India – UAE DTAA

Background

Double Taxation Avoidance Agreement (DTAA) is an agreement between two countries that aims to eliminate the double taxation of income earned by individuals or entities in both countries. The DTAA provides a mechanism for foreign investors to avoid being taxed twice on the same income. It allows foreign investors to claim tax relief in their home country for the tax paid in India. The DTAA also helps to prevent tax evasion and promote transparency in tax matters.

The DTAA came into force on the 22 September 1993. It has been revised several times since then.

The DTAA ensures that taxpayers who are residents of one country but earn income from the other country are not taxed twice on the same income. The agreement covers taxes on income and wealth and applies to residents of both countries.

Scope of India UAE DTAA

Foreign investors in India can be categorised into different groups based on their investment objectives, the nature of their investment, and the regulatory requirements they need to comply with. Some of the categories of foreign investors in India are:

• Residence-based Taxation: The DTAA provides clarity on the tax treatment of residents and non-residents in both countries. It ensures that individuals and businesses are not taxed twice on the same income.
• Business Profits: The agreement provides guidelines for the taxation of business profits earned by companies in either country. In case an enterprise has a Permanent Establishment in both India and UAE, the business profits will be taxed in both countries. However, the DTAA provides relief from double taxation by allowing the taxpayer to claim a credit for the taxes paid in one country against the taxes payable in the other country.
• Dividends, Interest and Royalties: The DTAA provides rules for the taxation of dividends, interest, and royalties received by residents of either country. It ensures that these payments are taxed at a reasonable rate and not subject to double taxation.
• Capital Gains: The agreement provides for the taxation of capital gains arising from the sale of assets, such as shares, real estate, and other investments. It ensures that residents are taxed fairly and not subject to double taxation.
• Exchange of Information: The agreement provides for the exchange of information between the tax authorities of both countries to prevent tax evasion and ensure compliance with tax laws.

Permanent Establishment

As per Article-5 of India-UAE DTAA, a Permanent Establishment (PE) means a fixed place of business through which an enterprise of one country carries on its business activities in the other country. It includes the following:
 
i)    A place of management;

ii)    A branch;

iii)    An office;

iv)    A factory;

v)    A workshop;

vi)    A mine, an oil or gas well, a quarry or any other place of extraction of natural Resources;

vii)    A farm or plantation;

viii)    [Construction PE] A building site or construction or assembly project or supervisory activities in connection therewith, but only where such site, project or activity continues for a period of more than 9 months;

ix)    [Service PE] The furnishing of services including consultancy services by an enterprise of one country through employees or other personnel in the other country, provided that such activities continue for the same project or connected project for a period or periods aggregating more than 9 months within any twelve-month period;

x)    An enterprise of UAE shall not be deemed to have a permanent establishment in India merely because it carries on business in India through a broker, general commission agent or any other agent of an independent status, provided that such persons are acting in the ordinary course of their business. However, when the activities of such an agent are devoted wholly or almost wholly on behalf of that enterprise itself or on behalf of that enterprise, he will not be considered an agent of an independent status within the meaning of this paragraph;

xi)    Person other than an agent of an independent status to whom paragraph (x) above applies, acting in India on behalf of an enterprise of UAE as shall be deemed to be a PE of that enterprise in India if (& vice versa) He has and habitually exercises in India an authority to conclude contracts on behalf of the enterprise, unless his activities are limited to the purchase of goods or merchandise for the enterprise;

The mere presence of a company's goods or merchandise in the other country does not, by itself, constitute a Permanent Establishment.

The DTAA also considers certain activities as not constituting a PE, such as:

• The use of facilities solely for the purpose of storage, display or delivery of goods or merchandise belonging to the enterprise;
• The maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage, display, or delivery;
• The maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of processing by another enterprise;
• The maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise, or of collecting information, for the enterprise;
• The maintenance of a fixed place of business solely for the purpose of carrying on, for the enterprise, any other activity of a preparatory or auxiliary character.

Overall, the definition of Permanent Establishment under the India-UAE DTAA plays a crucial role in determining the tax liability of foreign enterprises doing business in India or UAE.

