
2. Permanent establishment in a country may be construed based on the place of management, a branch, an office, a factory, a workshop, a warehouse, a mine, or oil or gas well or a building site or construction where such site, project or supervisory activity continues for more than 9 months.
3. The profits of a UAE- based enterprise shall be taxable only in UAE unless the enterprise carries on business in India.
4. Deductions of expenses including executive and general administrative have been provided.
5. Profits derived from the operation by the enterprise of ships in international traffic shall be taxable in the state in which the company is situated in.
6. Remuneration derived by a resident of UAE in respect of an employment exercised in India shall be taxable only in the first mentioned state.
7. Directors’ fees and other similar payments derived by a UAE resident as a member of the board of a India- based company, shall be taxable in India.
8. the withholding tax rates agreed upon in the DTAA:

• Interest- 5%, if loan is granted by a bank/similar financial institute and 12.5%, in all other cases;
• Dividend- 10%;
• Royalty- 10%.

Inference and benefits

In the present era of cross-border transactions across the globe, the effect of taxation is one of the most important considerations for any trade or investment decision. The double taxation treaty prevents the income tax, the wealth tax and the corporate tax from getting imposed twice on the enterprises that have already been taxed in either of the contracting states. There has been a lot of confusion in the past, with regards to the DTAA’s applicability, however, the protocols have provided certainty as regards determining tax residency for UAE residents. It has also further accelerated the inbound investments in India from the UAE