The party for UAE residents who were investing in Indian capital or real estate markets may soon be over. These investors will not be able to avail capital gains tax exemption from April 1, 2008 following an amendment to the India-United Arab Emirates Double Taxation Avoidance Agreement (DTAA).
Investors, both individuals and companies, will be liable to pay capital gains of 10%, according to a recent notification. UAE does not impose tax, and with India exempting capital gains under the treaty, it gave rise to benefit akin to India-Mauritius tax treaty.
Foreign investments from UAE, particularly in the real estate sector, have seen a rise in the last few years with a large number of players like Emmar setting operations in India. Withdrawal of these tax benefits are likely to have large scale implications for such investments. Foreign direct investment from UAE stood at $488.15 million up to July, 2007.
Interestingly, sale of shares of a company, which holds real estate assets only, will be liable to capital gains tax in the country where the asset is situated. The notification also puts to rest the confusion regarding taxation of individuals or companies, which had become a matter of litigation. According to the notification, a resident will be defined as an individual who resides in UAE for at least 183 days in a calendar year concerned, and a company which is incorporated in the UAE and which is managed and controlled wholly in UAE. The notification has also clarified that UAE's sovereign wealth fund Abu Dhabi Investment Authority will be recognised as a resident of UAE. Says Ernst & Young partner Amitabh Singh: "The amendments are quite well thought out. While on one hand, it removes the ambiguity of residency from UAE's perspective, it makes capital gains on shares of a company taxable in its country of residence with the exception of a company whose predominant underlying asset is comprised directly or indirectly of immovable property in which case the situs of the immovable property determines the situs of taxation. This effectively narrows the window for capital gains exemption hitherto being enjoyed."
In a bid to prevent misuse of the treaty, a limitation of benefit also has been inserted in the treaty. "An entity which is a resident of a contracting state shall not be entitled to the benefits of this agreement if the main purpose or one of the main purposes of the creation of such entity was to obtain the benefits of this agreement that would not be otherwise available," the notification says. "However, the government institutions appear to have been spared from this taxation. It is a balanced give and take between the two governments which may set the tone for similar re-negotiations of other treaties as well", Mr Singh said. The treaty was signed in 1992 and came into effect from 1994.