INTRODUCTION

For nearly three decades, India and the UAE watched their economic and investment relationship flourish, characterized by notable cross-border trade, capital flows, and people-to-people linkages. At the nexus of the economic and investment relationship is the Double Taxation Avoidance Agreement (DTAA) between the two jurisdictions, which was first executed in 1993. The purpose of the DTAA is to ensure that income will not be taxed twice – not only to create a conducive environment for investments and exchange, but also to protect the rights of the taxing jurisdiction. Most recently, the DTAA has undergone amendments to comply with the international standards of the OECD’s Base Erosion and Profit Shifting (BEPS) and India’s tax reforms for domestic purposes. This article seeks to critically analyze the development of, modifications to, and implications from a legal, economic and strategic perspective of the India–UAE DTAA.

EVOLUTION OF THE INDIA–UAE DTAA

The development of the 1993 DTAA focused on preventing double taxation, and also preventing fiscal evasion for taxes on income and capital. The 1993 DTAA was able to clarify the taxing rights of both countries over different streams of income such as dividends, interest, royalties, and capital gains. However, as time progressed there was misapplication of the treaty by shell companies and conduit entities incorporated in the UAE with no economic substance and purely to take advantage of the treaty provisions.

As such, with the awareness of those risks, India and the UAE amended the agreement from time to time through protocols, starting in 2007, then 2012, and lastly through amendments going from 2016 to 2019 which implemented some of the most consequential amendments to the 1993 DTAA treaty. These ultimately seek to address the abuse in treaty use, comply with international standards, and improve transparency. These changes altar the treaty-based tax arbitrage towards a substance-over-form concept.

IMPORTANT RECENT AMENDMENTS

1. Capital Gains Taxation: Source-Based Taxation Changes

One of the most significant amendments was addressing India’s ability to tax capital gains arising from the sale of shares in Indian companies, made by entities resident in the UAE. Previously, capital gains were only taxable in the UAE. Apart from UAE’s favourable tax regime effectively resulted in no tax liability. The change to source-based taxation is consistent with India’s new DTAAs with Mauritius and Singapore, and more importantly, is in line with India’s overarching policy to retain taxation authority over its own domestic capital market gains.

Impact: Now, companies and investors based in UAE selling Indian shares will have a taxation obligation in the resident state. The tax liability for private equity and portfolio investors that used a UAE holding structure to generate tax-neutral exits has been punitively impacted.

1. Residency and Substance Requirements

A second important change is the meaning of “residency” for both individuals and entities. For the purposes of treaty benefits:

• Individuals must physically be in the UAE for at least 183 days in a tax year;
• Entities must be incorporated in the UAE and be managed and controlled in the UAE.

The concept of “substance” in this respect is meaning that is not enough to simply register your company in the UAE, without conducting actual business operations and management in the UAE.

Impact: Shell companies that are formed to route investments into India via the UAE, which are not conducting any meaningful business operations there, may now be denied treaty benefits. Presently tax authorities can assess such entities by looking at the location of board meetings, strategic decision making, and operational presence.

1. Withholding Tax Limitations

The newly revised DTAA assigns the following WHT limits:

• Dividends: 10% limit
• Interest: 5% limit for banks and other financial institutions; 12.5% limit for all other lenders
• Royalties and Fees for Technical Services: 10% limit

These rates are uniform, providing some predictability for taxpayers and also addressed by preserving source country rights.

Importantly, there is a provision in the treaty that prevents India from unilaterally increasing these tax rates on UAE investors.  Currently there is no dividend distribution tax in India, but it is reassuring to UAE investors that if India decided to re-introduce this tax, it cannot alter the terms of the DTAA both in the future and retrospectively.

1. Limitation of Benefits (LOB) Clause

The key anti-abuse measure contained in the UAE-India tax treaty is the Limitation of Benefits (LOB) clause which prevents mischief from entities forming for the sole purpose of accessing treaty benefits. The LOB requires that the resident entity must be viewed as:

• A listed company or company with substantive business in the UAE; and
• Not a conduit/shell company set up merely for tax mitigation.

The clause satisfies India’s commitments under the Multilateral Instrument (MLI) and the OECD’s BEPS Action 6 recommendations.

1. Non-Discrimination & PE Taxation

Under the revised DTAA, India can tax UAE entities’ Permanent Establishments (PEs) in India at higher rates than Indian domestic companies without violating the non-discrimination provision. This provision indicates India’s intention to claim greater taxing rights on foreign business income.

