Introduction
It can be confusing being an NRI living and earning in the UAE, but still have to worry about paying taxes on your Indian assets. Are you liable to pay taxes on your generated income in both countries? Well, this phenomenon is known as “Double Taxation”, and it can be quite burdensome to pay taxes on the same income more than once for the same reason. Moreover, it can take a pretty chunk out of your overall income.
To prevent such a situation from occurring, the governments sign Double Taxation Avoidance Agreements (DTAAs) with multiple countries.
These treaties are signed by governments to reduce tax burdens. Having signed over a hundred different types of DTAAs, the UAE plans to improve opportunities for investment, exportation and operations in international markets for its citizens. But what exactly are these agreements?
What is DTAA and Why Does It Matter for NRIs?
Double taxation occurs when similar taxes are imposed on the same taxpayer in two different countries on the same tax base. Double taxation on income generated across multiple countries can hamper international trade and cooperation.
DTAAs are essentially agreements signed by allied countries to eliminate this double taxation for their citizens. This can have positive benefits, such as promoting a stable and predictable business environment, diversifying national income sources, and boosting developmental goals.
Why NRIs and UAE-Based Businesses Rely on DTAA
For NRIs and businesses engaged in cross-border business activities, DTAAs are essential in avoiding being taxed in both the UAE and India on the same income. It also brings about additional benefits, such as lower withholding tax rates on various types of income, capital gains relief, and even tax exemptions.
Moreover, DTAA encourages businesses to engage in international sales as these agreements mandate a permanent establishment (PE) to be set up in the country to be considered for taxation.
Explore how NRI Taxation in India affects your income, investments, and remittances.
Importance of the India-UAE DTAA for NRIs
The India-UAE DTAA was signed in 1993. It is a fundamental agreement that later laid the foundation for the UAE’s extensive network of DTAAs. Initially made to income generated from air transport between the two countries, it has since undergone multiple amendments. This reflects the evolving economic relations between the two historic nations (Ministry of Finance, 2024).
India is also the UAE’s third-largest trading partner. Moreover, more than 3.5 Million Indian expatriates live & earn in the UAE. This further goes on to show the importance of this document being crucial to the economic benefits enjoyed by the citizens of both nations.
Types of Income Covered Under India–UAE DTAA
The DTAA defines the scope of taxation for different types of income generated by individuals and entities who generate income from India and the UAE. The taxation rules for key income categories under this agreement are summarised below:
| Type of Income | Income Earned In | Income Taxed In | Exceptions |
|---|---|---|---|
| Interest | Residing country of the recipient | Home country | Taxed in the source country, capped at 5% on bank loans and 12.5% on other cases |
| Dividends | Residing country of the recipient | Home country | Capped at 20% tax in the country where the payer is located (may be lower) |
| Royalties | Residing country of the recipient | Home country | Capped at 20% in the country where the royalty is generated (may be lower) |
| Fee for Technical Services | Residing country of the recipient | Home country | Capped at 20% to be paid in the source country. |
Capital Gains Tax for NRIs Under India – UAE DTAA
If the Individual is considered an NRI under section 6 of the Income Tax Act, they can strategically utilise the DTAA agreement to mitigate capital gain taxes in India. To do this, three prerequisites must be met:
1. The individual must be classified as a Non-Resident.
2. They must procure a tax residency certificate from the relevant foreign tax authorities.
3. Filing Form 10F on the income tax portal is necessary to avail of the DTAA benefits.
For those meeting the above prerequisites, as per the provisions of article 13(5) of the DTAA, transfers involving mutual funds and bonds in India are not considered subject to taxation
What is a Tax Residency Certificate (TRC)?
A Tax Residency Certificate is a legal document made to confirm an individual’s or business entity’s legal tax status. This document is essential for claiming tax benefits under DTAA as it confirms the legal residency status of the claimant and determines the tax benefits available to the certificate holder.
How NRIs Can Apply for a TRC in the UAE
To obtain a Tax Residency Certificate (TRC) in the UAE, you must make an application online via the Federal Tax Authority (FTA) portal.
The eligibility criteria to obtain a TRC for Individuals are:
The applicant must be a resident of the UAE for at least 183 days in a 12-month period.
The applicant must possess a salary certificate or showcase proof of source of income.
The applicant must have proof of residence in the UAE (which can include an Emirates ID and Residence Visa OR a passport copy and entry and exit report.
The required documents to obtain a TRC for Individuals are:
Passport
Valid Residence Permit
Emirates ID (provided that the name on the ID is matching the name in the application)
Proof of permanent place of residence
Proof of source of income - Salary certificate (if self-employed, provide a trade license and share certificate. Otherwise, if you rely on income generated from owned properties, provide a lease agreement if the property is leased. Or, if retired, provide a letter stating to the FTA that you are relying on your savings, funds, bonds, etc.
A bank statement issued by a local bank covering six months within the financial year of the initial application request
The eligibility criteria to obtain a TRC for businesses are:
The applicant must have been established for a period of at least one year.
The applicant must have their financial accounts audited or prepared by an accredited audit firm and certified and stamped by the same.
The submitted audit report must concern the past year in which the tax certificate was requested.
The required documents to obtain a TRC Document for Companies are:
Trade license
Memorandum of association
Proof of authorisation
Copy of financial audit report
Certified lease agreement/ownership proof for the office
A bank statement issued by a local bank covering six months within the financial year of the initial application request.
DTAA Checklist: Key Things NRIs Should Know
To fully capitalise on the tax benefits provided by the DTAA agreements, NRIs must keep in mind the following key factors:
TRC Requirement: To claim DTAA Benefits, NRIs must obtain a Tax Residency Certificate from the UAE Federal Tax Authority, as this certificate serves as proof of UAE residency for tax purposes.
Types of Income covered under DTAA: The different types of income coming under the DTAA provision are Interest Income, Dividend Income, Royalty & Technical Fees, and Capital Gains Tax.
Residential Status under Indian Tax Law: The residential status of NRIs must be assessed according to section 6 of the Indian Income Tax Act. If the claimant has stayed in India for or more than 182 days in a given financial year, they are classified as Indian residents, and so their global income is taxed in India.
Tax Credit & Filing Requirements: NRIs can claim foreign tax credit in the UAE for taxes paid on Indian Income. And if an NRI's taxable income in India exceeds 2.5 Lakh rupees, the NRI must file an ITR (Income Tax Return) in India.
Case Studies: How NRIs Benefit from the India - UAE DTAA
Interestingly, the tax benefits offered by treaties like DTAA can lead to some unique situations, such as double non-taxation. Consider the case of K.E Faizal, a UAE NRI, whose investments in equity-oriented mutual funds amounted to capital gains of 1.34 crore rupees. In this case, it was determined that equity-oriented mutual funds do not fall under the category of “shares”; therefore, the short-term capital gains derived from transferring such funds are exempt from taxation under Article 13(5) of the DTAA agreement. Such situations provide a lucrative opportunity for investors to optimise their tax obligations by strategically investing in equity-oriented mutual funds
Conclusion
In conclusion, DTAA agreements provide NRIs with tax advantages. Understanding its implications on various types of income is essential for NRIs engaged in financial activities spanning multiple borders. By leveraging provisions within the DTAA, NRIs can easily navigate dynamic global regulatory landscapes. This will lead them to save on their taxation substantially.
