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Amendments to India-UAE tax treaty coming into force next year
December, 06th 2007
Includes determination of resident status

The Government has sought to put to rest the uncertainties regarding the interpretation and application of various provisions of the India-UAE tax treaty.

India and the UAE have signed a Protocol that has introduced key amendments that affect computation of business profits, dividends, capital gains, determination of residence status and provides for limitation of benefits clause to prevent misuse of tax treaty.

This Protocol, which has now been notified, will come into effect, for incomes arising in India, from April 1, 2008, that is financial year 2008-09.

As per the amendments, the duration of stay in the UAE would be the criterion for determining residency rather than factors such as fiscal domicile. Moreover, a company that is incorporated in the UAE and wholly managed and controlled there alone would be considered as a resident of UAE.

On the capital gains front, the Protocol has brought an amendment that seeks to withdraw the capital gains protection that was hitherto sought to be utilised by the UAE residents under the double taxation avoidance agreements (DTAA) entered into in April 1992.

Capital gains

As per the tax treaty, capital gains from sale of any property, including shares, other than immovable property, is taxable only in the country in which the seller is resident.

After the latest amendments, the capital gains on sale of shares would be taxed in the country in which the company is a resident. Moreover, capital gains from sale of shares of a company whose property mainly comprised immovable property would be taxed in the country where such property is situated.

The amendments to the tax treaty, through the Protocol, may result in revisiting of inbound investments that are originating from the UAE, especially in view of the amendments to the Article dealing with capital gains. The introduction of limitation of benefits clause to prevent treaty abuse is a welcome measure, Mr Aseem Chawla, Tax Partner, Amarchand & Mangaldas told Business Line.

Mr Rahul Garg, Executive Director, PricewaterhouseCoopers (PwC), said that the issue of application of treaty has been set at rest by prescribing a new criterion of residency based on number of days of stay and place of incorporation and management control.

Also, the capital gains tax protection available to the UAE residents in respect shares of Indian companies has been done away with. Also, it is now provided that the capital gain would be liable to tax in India in the hands of UAE resident, if underlying immovable property of the company is situated in India, Mr Garg said.

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