Double taxation means taxes charged on the same income, asset, or transaction twice by different authorities. There are many cases of double taxation for natural and legal persons. In the blog below, we focus only on double taxation in the case of income earned in another country while being a tax resident in one country.
Understanding double taxation
Suppose your home country is Q. If you work in another country, say Z, it becomes your host country. Under double taxation, host country Z imposes taxes on the income you earn there. Since you are resident in Q, you also pay taxes on the same income in your home country.
This is how you pay double taxes on the same income – once in the host country and once in the home country. Double taxes on the same income may discourage people from earning income in other countries. This impacts international trade and investments.
So, countries have resorted to signing Double Taxation Treaty (DTT) with other jurisdictions. Let’s see how double taxation treaties help you avoid paying double taxes.
The role of Double Taxation Treaties
Double Taxation Treaties are taxation agreements between two countries. These treaties define the taxation rules for international trade and investment transactions between the two countries. The countries agree on the products or services on which international trade between them will not invite double taxation.
Thus, double taxation treaties allow entities and individuals to avoid paying double taxes on incomes earned within each other’s boundaries. Thus, it improves international trade and investments in these two countries. Also, citizens and corporates are happy with the one-time tax.
The need for UAE Tax Residency Certificate
In regards to this, UAE introduced the law for determining tax residency in the country. The Cabinet Decision No. 85 of 2022 determines when a natural or legal person is called a tax resident in UAE. These rules came into effect on March 1, 2023.
UAE introduced the tax residency certificate (TRC) to ensure individuals and entities can prove their tax residence status. By proving their tax residence in UAE, the entities validate that they are paying taxes in UAE. Thus, they can avoid paying taxes on the same income in other countries.
As a tax resident in UAE, you will already be paying taxes on your income in the country. This income includes income earned in UAE as well as outside the country. With the presence of the rule on tax residence certificate, you can avoid paying double taxes on the same income in another country.
Thus, for countries where UAE’s double taxation agreements exist, the tax residency certificate serves as a document proving the entity or individual’s tax residence in UAE. The provisions of the treaty apply to such transactions. And the applicant, while applying to FTA for a tax residency certificate, also submits the document received from the other jurisdiction.
In the cases where Double Taxation Treaty does not exist, individuals and entities can submit the tax residency certificate to avoid double taxes. The certificate is evidence of your tax residency in UAE, which means you pay taxes in UAE. That means you are not liable for taxation on the same income in another country.
Benefits of Tax Residency Law
When there were no rules regarding tax residency in UAE, the provisions of international tax treaties ruled. The treaties defined the taxes imposed on the parties in the transaction. But, with the introduction of this law and the certificate, entities and individuals have better clarity on taxation matters.
It is also beneficial for expatriates working in UAE. They will be better able to determine their tax residency status.
Individuals can also use the tax residency certificates to apply for tax relief. If they have already paid taxes in another country, they can claim a refund of the same under the double taxation treaty by submitting the TRC.
The existence of Double Taxation Treaties and Tax Residency Certificates makes UAE an attractive investment destination. If an entity is a tax resident in UAE and has paid taxes to some other country with which UAE has signed a DTT, it can claim a refund. Alternatively, by showing the TRC, the entity can get an exemption from tax.
How can Tax Residency UAE help you?
To avail of these benefits of tax residency law, you must get the tax residency certificate in UAE. To ensure a smooth and accurate process, the best option is to contact a third-party service provider. Tax Residency UAE is an expert in handling the application procedures and documentation for TRC.
Our tax experts help you find your eligibility for the tax residency certificate. Based on the eligibility, we fill up the application form and keep the documents ready. We facilitate a smooth and accurate procedure to ensure you get your tax residency certificate.
