Double Taxation Agreements in UAE: Core Principles and Key Provisions

UAE’s tax system has been one of the biggest reasons for the growth of UAE's business economy, and it ranks 16th in the World Bank’s “Doing Business” rankings. It charges almost negligible taxes, leaving people free of worries about taxes. To further increase its appeal as an investment hub, the United Arab Emirates has signed several Double Taxation Agreements (DTAs) with countries across the globe.

In this blog, we will cover the following about the double taxation avoidance agreement with UAE:

• What is a double taxation agreement.
• How does it work in the UAE?
• Core principles around DTAs
• How does it help us?

What are Double Taxation Agreements (DTAs)?

Double taxation is when you are charged two times on the same income. It is usually a common scenario for foreign companies as they have to pay their domestic taxes as well as foreign taxes. Many countries have a double taxation avoidance agreement to make the environment smoother.

Double Taxation Agreements are formal treaties between two countries to solve the double taxation issue. It is signed to promote international trade by providing a clear framework in which tax burdens would be either removed or reduced.

Core Principles of DTAs

Double Taxation Agreements (DTAs) are based on certain growth and tax principles like:

Double Taxation

The primary aim is to avoid taxing the same income in both countries. This is achieved by:  

• Exemptions: No tax on certain kinds of income  
• Tax Credits: Taxpayers have a reduced liability as in one country with taxes paid in another. 

Allocating Rights for Taxation  

DTA has provisions specifying to which country the primary right to tax income has been allocated for certain kinds of income, like the:

• Employment income
• Dividend
• Interest.  
• Business profits based on the location or source of income  

Non-discrimination

DTAs make sure that foreign residents are not to be subjected to less favourable tax treatments than local residents in the same situations. It makes for justice and equality in tax treatment.  

Encouragement of International Trade 

By bringing in a stable and predictable tax regime, the tax authorities are able to push their local investors to go beyond national boundaries. Fewer tax barriers have helped the countries to bring in big flows of trade and investment historically. DTAs are one of the best ways to achieve this.

Transparency and Exchange of Information

DTA can work properly only if there is utmost transparency between the countries. 

Advantages of DTAs for Businesses in the UAE

Double Taxation Agreements have a lot of advantages like:

• Companies do not have to pay double taxes. This lowers their overall tax burden and boosts profitability.
• Reductions or exemptions on withholding taxes on income sources like dividends, interest, and royalties
• DTAs clearly outline tax responsibilities to avoid any possible confusion.
• Businesses in the UAE can get an edge in global markets as this improves profitability.
• DTAs guarantee that UAE-based businesses are not subjected to unfair taxation in the partner country
• DTAs establish a framework for resolving tax disputes through Mutual Agreement Procedures (MAPs), minimizing the risk of extended legal conflicts.

Countries UAE have Signed DTAs With

The UAE has signed over 140 Double Taxation Agreements with countries worldwide to avoid taxing the same income twice. These agreements are governed by UAE federal laws and align with international tax standards set by bodies like the OECD.

The Ministry of Finance is the primary authority overseeing DTAs in the UAE. 

Key Provisions of UAE DTAs

The UAE’s Double Taxation Agreements include provisions for:

1. Residency: Residents are typically taxed on their global income in their home country, with relief provided for taxes paid in the other country. For cases where residency could apply to both countries, rules like the location of a permanent home, vital interests, or nationality are used to determine a single residency.
2. Permanent Establishment (PE): Only profits linked to the registered PE can be taxed by the host country. For example, under the UAE-UK DTA, if a UAE company operates in the UK through a PE, only the profits from that PE are taxable in the UK.
3. Income from Immovable Property: Income from properties like real estate or natural resources is taxed in the country where the property is located. For instance, if a UAE resident earns rental income from UK property, the UK can tax it.
4. Business Profits: Profits from cross-border business activities are taxed in the country of residence unless linked to a permanent establishment abroad.

Conclusion

The UAE’s strong network of Double Taxation Agreements has played one of the biggest roles in helping local Emirati businesses grow into MNCs. With over 140 DTAs, UAE has ensured an ease in business that has allowed local businesses to expand globally and attracted international companies to invest in the UAE.