A summary of structure of entities covered in Permanent Establishment is as follows:

Particulars	Indian Definition	UAE Definition	India-UAE DTAA Definition
Brief meaning	- Any fixed place of business serving the activities of an enterprise. - Any entity engaged in any activity, relating to the production, storage, supply, or distribution. - Wider definition than Tax treaty.	- Any fixed place of business serving the activities of an enterprise. - entity perform clearly differentiated activities and the management of these is carried out in UAE. - Wider definition than Tax treaty.	- Any fixed place of business through which the business of an enterprise is wholly or partly carried on. - Narrower definition than respective taxation.
Examples
Place of Management	Yes	Yes	Yes
Branch or Office	Yes	Yes	Yes
Factory or Workshop	Yes	Yes	Yes
Fixed place solely for the purpose of purchasing goods or merchandise	Yes	Yes	No
Fixed place solely for the purpose of maintenance of a stock of goods	Yes	Yes	No
Building site or Construction	Yes     (if Duration > 6 Months)	Yes     (if Duration > 6 Months)	Yes     (if Duration > 9 Months)

Withholding Tax as per Indian Tax laws

A summary of withholding tax rates is as follows:

Nature of income	Indian Income Tax Act	India-UAE DTAA *
Dividend	20%	10%
Interest	20%	5%/12.50%
Royalty	20%	10%
Fee for Technical Services	20%	Not covered under DTAA

* The rates as per income tax Act shall be increased by applicable surcharge (2%/5% - for companies and 10%/15%/25%/37% - for individuals) and cess (4%).

(1)    Taxability of dividend is on gross basis and the amount of tax is deducted by the source country.

(2)    Interest is also taxable on gross basis and the tax is withheld by the source country.

Benefits and Rates of Tax as per DTAA

(1)    Dividend Income: “Dividends” as used in Article 10 means — income from shares of other rights, not being debt-claims, participating in profits, as well as income from other corporate rights which is subjected to the same taxation treatment as income from shares by the laws of the country of which the company making the distribution is a resident. Such dividend earned in India by a resident of UAE are taxable in India at a rate of 10% of the gross amount of the dividends.

(2)    Interest: as per Article-11, the term “Interest” in this Article means – income from debt-claims of every kind, whether secured by mortgage and whether carrying a right to participate in the debtor's profits, and in particular, income from Government securities and income from bonds or debentures including premiums and prizes attaching to such securities, bonds, or debentures. Penalty charges for late payment shall not be regarded as interest for the purpose of this Article. Such interests earned in India by a resident of UAE are taxable in India at the following rates:

(a)    a rate of 5% of the gross amount of the interest if such interest is paid on a loan granted by a bank carrying on a bona fide banking business or by a similar financial institution (including an insurance company); and

(b)    a rate of 12.50% of the gross amount of the interest in all other cases.

The interest income arising in India shall not be taxable in India (& vice versa) if:

(i)    The payer of the interest is the Government of India or UAE or a local authority thereof, or

(ii)    the Central Bank of India or UAE.

The above rates and taxability are not applicable if such incomes are earned through a permanent establishment situated therein. Then the permanent establishment shall be taxed as per rates of income tax act (i.e., 40%)

(3)    (A) Royalty: As per Article 12 term "royalties" means – payment of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work, including cinematography films, or films or tapes used for radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for the use of, or the right to use, industrial, commercial or scientific equipment, or for information concerning industrial, commercial or scientific experience but do not include royalties or other payments in respect of the operation of mines or quarries or exploitation of petroleum or other natural resources.

Such royalties earned in India by a resident of UAE are taxable at a rate of 10% of the gross amount of the royalties and however, if such services are provided through a permanent establishment, then the PE shall be taxed as per rates of income tax act (i.e., 40%).

(B) Fees for Technical Services: term "fees for technical services" is not specifically defined in the India-UAE Double Taxation Avoidance Agreement. However, the definition of permanent establishment includes consultancy services that are within the ambit of technical services as used in common parlance and are matter of legal interpretation.

(4)    Tax on Capital gains: Article – 13

(a)    Immovable Property: Gains derived by a resident of a UAE from the alienation of immovable property situated in the India may be taxed in India.

