Navigate DTAs to Boost UAE Business Profitability
What is Double taxation? It is described as when the same is taxed double by two different jurisdictions is referred to as double taxation. This can directly lead to a financial burden for the businesses, especially in cross-border transactions involving international trade, investment or employment. For example: A UAE resident earns a rental income from a property in India, India taxes the rental income due to source income and UAE may also tax based on worldwide income if applicable. To avoid double taxation and reduce tax burdens, treaties have been signed by two or more countries which are known as Double Taxation Agreements (DTAs).
In this blog, we will learn about what are DTAs, how they work and how they benefit UAE businesses.
What Are Double Taxation Agreements (DTAs)?
Double Taxation Agreements (DTAs) are treaties between two or more countries designed to avoid the same income or profit from being double taxed. DTA ensures that income generated in one country may not be taxed when repatriated to the resident’s home country. These agreements are particularly beneficial for individuals and businesses who are engaged in cross-border transactions or operations.
Key Features of DTAs:
- Tax Residency Rules: A taxpayer is mostly taxed in the residence country but may also be taxed in the source country where income is generated.
- Allocation of Taxing Rights: Business profits will be taxable in the residence country unless the business has a Permanent Establishment (PE) in the source country. Dividends, interests and royalties are provided with reduced withholding tax rates. Employment income will be taxable where the services are performed.
- Elimination of Double Taxation: There are two methods which are specified in DTAs- Exemption Method and Credit Method to avoid double taxation.
- Exchange of Information: DTAs encourage transparency and cooperation between tax authorities which allows the exchange of taxpayer’s information.
- Encouragement of Cross-border Trade and Investment: DTAs promote UAE businesses to expand in international markets by reducing double taxation, and encouraging economic growth.
How Do DTAs Benefit UAE Businesses?
UAE has signed more than 140 tax treaties with different countries which makes UAE an attractive centre for international trade and investments.
1. Double Taxation Avoidance:
DTAs ensure that business income from abroad will not be taxed double- firstly in the source country where the income is generated and then in the UAE. In this way, the overall tax burden is reduced on UAE businesses that deal with cross-border transactions.
2. Lowered Withholding Tax Rates:
Lower withholding tax rates are provided by DTAs on dividends, interests, royalties and other cross-border payments, which directly reduce the overall tax burdens.
3. Tax Residency certificate (TRC):
DTAs help UAE businesses get benefits by obtaining the TRC and reducing their tax liabilities.
4. Assistance in International Trade and Investment:
UAE businesses are encouraged to grow in foreign markets and influence foreign investors to UAE by reducing the risk of double taxation.
5. Exemption from Certain Taxes:
Specific incomes like capital gains or profits from international shipping and air transport are fully exempted from the taxes.
6. Encouragement for SMEs and Start-ups:
DTAs assist small and medium enterprises (SMEs) and start-ups to enter foreign markets by lowering the tax barriers.
Types of Income Covered by DTAs
DTAs define the types of income that are subject to tax in either country or both countries. Below are the common categories of income covered under DTAs—
- Business Profits: The profits of a business are taxable only in the residence country unless the business operates through a permanent establishment (PE) in the other country.
- Dividends, Interests and Royalties: These are taxable in the country where the recipient resides and the source country may impose a reduced withholding tax rate, as specified in the treaty.
- Capital Gains: Gains from the sale of immovable property are taxable in the country where the property is located while the gains from the sale of shares and securities are taxable in the source country or exempted based on the treaty.
- Employment income: Salaries, wages and other employment income are generally taxable in the country where work is performed.
- Other income: Other income includes pensions, annuities, Government salaries and income from independent personal services, taxing rights are defined under DTAs.
Steps to Leverage DTAs for UAE Businesses
1. Identifying applicable DTA
- Confirm the treaties existing between UAE and the other country where the income is originated.
- Cross-check the particular provisions of the DTA relevant to your business.
2. Treaty Provisions Acknowledgement
- In the case of specific incomes such as dividends and royalties, analyze the DTA provisions.
- Withholding tax rates and exemptions need to be verified
3. Obtain a Tax Residency Certificate
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Documents such as audited financial statements, trade licences, lease agreements and passport copies of shareholders or directors are required at the time of applying for TRC.
- Apply Tax Residency Certificate (TRC) from the UAE Ministry of Finance to claim treaty benefits.
4. Claim DTA Benefits
- File tax returns and claim treaty benefits in the foreign jurisdiction by:
- Availing for reduced withholding tax rates directly at the source.
- Requesting refunds for any overpaid taxes.
- To avoid double taxation, report foreign-sourced income and claim tax credits in filing corporate tax return.
5. Maintain Documentation for Compliance
- Financial statements, proof of residency (TRC), contracts related to cross-border transactions and tax fillings, these are to be maintained in the records.
- It is advisable to stay compliant with both the countries- UAE and foreign tax regulations.
Challenges while using DTAs
- It might be difficult to interpret the typical legal language and apply the treaty provisions.
- If we delay applying Tax Residency Certificate (TRC), it can also cause a delay in access to treaty benefits.
- Mistakes in applying reduced withholding tax rates may result in excess taxes paid.
- Businesses may pay excess tax if they make errors in applying reduced withholding tax rates.
- Maintaining proper documentation to support DTA claims can be stressful and require rigorous compliance.
- Generally, the procedure is extensive and complicated for reclaiming overpaid taxes in the source country.
How Flying Colour Tax Consultant LLC Can Help
We, at Flying Colour Tax Consultant LLC, specialise in guiding UAE businesses leveraging DTA effectively. We can support you in the following ways:
- DTA Analysis: Review applicable treaties and provisions relevant to your business activities.
- TRC Assistance: Assisting with obtaining a Tax Residency Certificate (TRC) from the UAE Ministry of Finance.
- Cross-Border Tax Planning: Structuring your international operations to minimize tax liabilities.
- Compliance and Documentation: Ensuring proper documentation including contracts, invoices and proof of tax payments.
Flying Colour Tax Consultant LLC has decades of experience in UAE taxation and international tax treaties. We handle it all, from planning to execution and compliance.
To learn more about Navigating Double Taxation Agreements (DTAs) for UAE Businesses, book a free consultation with one of the Flyingcolour team advisors.
Disclaimer: The information provided in this blog is based on our understanding of current tax laws and regulations. It is intended for general informational purposes only and does not constitute professional tax advice, consultation, or representation. The author and publisher are not responsible for any errors or omissions, or for any actions taken based on the information contained in this blog.