New Delhi: In a move that could have a significant impact on potential Arab investments into India, the government plans to end the capital gains tax-free regime currently available to residents of the United Arab Emirates (UAE).
Under proposed amendments planned for the double taxation avoidance agreement between the two countries, details of which are now emerging, capital gains on sale of shares have been made taxable in the state where the gains arise. The proposed amendments would apply to both individuals and companies.
The Union cabinet had already approved the amendments to the treaty which was signed in April 1992 and was effective from April 1994. Officials familiar with the proposed changes said the revised treaty would be formally signed after the UAE government approved the provisions.
The Indian government has also been trying to renegotiate a similar tax treaty with Mauritius. This small island country in the Indian Ocean is a favourite launching pad for investments into India.
Many foreign institutional investors as well as other companies register shell companies in Mauritius, through which they route their investments into this country.
UAE-based entities have invested about $321 million out of the $39.53 billion in foreign direct investment that has come into India, or just 0.86%, in the 15 years ended this past November.
But investments by UAE companies in India are set to increase as they are awash in money following the tripling of oil prices since 2002. Dubai’s DP World, for instance, has made big investments in Indian ports and is looking to expand operations there. Dubai-headquartered real-estate company Emaar Properties has tied up with MGF to form a real-estate company Emaar MGF Pvt. Ltd. Emaar has already announced plans to bring in $1 billion into the real estate business in India.
It is unclear what impact this proposed treaty would have on specific investments planned in India by UAE-based companies such as Emaar. A spokesperson for Emaar in Dubai couldn’t immediately be reached for comments, which were requested via email.
The UAE comprises seven emirates: Abu Dhabi, Ajman, Dubai, Fujairah, Ras al-Khaimah, Sharjah and Umm al-Quwain. The region is flush with money, largely on account of its oil and gas output as well as a steady diversification.
Senior Indian government officials said the proposed amendments had been made to correct situations wherein UAE residents were not paying any tax on capital gains. “As there is no tax in the UAE, residence-based taxation of capital gains resulted in a situation of total non-taxation, since such gains arising to a resident of the UAE could not be taxed either in the UAE or in India,” said an official, who did not wish to be identified.
The official said that under the new provisions, the liability of the tax on capital gains made from sale of shares would fall on the state in which the immovable property of the person or the company making the capital gains is situated. The capital gains on other property would, however, continue to be subject to residence-based taxation.
The proposed amendments in the treaty would include both individuals and companies. “The issue whether ‘individuals’ or ‘companies’ incorporated in the UAE are eligible for benefits in the (treaty) was a matter of litigation,” this official pointed out, noting that the proposed amendments would remove that question for good.
Under the new definition, a resident would include an individual who is present in the UAE for a period of at least 183 days in the relevant calender year, officials said. Further, a company incorporated in the UAE, which is managed and controlled wholly there, would be considered a resident.
As part of the proposed changes, taxes on dividends have also been streamlined and fixed at 10%, doubling the tax that companies are currently paying on dividends paid by a related entity. The current treaty has a dual rate of 5% and 15%. A 5% dividend tax was applicable on the gross amount of dividend if the beneficial owner is a firm which owns at least 10% of the share of the company paying the dividend. All other dividends were being taxed at 15% of the gross amount of dividend.
“The proposed amendment to the treaty puts beyond doubt that all residents of the UAE would be liable to pay capital gains tax in India on transfer of shares held as capital asset in Indian companies. The amendment also covers the companies which would have land or buildings or other immovable property as their principal property situated in India,” said Rahul Garg, Executive Director PricewaterhouseCoopers.