HOW DOUBLE TAXATION AGREEMENTS (DTAS) CAN HELP UAE BUSINESSES LOWER TAX LIABILITIES

This article has been researched and written by the Tax & Compliance Team at Creation Business Consultants. AI has not been used in generating this article.

WHAT ARE DOUBLE TAXATION AGREEMENTS?

The Double Taxation Agreements (DTAs) are between the UAE and other countries to avoid taxing the same income two times. First, where the income is earned and secondly, in the taxpayer’s country of residence. DTAs leverage parties’ financial impacts of tax obligations, removing roadblocks to international trade and investments.

As of 2025 appears to have around 140 DTAs in place with the UAE, including new DTAs with Kuwait (effective January 2025), Qatar (effective July 2024), and Bahrain (effective March 2025).

WHY DOUBLE TAXATION AGREEMENTS MATTER

• Prevention of Double Taxation – DTAs prevent income from being taxed twice, allowing the taxpayer to reduce their financial commitments when doing business.
• Promotion International Business Development – Reduced tax cost resulting from DTAs encourages cross-border trade and investments.
• Supporting tax compliance – similar to OECD’s BEPS (Base Erosion and Profit Shifting) initiative – DTAs seek to reduce tax evasion and are a step towards transparency.

WHAT DOUBLE TAXATION AGREEMENTS COVER

DTAs outline tax treatment for:

• Business Profits: located in that country but taxable only if the business has a “Permanent Establishment (PE)” there.
• Dividends, Interest, and Royalties: often a reduced withholding tax rate, making the cross-border transaction not too tax eventful.
• Capital Gains: usually not taxable based on the treaty provisions and the type of investments.

THE UAE’S DOUBLE TAXATION AGREEMENT NETWORK: A GLOBAL ADVANTAGE

The UAE has 140 Live DTAs that cover high-priority markets throughout Europe (UK, Germany), Asia (India, Singapore), and the Middle East (Saudi Arabia, Kuwait). Most recent GCC treaties (UAE Keen) tax dividends at 5% and royalties at 10%, which has allowed for some greater tax efficiency when cross-border transactions take place.

CORE BENEFITS OF UAE DOUBLE TAXATION AGREEMENT (DTAS):

1. Lower Withholding Taxes:

• Dividends: 10% – UAE-India DTA, versus India’s standard 20.8% tax rate.
• Royalties: 5% – UAE-Germany DTA, which lessens tax cost using intellectual property.

2. Permanent Establishment (PE) Clarity:

• Often, no further tax is levied on short-term projects (usually 6-12 months).

3. Capital Gains Tax Relief:

• It pertains to the size of holding (generally less than 25% under UAE-Singapore DTA).

With an estimated $25 billion of foreign direct investment (FDI) by 2025, DTAs are strengthening the UAE’s aims of becoming a leading global business hub.

HOW DOUBLE TAXATION AGREEMENTS REDUCE TAX LIABILITIES

DTAs prevent double taxation using two key methods:

• Exemption Method – Tax is performed in one jurisdiction only.
• Credit Method – Foreign tax paid is reduced from the UAE tax obligation.

For illustrative purposes, if the company based in the UAE earned €1 million in Germany and paid €150,000 in German taxes, under the UAE’s 9% corporate tax, the company’s tax obligation would then be €90,000. Since the German tax is credited, therefore, the company will not have further UAE tax obligations and will then avoid double taxation.

WITHHOLDING TAX REDUCTIONS UNDER UAE DOUBLE TAXATION AGREEMENTS

The UAE has no withholding taxes at all; however, like nearly every country in the world, the UAE has signed DTAs that reduce tax rates in the countries with which it has linked DTA agreement. This significantly improves the cost-effectiveness of transferring profits internationally or reinvesting.

