The UAE’ economic growth over the last few decades has been unprecedented. Foreign investment has been the primary driver that’s allowed the UAE to reduce its reliance on oil revenue and diversify its economy into areas such as finance, tourism, retail and real estate, to name just a few.
Much of the UAE’s appeal as a business investment destination can be attributed to the favourable tax environment that it provides to foreign investors. The UAE does not impose corporate or income tax on its business or residents and its numerous free trade zones also offer full exemption from customs duties and VAT and full repatriation of company capital and profits.
With these available benefits, it’s not hard to see the appeal of establishing residency in the country and/or setting up a business.
With so many expats living and working in the UAE, it’s important that the country has agreements in place with other countries to ensure clarity on the issues of taxation rights and to protect individuals and companies’ financial interests.
The UAE’s extensive double taxation treaty network does just that.
What is double taxation?
Double taxation refers to the imposition of taxes twice on the same source of income, asset or financial transaction. It can occur when tax is levied on a business where income is generated then a second time when that income is repatriated in the business’s home country.
Double taxation can refer to income tax incurred at both an individual and business level, meaning that since businesses are considered as separate legal entities from their shareholders, there is a risk that a corporation can be taxed on its annual profits and then the shareholders can be taxed on those same profits when they are received as dividends applied to their earnings
It is generally accepted that double taxation is harmful to international trade and negatively impacts the effective exchange of goods, services and capital.
Double taxation agreements are a tool used by countries to address this issue and remove the possibility of double taxation conflicts. These agreements ensure that individuals and companies are not obliged to pay twice on the same taxable source in two different jurisdictions. By alleviating these concerns and risks, taxation treaties help to reduce or eliminate illegal taxation practices, encourage cross border trade and foreign investment and ensure tax certainty.
How to determine where benefits are taxable
The agreements provide clear rules on how to declare benefits based on their origin and therefore avoid double taxation.
One of these rules is the exemption method. This involves the country of residence waiving the tax on income obtained in another country. The taxpayer is then liable to pay the tax in the host country where the income is generated.
Another rule which may be written into a tax agreement is the imputation method, whereby income generated in another country is declared in the country of residency and the state of residency will deduct all of the tax paid in the country of origin (total imputation) or the amount of tax that would have been payable in the country of residency had the income been obtained there (partial imputation).
The UAE’s double taxation treaty network
To date, the UAE has 111 double taxation agreements in force with another 28 under negotiation and the Ministry of Finance (MoF) is keen to grow this network even further. This is one of the largest double taxation treaty networks in the world and evidence of the UAE’s commitment to ensuring the fairness and transparency of its tax system.
Being part of such as comprehensive network of countries is advantageous both for the UAE itself and the businesses operating within the country. It furthers the country’s economic diversification aspirations and also encourages the free flow of goods and services between member countries
What is contained within the UAE’s double taxation treaties?
Each of the UAE’s double taxation agreements differ slightly in content and inclusions. However, most will contain provisions about how certain types of income such as dividends, capital gains and pensions should be taxed as well as other rules to ensure fair and equal treatment of individuals based on factors such as nationality or residency.
Some may also allow for tax reductions for government investments or exemptions on taxes levied on air transportation and shipping. These agreements create stronger bonds between member states and encourage the free exchange of trade.
Obtaining UAE tax residency
For individuals and companies to benefit from all of the double taxation agreements that the UAE has in place, they must first have tax residency. This can be obtained by applying for a Tax Residency Certificate (TRC).
Any company that has been operating in the mainland or a free zone for at least a year is eligible for the TRC and it can be obtained from the Ministry of Finance (MoF). Offshore companies, however, are ineligible and must instead apply for a tax exemption certificate.
