An Overview of the UAE’s Double Tax Avoidance Agreement (DTA) Treaty Network

The United Arab Emirates (UAE) has established a comprehensive network of Avoidance of Double Taxation Agreements (DTAs) to promote international trade and investment, provide tax certainty to investors, and prevent the double taxation of income.

By Arendse Huld

Through its extensive DTA network, the UAE seeks to encourage foreign investment and attract more international businesses and capital by reducing the tax burden on foreign investors. The agreements ensure that income is not taxed both in the UAE where the income is sourced and again in the company’s country of origin. At the same time, they help to prevent tax evasion and avoidance by including provisions for the exchange of tax information between signatory countries.

Both foreign companies operating in the UAE and companies that are resident in the country can benefit from the DTAs.

The UAE’s DTA network

The UAE currently has DTAs with 142 jurisdictions, covering the majority of its trade and business partners.

In addition to the above DTAs, the UAE is also a member of several multilateral and bilateral investment treaties that provide legal protections for investors and companies.

Key DTA provisions

The UAE’s DTAs, as is typical with such treaties, usually include provisions defining tax residency, allocating taxing rights between the two countries for various types of income such as dividends, interest, royalties, and capital gains, and detailing methods for relief from double taxation, either through exemption or tax credits. They also normally define what constitutes a permanent establishment to determine the taxability of business profits and include non-discrimination clauses to ensure fair treatment of nationals or residents. Finally, the treaty will usually contain protocols for the exchange of information to prevent tax evasion and ensure transparency.

For instance, the 2016 UK-UAE Double Taxation Convention (UAE-UK DTA) applies to persons who are residents of one or both the UK and the UAE. The taxes covered by the convention in the UAE are income tax and corporate tax, while in the UK they are income tax, corporation tax, and capital gains tax.

Residence

Residence determines the primary tax jurisdiction of an individual or entity. The country of residence typically has the primary right to tax the global income of its residents. The DTA outlines how the residence country can tax its residents and provides relief measures to avoid double taxation on income sourced from the other contracting state.

Meanwhile, DTAs include tie-breaker rules to resolve situations where an individual or entity might be considered a resident of both contracting states under their respective domestic laws. These rules establish criteria such as the location of a permanent home, center of vital interests, habitual abode, and nationality to determine a single residence for tax purposes.

In the UK-UAE DTA, companies are considered a “resident of a Contracting State” if:

• In the UAE: they are domiciled in the UAE or have their habitual abode or center of vital interest in the UAE, or is incorporated or otherwise recognized under the laws of the UAE, including any local government or local authority thereof; or
• In the UK: they are liable to tax by reason of residence, place of management, place of incorporation, or any other criterion of a similar nature. It does not include any person who is liable to tax in the UK with respect only to income from sources in the UK.

Permanent establishment

Permanent establishment determines the right of a country to tax the business profits of a foreign enterprise. A permanent establishment is defined as a fixed place of business through which the business of an enterprise is wholly or partly carried out.

In the UK-UAE DTA, “permanent establishment” is defined as a “fixed place of business through which the business of an enterprise is wholly or partly carried on”, and includes the following:

1. A place of management;
2. A branch;
3. An office;
4. A factory;
5. A workshop; and
6. A mine, an oil or gas well, a quarry, or any other place of exploration for or exploitation of natural resources.

Immovable property

Income from immovable property is treated with specific provisions to avoid double taxation and provide clarity on taxing rights. In the UK-UAE DTA, income derived by a resident of one contracting state from immovable property situated in the other contracting state may be taxed in that other state. This means if a UAE resident earns income from property located in the UK, the UK has the right to tax that income, and vice versa.

The term “immovable property” is defined according to the laws of the country where the property is situated. If a UAE resident company derives income from immovable property in the UK, the definition as per UK law would apply.

The provisions apply to all forms of income derived from immovable property. This includes income from the direct use, leasing, or any other form of utilization of such property. Thus, rental income, income from agricultural activities, and income from the exploitation of natural resources fall under this provision.

Business profits

Under a DTA, the profits of an enterprise from one contracting state are taxable only in that state unless the enterprise conducts business in the other contracting state through a permanent establishment situated there. For instance, in the case of the UK-UAE DTA, if a UAE company does have a permanent establishment in the UK, then the UK can tax the company’s business profits, but only the profits attributable to that permanent establishment.

Moreover, when an enterprise from the UAE carries on business in the UK through a permanent establishment, the profits attributable to that permanent establishment are calculated as if it were a distinct and separate company engaged in similar activities under similar conditions and dealing independently with the rest of the company. This means that the permanent establishment’s profits are determined based on what the permanent establishment would earn if it were a standalone entity.

Note that in the case of profits garnered from the operation of ships or aircraft in international traffic, exclusive taxing rights are normally granted to the country of residence of the company operating the ships or aircraft. This is the case in the UK-UAE DTA, which states that “profits of an enterprise of a Contracting State from the operation of ships or aircraft in international traffic shall be taxable only in that State.”

Managing double taxation without a DTA

When a company is from a country that does not have a DTA with the UAE, it can face more complex and potentially less favorable tax implications. Without a DTA, the company might be subject to double taxation, paying taxes on the same income in both the UAE and its home country without relief measures. Although some countries offer unilateral tax credits or deductions for foreign taxes paid, these may not fully alleviate double taxation and are subject to domestic tax laws.

Additionally, the absence of a DTA means that companies may not benefit from the UAE’s favorable tax policies, such as a low corporate tax and no tax on royalties, dividends, interest, and capital gains, as they become subject to higher domestic rates. There may also be less clarity on tax residency, leading to potential disputes or compliance challenges. This scenario generally results in higher overall tax costs, and increased compliance burdens, and may necessitate strategic adjustments to minimize tax liabilities.

To mitigate the risk of double taxation, companies should first explore whether their home country offers unilateral relief measures such as tax credits or deductions for foreign taxes paid, even in the absence of a DTA. These measures can help reduce the effective tax rate on their foreign income, although they may not fully eliminate double taxation. Companies can also carefully structure their operations and financial arrangements to leverage any available tax incentives or relief provisions in the jurisdictions where they operate.

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