The
India- UAE Protocol- What’s in Store?
The
trade relationship that India
has had with UAE has always been on a special front and assumed significance.
One Million Indians stay in the UAE alone and the trade volume exceeds more
than $18 billion per annum. The cross-border transactions between the two
countries have been on the increase with leading UAE based firms based in the
real estate sector making investments in India and targeting and making
investments in the real-estate sector and investing heavily in hotels, malls,
healthcare, IT parks and integrated townships.
The
Treaty was originally signed in India
on April 29, 1992. There has been a considerable amount of litigation relating
to the Treaty, especially on the definition of "resident". In an
attempt to put to rest the litigation surrounding the treaty and to prevent the
misuse the beneficial provisions of the double taxation avoidance agreement (“DTAA”)
between India and the United Arab Emirates (“UAE”), the
Government of India and the Government of UAE signed a protocol on March 26,
2007 amending the India
– UAE DTAA.
The
protocol, amending the terms of the Treaty, will be effective in India from
April 1, 2008. The UAE follows the calendar year for its tax purposes and,
hence, in the UAE this protocol is effective from January 1, 2008.
The
protocol has introduced key amendments that affect the determination of
residence, taxation of capital gains, etc. The protocol also provides for the
"Limitation of Benefits" clause to prevent the abuse of the Treaty
The
India – UAE DTAA has been a
subject matter of conflicting decisions at various levels of judiciaries in India.
There have been many conflicting decisions on whether or not individuals
resident in UAE will be entitled to claim the treaty benefits in India.
This is because the UAE does not currently impose tax on individuals
Eligibility to claim benefits
The no-tax regime in the UAE is
considered by many tax authorities as the perfect ground to deny the benefit of
the Treaty to UAE residents, as otherwise they would have a situation of
"Double Non-taxation".
The basic premise of the tax treaty is
that to get the benefit the `person' needs to be a "resident" of
either of the countries. The definition of the term resident therefore assumes
paramount importance.
Present Position
Currently, the definition is common for
both India
and the UAE, and provides that a resident shall be:
any person who, under the laws of that
state;
is liable to tax therein;
by reason of his domicile, residence,
place of management, place of incorporation or any other criterion of a similar
nature.
The controversy arises because of the
inclusion of the words "liable to tax" in the above definition, since
there is no taxation on individuals in the UAE.
The gist of the various decisions where
the above issue was considered is given below:
The Authority for Advance Rulings (AAR)
in the Mohsinally Alimohammed Rafik (1993) case gave a ruling favoring the
assessee.
A contrary view was adopted by the AAR
in 1999 in the Cyril Eugene Periera case and the AAR
ruled that the assessee was not entitled to the Treaty benefits.
In 2003, the apex court considered the
issue in the landmark Supreme Court judgement of Azadi Bachao Andolan
case in relation to the Indo-Mauritius Treaty and held that the liability to
taxation was relevant, and not the fiscal fact of actual payment of tax.
Further, the AAR
followed this decision in 2004 in the Emirates Fertilizer Trading Co. WLL case.
The controversy continued in 2005 with the AAR
ruling against the assessee in the Abdul Razak A Meman and others case. The
protocol has set to rest the above controversies and ensured that the
beneficial provisions of the Treaty are available to residents of the UAE.
Post-protocol scenario
The protocol has amended the definition
of "Resident in UAE" under the Treaty to provide that that an
individual who is present in the UAE for a period or aggregate period of at
least 183 days in a calendar year will be treated as resident of UAE.
Noticeably, the "liable to tax" criterion has been dropped in the
amendment. It may be relevant to note that the treaties signed by India with Singapore,
Italy, Kuwait, and so on, do not provide
for "liable to tax" clause.
With respect to the residential status
of individuals in India, the
protocol provides that this would not include any person who is liable to tax
in India in respect only of
income from sources in India.
Hence the Treaty benefits will be available only to assessees who are subject
to tax on their global income in India.
This is on similar lines as the
treaties with the USA, Australia, Slovenia
and Hungary.
A company which is incorporated in the
UAE and which is managed and controlled wholly in UAE is considered a resident
in UAE for the purposes of this Treaty.
The Treaty provides for
"residential status" definition only in respect of individuals and
corporates
Taxation of Capital Gains
Present position: The
Treaty provides that capital gains are taxable in the country of residence of
the alienator of the assets, except where the capital asset is: an immovable
property; or movable property of permanent establishment/fixed base of an
entity situated in other state, in which case the gains are taxable in the
country of situs of such assets.
