India signed the Double Tax Treaty with more than 90 countries, including UAE, USA, UK, Qatar, Italy, Romania, Spain, Sudan, and Canada, and limited agreements with 8 countries such as Afghanistan, Pakistan, Lebanon, and Iran. The UAE-India Double Tax Treaty ratified in 1993, emanated from a burgeoning economic relationship worth over 20 billion dollars between the UAE and India. Its primary objectives are to fortify economic ties and forestall double taxation, thereby safeguarding the interests of legal entities. This treaty serves as a pivotal instrument for individuals and businesses engaged in activities spanning these two nations.
The Scope of Taxation Under UAE-India Double Tax Treaty
Clause 2 of the UAE-India Double Tax Treaty stipulates the specific taxes conferred in the agreement. These encompass income tax imposed by India and income tax and corporate tax levied by the UAE. Notably, the Double Tax Treaty stipulates tax regulations that govern the taxation of profits originating from local operations and individual income, spanning items such as salaries, pensions, and director's fees, mandating that they be subject to taxation in the country where the commercial activity transpires. Furthermore, it regulates the taxation of interests, dividends, and royalties. The determination of the country of residence for a legal entity takes into account the existence of specific establishments on its territory, such as a place of management, branch, office, mine, or factory. This clarity is paramount as it sets the boundaries within which the treaty operates, ensuring that only designated taxes fall under its purview.
Cross-Border Taxation: Permanent Establishment (PE)
These activities encompass entities such as offices, branches, or factories that are treated as “permanent establishment (PE) under clause 5 of the UAE-India Double Tax Treaty. The treaty mandates both nations to promptly share significant alterations to their respective tax systems.
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Table: Key Points of the DTAA Between India and UAE
| Aspect | Details |
|---|---|
| Objective | To avoid the incidence of double taxation and prevent fiscal evasion with respect to taxes on income. |
| Taxes Covered | Includes taxes on income imposed by the government of each country, including federal taxes. |
| Residency | Defines a resident based on tax domicile. The treaty outlines the criteria for residency for taxation purposes. |
| Permanent Establishment | Specifies what constitutes a permanent establishment (PE) and the activities that may lead to PE status, which can affect taxation rights. |
| Business Profits | Business profits are taxable in the country of residence unless the business has a PE in the other country. |
| Dividends, Interest, and Royalties | Conditions under which dividends, interest, and royalties can be taxed in the source country, and the respective tax rates. |
| Capital Gains | Rules governing taxation of capital gains from the alienation of property. |
| Elimination of Double Taxation | Details methods for elimination of double taxation for both countries, generally via a tax credit system. |
| Non-Discrimination | Provisions ensuring non-discriminatory tax treatment of nationals and businesses of one country in the other. |
| Mutual Agreement Procedure | Mechanism for resolving tax disputes and issues of double taxation between the two countries. |
| Exchange of Information | Agreement on sharing tax-related information between the tax authorities of India and UAE to enforce domestic laws. |
| Duration and Termination | Information on the duration of the agreement and provisions for its termination or modification. |
Income Categories Under the UAE-India Double Tax Treaty
- Personal/Individual Income/Services and Revenues: The treaty offers protection for personal services and related income streams. It meticulously outlines individual income sources, including local profits such as director's fees, pensions, and salaries that may be subject to taxation in the host country.
- Air Transportation and Shipping Income: The treaty's reach also encompasses income generated from commercial activities in air transportation and shipping.
- Royalties, Interests, and Dividends: The provisions of the UAE-India Double Tax Treaty delve into dividends, royalties, and interests, subjecting them to the treaty's regulatory framework. For instance, in 2017, the treaty limited the withholding tax rate on dividends to 5% of the gross dividend amount. It expressly delineates the maximum withholding tax rates on royalties and interest-based income, a critical consideration for investors and shareholders.
- Capital Gains on Property Alienation and Immovable Properties: Article 13 of the UAE-India DTAA addresses capital gains, particularly those stemming from the sale of immovable property. This clause ensures that capital gains are subject to taxation in the country where the property is situated, providing clarity for investors in real estate assets. Income derived from property alienation or immovable properties is safeguarded under this treaty.
- Protection for Companies in Free Trade Zones: Tax Benefits for Entrepreneurs Establishing companies in Dubai's free trade zones can leverage tax advantages stemming from the UAE's double taxation agreements with various nations.
Information Sharing (Article 25)
This article expedites the exchange of information between the tax authorities of both countries. The exchanged information encompasses data relevant to the enforcement and administration of their respective tax laws. By facilitating this information exchange, the clause serves as a potent tool against tax evasion, ensuring that the DTAA is employed for its intended purpose.
Resolving Disputes with Mutual Procedures (Article 26)
This procedure offers a mechanism to resolve disputes stemming from the interpretation or application of the treaty. Significantly, the MAP clause furnishes taxpayers with recourse in cases of double taxation or other disputes, augmenting the treaty's efficacy. This provision propels cross-border investments and intellectual property collaborations by mitigating the tax burden associated with interest and royalty payments.
Treaty Termination (Article 28)
Every DTAA encompasses provisions governing its potential termination. Article 28 of the UAE-India DTAA specifies that either country can terminate the treaty through diplomatic channels. Nonetheless, such termination typically becomes effective after a predefined period. This meticulous stipulation ensures a seamless transition and forestalls abrupt disruptions to existing investments and tax arrangements.
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Practical Implications of the Double Tax Treaty
A comprehensive understanding of these pivotal clauses within the UAE-India DTAA is imperative for businesses and individuals engaged in cross-border activities between these two nations. The treaty proffers an array of advantages, including reduced withholding tax rates, well-defined guidelines about Permanent Establishment (PE), and mechanisms for dispute resolution. Importantly, it is imperative to acknowledge that tax treaties may evolve, potentially leading to alterations in specific provisions. Hence, taxpayers should remain abreast of any amendments to the treaty and, when necessary, seek professional counsel.
Conclusion
The UAE-India Double Taxation Avoidance Agreement constitutes an indispensable instrument for nurturing economic collaboration and mitigating double taxation. Its pivotal clauses provide lucid directives regarding the taxation of income in each country, thereby diminishing the complexity and ambiguity associated with international taxation. A thorough comprehension of these clauses and their ramifications empowers businesses and individuals to navigate the intricacies of cross-border activities with confidence, secure in the knowledge that the treaty establishes a framework for equitable and consistent taxation. For more information about the double Tax, treaty contact us at Tax Consultant Dubai.