DTAA of India and UAE

If Mr. A is resident... having 100% holding FZE entity in Dubai...

What are the tax compliances for that entity ??.

As for resident the global income is taxable so:-

1. Need to disclose it in ITR of Mr. A
2. He need to pay tax as well, as per applicable slab..

There is DTAA agreement of UAE and India...
But i am having doubt with interpretation of Article 7 and Article 25.

As per that:- on this income needs to pay tax in India as well, suppose if Mr. A is coming in the slab rate of 30%, and profit of that entity is 100000, then Mr. A is liable to pay tax in India of rs. 30,000/-

As per article 25, Mr. A can claim deduction of whatever taxes he has paid in Dubai, but since it is tax free zone so no credit ll be there...and he is liable to pay 30000/-

Any other view?

Hi Amit,

You’ve raised a very common and important question regarding the taxation of income from a 100% owned Foreign Entity (FZE) in Dubai (UAE) and how the India-UAE DTAA applies, especially Articles 7 and 25.

Here’s a breakdown and interpretation:

1. Residential Status and Global Income:

Mr. A is a resident Indian, so worldwide income is taxable in India.
Income earned by the foreign entity (FZE) is part of Mr. A’s global income, but...

2. Is the FZE a Separate Taxable Entity?

The FZE is a separate legal entity.
Normally, profits of a foreign company are not directly taxable in India in the hands of the resident shareholder unless controlled foreign company (CFC) provisions apply.
India does not yet have comprehensive CFC rules like some countries; though GAAR provisions may apply in certain cases.

3. Article 7 (Business Profits) of India-UAE DTAA:

Article 7 generally says that business profits of an enterprise are taxable only in the country where the enterprise is resident, unless it has a PE (Permanent Establishment) in the other country.
So, profits of the Dubai FZE should be taxed in UAE and not in India, unless Mr. A’s business in India has a PE in UAE or vice versa.

4. Article 25 (Elimination of Double Taxation):

Article 25 allows the resident country to provide credit for tax paid in the source country.
Since UAE FZE is in a tax-free zone (often zero corporate tax), there is no tax paid in UAE, so no foreign tax credit available.
However, since profits should generally not be taxed in India if no PE exists, India should not tax the FZE’s profits directly.

5. Taxation in India of Mr. A’s Shareholding in FZE:

Income from shares of the FZE (like dividends, capital gains) is taxable in India.
Dividends from UAE may be taxed in India with no foreign tax credit (if UAE does not levy dividend tax).
Capital gains from sale of shares in the FZE are taxable in India.

6. If the Income is Directly Taxed in India (Without PE):

Your scenario that Mr. A is liable to pay tax @ 30% on the full profits of the FZE in India does not normally hold under DTAA.
Unless the income is attributable to PE in India, business profits should not be taxed again in India.

Summary:

Scenario	Tax Treatment
Business profits of FZE in UAE (no PE in India)	Taxable only in UAE (generally zero tax)
Dividend from FZE to Mr. A	Taxable in India, no foreign tax credit if UAE zero tax
Capital gains on sale of FZE shares	Taxable in India as per domestic law
Global income of Mr. A (other than FZE profits)	Taxable in India

Your Viewpoint on Tax Payable of Rs. 30,000 on 1,00,000 Profit in UAE:

Not applicable if no PE or CFC rules.
Income should be taxed in UAE and not in India under DTAA Article 7.
India taxes dividend or capital gains from FZE, not the underlying business profits.