Post-protocol scenario: The
protocol provides that in the following circumstances the taxation of capital
gain would not depend on the residence of the alienator.
Capital gains arising from the
alienation of the capital stock of a company, the property of which consists
directly or indirectly principally of immovable property, shall be taxed in the
state in which the property is situated.
In the case of gains arising on
alienation of shares other than those mentioned above, the same shall be taxed
in the state in which the company issuing the shares is resident.
The implication of the above could be
discussed as follows:
Example 1: An NRI
settled in the UAE sells his investments in India. As per the Indian tax laws,
he is taxable in India.
Prior to the protocol, the Treaty provides for taxation of such capital gains
only in the country of residence of the NRI. Hence the capital gains arising
out of these transactions would be subject to taxes only in the UAE. Given that
UAE does not impose any taxes on individuals, the capital gains arising out of
such sale would not be subject to any taxes.
With the Indo-UAE protocol, this
situation would undergo a change, and the NRI would be liable to taxes in India on the same, since the situs of the shares
are in India.
Where the capital gain arises out of a transaction where securities transaction
tax has been paid the taxability of the same would be as follows:
Long-term capital gains: Nil
Short-term capital gains: 10 per cent
However, where the shares are unlisted
or no securities transaction tax has been paid, then the capital gain would
attract taxation at the normal tax rates.
Example 2: An UAE
investor transfers shares held in a company resident in the UAE. The property
of the company consists of immovable property situated in India,. Hence such transfer of
shares would be covered under the ambit of the above clause, and would be
taxable in India.
Example 3: An UAE
investor transfers shares held in a company resident in the UAE. The UAE Company
has high investments in an Indian real-estate company. The property of the
real-estate company in India
consists principally of immovable property situated in India. The
capital gains arising out of the above transfer of shares by the UAE investor
would also be covered under the ambit of the above clause since the immovable
property is held "indirectly" by the UAE company.This would squarely
affect UAE companies which have investments in real estate/real estate
companies in India.
Limitation of Benefits
The protocol has introduced Article 29
relating to "Limitation of Benefits" in the Treaty. This provides
that:
an entity will not be entitled to the
benefits of the tax Treaty;
if the main purpose or one of the main
purposes of the creation of such entity was to obtain tax Treaty benefits;
such tax benefits would otherwise not
be available.
The cases of legal entities not having
bona fide business activities in India/UAE will be impacted by this Article. By
introducing this Article, the Treaty intends to prevent conduit and shell
companies from utilising the benefits of this Treaty.
An area of concern would be to prove
the bona fides of the business activities of the entity. The Treaty does not
provide the parameters to prove the bona fides unlike in the case of the Mauritius and Singapore treaties.
For instance, the Singapore
protocol provides that a resident of a contracting state is deemed not to be a
shell/conduit company if:
it is listed on a recognised stock
exchange of the contracting state; or
its total annual expenditure on
operations in that contracting state is equal to or more than S$200,000 or Rs
50,00,000 in the respective contracting state as the case may be, in the
immediately preceding period of 24 months from the date the gains arise.
With respect to the Indo-Mauritian
treaty, wherever a certificate of residence is issued by the Mauritian
authorities, such certificate will constitute sufficient evidence for accepting
the status of residence as well as beneficial ownership for applying the DTAC
(double taxation avoidance convention) accordingly.
In the absence of such specific
provisions, proving the bona fides would be a contentious issue.
With the protocol coming into effect,
there would be an end to litigation relating to the "residence" and,
hence, would be a welcome relief to many assessees. However, certain
terminologies used in the protocol have not been defined clearly, and hence
could be open to litigation.
For instance, the definition of the
resident as applicable to a company indicates that the management should be
wholly controlled and managed. However no yardstick has been provided to
understand the term "wholly".
The protocol has brought in taxation of
capital gains relating to alienation of shares of a company whose property
directly/indirectly principally consists of immovable property. However no
definition has been provided for "indirectly" and
"principally".
The protocol has not provided the
parameters to prove the bona fides of the business entities.
With the introduction of the Limitation
of Benefits clause in the Indo-UAE treaty, the general expectation is that a
similar clause would shortly get introduced in the Indo-Mauritian treaty, as
well
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