(b)    Movable Property: Gains from the alienation of movable property forming part of the business property of a permanent establishment which an enterprise of a UAE has in India or of movable property pertaining to a fixed base available to a resident of UAE in India or the purpose of performing independent personal services, including such gains from the alienation of such a permanent establishment, such gains shall be taxable in India.

(c)    Sale of Securities:

(i)    Gains from the alienation of shares of a company the property of which consists, directly or indirectly, principally of immovable property situated in a India will be taxed in India and vice versa.
(ii)    Gains from the alienation of shares other than those mentioned in paragraph (i) above in a company which is a resident of a UAE may be taxed in UAE and vice versa.

(d)     Gains from the alienation of any property other than that referred to in any of the above paragraphs (a), (b), (c) above shall be taxable only in the country of which the alienator is a resident.

(5)    Independent Personal Services: As per Article – 14, the term "professional services” includes independent scientific, literary, artistic, educational or teaching activities as well as the independent activities of physicians, surgeons, lawyers, engineers, architects, dentists and accountants. Income derived by a resident of UAE and who earns income from the performance of professional services or other independent activities of a similar character shall be taxable activities shall be taxable in India only if any of the following conditions is satisfied:

(a)    if they have a fixed base regularly available to them in India for the purpose of performing their activities; or

(b)    If their stay in India is for a period or periods amounting to or exceeding in the aggregate 183 days in the relevant fiscal year;

(c) If they have such a fixed base or remains in India for the aforesaid period or periods, the income may be taxed in India but only so much of it as is attributable to that fixed base or is derived in India during the aforesaid period or periods.

(6)    Dependent Personal Services: as per Article – 15, Salaries, wages and other similar remuneration derived by a resident of a UAE in respect of an employment shall be taxable in India only if the employment is exercised in India and such income shall be taxable at the rates in force. Such salary can be taxed in UAE only after fulfilment of the following conditions:

(a)    The recipient is present in India for a period or periods not exceeding in the aggregate 183 days in the fiscal year concerned, and

(b)    The remuneration is paid by, or on behalf of, an employer who is not a resident of India; and

(c)    The remuneration is not borne by a permanent establishment or a fixed base which the employer has in India.
However, remuneration in respect of an employment exercised aboard a ship or aircraft operated in international traffic by a resident of UAE may be taxed in UAE (and vice-versa).

Comparison with the other Tax treaties

Treaty Partner	Dividends	Interest	Royalties	Fee for Technical Services	Capital Gain on Shares held in India
Canada	15% / 25%	15%	10%/15%	10%/15%	Capital gain arises in both India and Canada
France	10%	10%	10%	10%	Capital gain arises in India if more than 10% Shares are held
Spain	15%	15%	10%/20%	20%	Capital gain arises in India if more than 10% Shares are held
Australia	15%	15%	10%/15%	Not Covered under DTAA	Capital gain arises in India
USA	15% / 25%	10%/15%	10%/15%	Not Covered under DTAA	Capital gain arises as per Indian/USA Income tax Act
Germany	10%	10%	10%	10%	Capital gain arises in India
Netherlands	10%	10%	10%	10%	Capital gain arises in India if more than 25% Shares are held
Italy	15% / 25%	15%	20%	20%	Capital gain arises in India
Japan	10%	10%	10%	10%	Capital gain arises in India
UAE	10%	5%/12.50%	10%	Not Covered under DTAA	Capital gain arises in India
United Kingdom	10% / 15%	10% / 15%	10% / 15%	10% / 15%	Capital gain arises as per Indian/UK Income tax Act

Conclusion

While addressing India-UAE DTAA, it is also important to consider two pertinent rulings:

• Hindustan Petroleum Corporation Ltd. vs. ADIT states that it is not necessary that unless a person is taxed in the UAE, they cannot claim the benefits of Indo-UAE tax treaty in India. What is truly relevant to see is whether the recipient was resident of the UAE.
• Swabird Exploration FZ, LLC, (AAR – New Delhi) notes that it was decided that permanent establishment is not constituted by mere presence of vessel of non-resident ship in the territorial water of India.