The definition of PE has been sharpened to ensure taxes are appropriate on companies that have a strong basis of presence or dependent agents in India.

1. Exchange of Information and Mutual Agreement Procedure (MAP)

The treaty agreed in 2012 included an expanded Exchange of Information (EOI) article, which permitted Indian and UAE tax authorities to:

• Request and exchange information that is “foreseeably relevant” for taxation and tax administrative purposes.
• Permit automatic and spontaneous exchanges, in line with OECD practice.

The MAP framework under the DTAA was improved so that AOA members are able to resolve cross-boarder tax disputes much quicker, including transfer pricing and residency type matters.

EFFECTS ON STAKEHOLDERS

• Effect on individual based in UAE (Including NRIs)

Most Indian expatriates who are based in the UAE also have investments in Indian capital markets or are earning income from sourcing in India. Under the new DTAA, the following will apply:

• Capital gains received on Indian shares would now be chargeable in India.
• Withholding tax rate on dividend income is set at 10%
• The individual must have adequate documentation to verify tax residency in the UAE (e.g. Tax Residency Certificate, tenancy contracts, utility bills).

NRIs coming to India but spending less than 183 days in India, could lose any benefits accruing from the treaty and submit to Indian taxation on their global income.

• Effect on Corporates and Investment Vehicles

Corporates considering investments via the UAE are now going to have to illustrate real substance – including local staff and infrastructure, and governance. If there is only legal incorporation and no commercial activity there is risk of denial of DTAA benefits using the LOB clause.

Also, investors should keep in mind India’s capital gains tax calculation when exiting its investments in India. Structures using private equity funds or SPV’s in the UAE where the whole operation has to reflect domestic business consultant, in addition to consider treaty limitations.

• Cross-Border Trade / PE Exposure

When UAE entities are engaged in service contracts or distributorships in India, they should evaluate whether they have a PE in India. If yes, the amounts attributable to the income from India will be taxed at Indian corporate tax rates, which are typically higher than for Indian companies, as they have to apply the new treaty.

To mitigate unintended PE exposure through structured arrangements, regulated contracts, and limiting the authority of agents and signatories will be essential.

• Advisers Role / Compliance Professionals

Tax advisers will now need to take a more active role and focus on the following:

• Substance documentation
• Establish residency verification processes
• Advance pricing agreements (APAs) and/or rulings in relation to PE and characterization of income
• Help in MAP applications when there is dispute

Compliance will also need to account for automatic exchange globally.

COMPARATIVE CONTEXT AND GLOBAL ALIGNMENT

The recent changes in the India–UAE DTTAA reflect a larger trend found in India’s treaties with Mauritius, Singapore, Cyprus, UK, and Netherlands with respect to source-based taxation, LOB clauses and features of PPT (Principal Purpose Test).

If anything, India is now on a path towards a blanket approach to BEPS recommendations in completing its treaty network and addressing its history of global tax arbitrage.

Compared to Mauritius or Singapore the India-UAE DTTAA is less stringent on MAP procedures but harder on demonstrating business substance as UAE did not have until recently a domestic corporate tax.

FORWARD OUTLOOK

With the introduction of a federal corporate tax regime in the UAE (effective June 2023), the India-UAE DTTAA may see further alignments to global standards. This will add additional requirements for UAE entities to:

• File returns
• Maintain books
• Demonstrate tax payments to be considered “residents”

Also, digital services tax, equalization levy provisions, and the possible adoption of Pillar Two minimum tax rules, will result in new treaty provisions or guidelines for interpretation.

CONCLUSION

The India-UAE DTAA has now matured into a solid tax treaty that mirrors both global certainty and domestic goals. The transition from a pro-investor world of primary focus to a regime where transparency, substance, and taxing rights populate the discussions indicates a substantive rebalancing of cross-border tax regimes. For individuals, corporates, and institutional investors, the lesson is simple, substance beats structure.

While the India-UAE DTAA remains a substantial contributor to value-addition, from lower withholding rates to MAP, the accountability for accessing that value has increased with respect to the need to document and explain investments to prospective regulators. Business enterprises and individuals will need to act with awareness of their obligations to assure compliance, find rationale to structure investments supporting their commercial objectives, and if there exists an uncertainty, support from the right tax and legal advisors.

As India looks to amplify its commercial reach, and the UAE continues to grow its footprint as a regional financial nexus, the India-UAE DTAA will be an important factor when business and individuals demand – but it will be an important factor only if compliance is tempered with the evolving changes to the global tax governance mechanisms.