CASE STUDIES: HOW UAE DOUBLE TAXATION AGREEMENTS PROVIDE REAL-WORLD TAX BENEFITS

To demonstrate the impact of DTAs, we will share real examples where companies have benefited by reducing their tax exposures and administrative burden:

1. Tech Expansion to India

• Problem: A technology company based in the UAE earns ₹50M ($600K) in revenues per annum on its Indian operations. Given that the business is a tax resident of the UAE, it will withhold the profits as dividends. This creates India’s 20.8% withholding tax on dividends, i.e., ₹10.4M or $125K. In addition, India’s withholding tax rules can deem the firm to have a Permanent Establishment (PE) classification in India, where the company will be exposed to Indian corporate tax at rates around 30%.
• Solution: By using the UAE-India DTA to repatriate profits, the firm will receive ₹5M ($60K) dividend distribution, and the granted 10% (₹5M or $60K) withholding tax means it will save ₹5.4M ($65K) p.a. In addition, the UAE-India STA articles pertaining to PE mean the company can operate in India for a period of less than 183 days without creating additional corporate tax exposure.
• Conclusion: By utilising the UAE-India DTA, the firm has paid less tax and achieved an outcome to determine any cleaner corporate governance rules, which allows for expansion into India without any double taxation risk and clarity on the Indian regulatory environment.

2. Licensing IP from Germany

• Problem: A UAE-based company is paying €100K in royalties to a German intellectual property (IP) owner. Under Germany’s usual tax regime, withholding taxes of 15% will apply, amounting to an additional €15K, or an overall cost of the technology licence of €115K.
• Solution: The UAE-Germany DTA reduces the withholding tax on royalties to 5% (€5K tax). This translates into €10K of annual tax savings. To claim the reduced withholding rate, the UAE-registered company provided German tax authorities with a Tax Residency Certificate (TRC) indicating its tax residency was in the UAE.
• Conclusion: With the UAE-Germany DTA in place, the company has reduced the cost of cross-border IP licensing, optimising the cost of international operation legally and ethically.

3. M&A in Singapore

• Problem: A UAE investor sold a minority stake of 25% in Singapore for $10M. Without a double taxation treaty, capital gains tax would have applied in Singapore at 20%, i.e., $2M as tax liability.
• Solution: The UAE-Singapore DTA provides an exemption from capital gains tax for investment holdings that remain below 25% ownership. Under the capital gains exemption, the investor will receive the entire $2M amount because they qualify for the benefit.
• Conclusion: The UAE-Singapore DTA enables investors to maintain full profit retention, which makes the UAE an attractive tax-efficient location to hold international assets.

COMPLIANCE AND STRATEGIC TIPS FOR MAXIMIZING DOUBLE TAXATION AGREEMENTS BENEFITS

To take advantage of Double Taxation Agreements (DTAs) and the tax risk they may expose the company to, companies need to:

• Obtain a Tax Residency Certificate (TRC): Agents or service providers who hold a TRC will be eligible for reduced withholding tax rates.
• Ensure arm’s-length pricing for intra-group transactions: Any transfer pricing policies should conform to the OECD Guidelines to minimise tax audits and compliance risk.
• Apply for the Mutual Agreement Procedure (MAP): Double Taxation Agreements are an effective way to resolve disputes between territories regarding cross-border taxation.
• Prepare for the UAE’s 15% Domestic Minimum Top-up Tax (DMTT): The DMTT is going to affect all multinationals that are domiciled in the UAE and earn in excess of €750M from January 2025, per the OECD’s Pillar Two requirement.

MAXIMIZE YOUR DOUBLE TAXATION AGREEMENTS BENEFITS

Double Taxation Agreements provide UAE businesses with significant tax savings, reduced withholding taxes, and more certainty when operating abroad. With over 140 treaties, they can make their transition into new markets, expand globally, reduce tax liabilities, and ensure compliance with local regulations.

To fully leverage DTAs, businesses should:

• Identify and map out which DTAs are applicable to their operations and prospective markets.
• Ensure compliance with evolving global tax standards, including OECD guidelines.
• Obtain any requisite Tax Residency Certificate (TRC) to obtain the reduced rates on taxes elsewhere.
• Obtain professional services to structure transactions properly to minimise tax exposure.

Contact us today to learn more about our TAX Services in the UAE to ensure tax legislation compliance against a global backdrop.