Understanding the UAE-India DTAA: How You Can Save Taxes on Cross-Border Income

In an increasingly interconnected world, cross-border business transactions are commonplace. However, these transactions often bring along the challenge of double taxation, where the same income is taxed in both the source and recipient countries. To address this, the Double Taxation Avoidance Agreement (DTAA) between India and the United Arab Emirates (UAE) plays a pivotal role. Established in 1993 and updated over the years, this agreement simplifies tax compliance, boosts bilateral trade, and fosters investment by eliminating double taxation.

Why is the India-UAE DTAA Important?

The DTAA ensures that individuals and entities conducting business between India and the UAE:

1. Avoid Double Taxation: Income is taxed either in the source country or the residence country, not both.
2. Promote Trade & Investment: With reduced tax burdens, businesses are encouraged to explore opportunities in both countries.
3. Clarify Tax Obligations: Specific tax rates and conditions provide transparency and prevent disputes.

Let’s delve into the provisions of the DTAA, examine its application, and explore example scenarios to understand its implications better.

Key Provisions of the UAE-India DTAA

1. Taxes Covered: In India: Income tax, wealth tax (Abolished), and surcharge. In UAE: Corporate tax and income tax (where applicable).
2. Applicable Income Streams:

3. Tax Credits:

• The residence country provides credit for taxes paid in the source country.
• This eliminates double taxation while ensuring compliance in both jurisdictions.
• No Carry Forward or Carry backwards of Foreign Tax Credits
• FTC Cannot exceed gross tax liability.

Example Scenarios

Scenario 1: UAE Resident Company A Receiving License Fees from India

• Facts: Company A, based in Dubai, grants a license to Company B in India to sell its products in the Indian market. Company B pays a license fee of ?1 crore to Company A, deducting TDS under Section 195.
• Tax Liability: India: Under the DTAA, license fees qualify as royalties, attracting a TDS rate of 10% (if there was no DTAA, Rate would have been 20%). Company B deducts ?10 lakh as TDS before remitting the remaining ?90 lakh to Company A.
• Taxation in UAE: Company A includes the ?1 crore as income in its taxable base under UAE Corporate Tax (assuming it is not exempt). Computation as follows;

Income Received in UAE:

o?? Gross income: ?1,00,00,000 (assuming this is the only income during the year for A)

o?? In AED: ?1,00,00,000 ÷ 22 = AED 4,54,545 (Assuming 1 AED = ?22).

UAE Corporate Tax (Before Foreign Tax Credit):

o?? Exemption for first AED 375,000.

o?? Taxable amount: AED 4,54,545 - AED 375,000 = AED 79,545.

o?? Tax @ 9%: AED 79,545 × 9% = AED 7,159 ≈ ?1,57,498.

Foreign Tax Credit:

o?? TDS Paid in India: ?10,00,000 ≈ AED 45,455

o?? Eligible Foreign Tax Credit: Lesser of the tax paid in India (AED 45,455) or the UAE tax liability (AED 7,159).

o?? Final UAE Tax Liability: AED 0 after utilizing the Foreign Tax Credit.

Scenario 2: Indian Resident Company X Earning Interest Income from UAE

• Facts: Company X, based in India, lends ?10 crore to Company Y in UAE, earning ?50 lakh as annual interest. UAE does not impose withholding tax on interest payments.
• Tax Liability:

India: The entire ?50 lakh is taxable in India as interest income, attracting tax at the applicable corporate rate (e.g., 30%). Company X pays ?15 lakh as income tax in India.

UAE: No tax is levied on the interest payment by Company Y as per UAE regulations. (There is disallowance of interest paid more than specified limit during filing of tax declaration in UAE)

Scenario 3: Capital Gains from Sale of Shares

• Facts: A UAE resident individual sells shares of an Indian company, earning a capital gain of ?20 lakh.
• Tax Liability:

In India: Under the DTAA, taxation depends on the nature of shares sold:

• Immovable property-linked shares: Taxed in India.
• Other shares: Taxed only in UAE. Assuming shares are linked to immovable property, the gain is taxed in India at 10%. TDS of ?2 lakh is deducted.

UAE: The ?20 lakh is exempt from UAE tax unless otherwise included in specific UAE tax provisions.

How Does the DTAA Benefit Taxpayers?

1. Reduced Tax Burden: Example: A UAE resident receiving ?1 crore as royalties from India saves significantly with a 10% TDS rate under the DTAA compared to India’s standard rate of 30%.
2. Enhanced Clarity: Taxpayers know exactly where and how their income will be taxed, reducing uncertainty in cross-border dealings.
3. Investment Encouragement: Businesses and individuals are motivated to invest in foreign markets, knowing that double taxation won’t erode their profits.

Challenges in Implementing the DTAA

While the DTAA simplifies taxation, certain challenges persist:

• Complex Documentation: Taxpayers must maintain evidence, such as TDS certificates and foreign tax receipts.
• Interpretation Disputes: Ambiguities in DTAA provisions can lead to disagreements.
• Anti-Abuse Provisions: The DTAA includes safeguards to prevent misuse, but compliance can be stringent.

Key Points to Consider:

• No PE in India: If a Company does not have a Permanent Establishment (PE) in India, its income is taxable in India on a gross basis via TDS as per Section 195. The TDS at 10% (as per India-UAE DTAA) satisfies its Indian tax liability.
• Filing Requirement under Indian Law: Section 139 of the Indian Income Tax Act mandates filing an ITR if a non-resident has income chargeable to tax in India.
• However, if the TDS fully covers the tax liability, the non-resident is generally not required to file a return.

• As per Section 115A(5) of the Income Tax Act, a non-resident is exempted from filing an ITR in India if: The only income in India is royalty/fees for technical services (covered under Section 115A) and TDS has been properly deducted at the applicable rate (as per DTAA).
• Documentation for Foreign Tax Credit: Companies must maintain the TDS/WHT certificates, proof of income, ITRs and necessary documentation for tax compliance.
• The rates given under the Finance Act are to be increased by the applicable surcharge and education cess of 4%.
• The DTAA rates are generally exclusive of surcharge and cess, and these additional components are not levied unless the domestic law specifically overrides the DTAA.

?Conclusion

The UAE-India DTAA stands as a testament to the growing economic partnership between the two nations. By preventing double taxation and clarifying tax obligations, it fosters trade, investment, and cooperation. However, understanding its nuances is critical for businesses and individuals engaged in cross-border transactions.

Whether you're a UAE-based company doing business in India or an Indian entity expanding into the UAE, leveraging the DTAA to its fullest requires diligent tax planning and compliance.

?Note: The scenarios discussed are for illustrative purposes only.