Dubai’s trade relationship with India has been witnessing a considerable growth. This has been due mainly to the distinctive ties between the Governments and people of the two countries and the joint economic agreements.

Trade between India and Dubai has reached over $20.5 billion (77 billion dirham) in the first six months of 2012, accounting for 13 per cent of Dubai’s total foreign trade. The total value of Dubai’s imports from India reached $9.5 billion (35 billion dirham) during the first six months of 2012. The imports primarily include diamonds, jewellery, electronic devices and mineral oil. The value of exports to India, comprising mainly gold, diamonds, jewellery and copper wires, stood at $5.17 billion (19 billion dirham) during the same period.  

To promote further inter country trade and commerce India has entered into Double Taxation Avoidance Agreement with Dubai. The treaty arrangements are as follows.

(a) The Govt.  of India and the Dubai desiring to promote mutual economic relations by concluding an agreement for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and on capital and have agreed as follows.

(b) There is no income tax or wealth tax on individuals in DUBAI. There was a limited treaty in 1969 and there was no such tax even earlier. The limited treaty paved the way for full fledged treaty on comprehensive basis coming into effect from 1-4-1994. Only foreign oil exploration companies, foreign banks and certain other kinds of corporate bodies are liable to tax in the Dubai.

Dubai Taxation Structure 

Direct Taxes

Dubai Personal Income Tax - Individuals are not taxed in the Dubai. Inheritance / Estate Tax: Inheritance, in the absence of a will, is dealt with in accordance with Islamic Sheria principles. Real Property Tax: A transfer charge of 2% is levied on the transfer of the real property, with the seller paying 0.5% and the buyer paying 1.5% on the sale value of the property. Net Wealth / Net Worth Tax: There is no Net Wealth / Net Worth Tax in Dubai. Capital Acquisitions Tax: There is no Capital Acquisitions Tax in Dubai.

Dubai Corporate Taxation - There are no taxes levied by the Federal Government on income or wealth of companies and individuals in Dubai. However, most emirates have issued tax decrees of general application. These impose income tax of up to 50% on taxable income of 'bodies corporate, wheresoever incorporated'. In practice, however, the enforcement of the decrees is limited to oil exporting companies and foreign banks. Corporate income tax is imposed on foreign oil companies, i.e. companies dealing in oil or oil exploration rights. Although the tax rate applicable to oil companies is generally 55% of operating profits, the amount of tax actually paid by the oil companies is calculated on the basis of a rate agreed mutually on the basis of specific individual concessions between the company and the respective Emirate. The tax rate may range between 55% and 85%.

The tax of Foreign Banks is not enforced in all the emirates. Branches of foreign banks are taxed at 20% of their taxable income in the Emirates of Abu Dhabi, Dubai, Sharjah and Fujairah. The basis of taxation does not differ significantly between the various Emirates. Dubai, Sharjah and Fujairah have issued specific tax legislation for branches of foreign banks, while Abu Dhabi does not have a specific decree.

Special arrangements also exist for major government controlled joint venture companies and some foreign banks. No tax returns are requested or required of other businesses operating in the Dubai. Further, there are no with holding taxes on outward remittance, whether of dividends, interest, royalties or fees for technical services, etc from the other businesses operating in the Dubai. Dubai free zones, which permit 100% foreign ownership, grant specific tax exemptions ranging from 15 to 50 years to companies operating in the free zones.           

Dubai Vat / sales tax -  There are no consumption taxes or VAT (Value Added Tax) in the Dubai, but individual Emirates may charge levies on certain products such as liquor and cigarettes and on certain services such as those provided in the hospitality industry.

Indirect Taxes - 
Municipal taxes are charged in some of the Emirates. In Dubai a 10% municipal tax is charged on hotel revenues and entertainment. In all the Emirates, except Abu Dhabi, Income from renting commercial premises is taxed at a rate of 10 %, and from renting residential premises at a rate of 5%. Abu Dhabi does not levy a municipality tax on rented premises, but landlords are required to pay certain annual licence fees.

Customs (import) duties are levied generally at a rate of 5% but there are many items which are duty exempt, such as medicines, most food products, capital goods and raw material for industries etc. Imports by free zone companies are also exempted unless products move outside the zone. If the products are moved outside the zone, customs duty is levied at 5%.

After the introduction of the new uniform customs tariff on 1 January 2003, all non-Gulf Co-operation Council (GCC) products, except for those exempted, are subject to 5% customs duty, while the product of GCC countries shall enter into each others' markets free of customs duties. Products are considered as originating in a GCC country if the value added to such product in the said country is more than 40% of the value of the product in question and if the factory that manufactured the product is at least 51% owned by GCC nationals.

In the event of re-export to non-GCC countries, a customs deposit has to be made and this will be refunded when proof of re-export is given to the authorities. In the event of re-export to GCC countries, customs duty at 5% will be levied at the first point of entry. The provisions of the GCC Customs Union have applied since 1 January 2003.

Dubai DTAA &  CBDT Circulars
As a prelude to the Indo- Dubai Treaty, CBDT issued two Circulars - No. 728 (dated 30-10-1995) and 734 (dated 24-1-1996). The purport of the Circulars is to apply the rates of tax pre-scribed in the relevant Finance Act or the rates prescribed in the DTAA between India and other countries (Circular No. 728) and India &  Dubai (Circular No. 734) whichever is more beneficial to the assessee (Non Residents). The text of the Circulars is given below.

CBDT Circular No. 728 :

(i) It has been represented to the board that when making remittances of the nature of royalties and technical fees, tax is being deducted at source at the rates specified in the Finance Act of the relevant year, without taking into account the special rates for taxation of such income provided for under the Double Taxation Avoidance Agreement with the country concerned.

(ii) The expression ‘rates in force’ has been defined in S. 2(37A) of the Income-tax Act. Under sub-clause 

(iii) of S. 2(37A), for the purposes of deduction of tax u/s.195, the expression is to mean the rate or rates of income tax specified in this behalf in the Finance Act in the relevant year or the rates of tax specified in the Double Taxation Avoidance Agreement entered into by the Central Government, whichever is applicable by virtue of the provisions of S. 90 of the Income-tax Act, 1961.

(iii) It is hereby clarified that in view of provision of Ss.(2) of S. 90 of the Act, in the case of a remittance to a country with which a Double Taxation Avoidance Agreement is in force, the tax should be deducted at the rates provided in the Finance Act of the relevant year or at the rate provided in the DTAA, whichever is more beneficial to the assessee.

CBDT Circular No. 734 :

Applicable rates of taxes under the Double Taxation Avoidance Agreement between India and the Dubai:

(i) It has been represented by some Non-Resident Indians in the Dubai that the banks and the UTI have been deducting tax at source on interest and dividend incomes at rates higher than those provided in the Double Taxation Avoidance Agreement between India and the Dubai. This has forced the Non Resident Indians to seek remedy by way of refund. It also appears that in each of such cases where refund was due and where decision on the applicability of the DTAA was involved, they had been advised to file a petition before the Authority for Advance Rulings.

(ii) The Board in its Circular No. 728, dated 30th October 1995 have already clarified that in case of remittance to a country with which a Double Taxation Avoidance Agreement is in force, tax should be deducted at the rates provided in the Finance Act of the relevant year or at the rates provided in the DTAA, whichever is more beneficial to the assessee.

(iii) Once again it is clarified that in respect of payments to be made to the Non Resident Indians at the Dubai, tax at source must be deducted at the following rates:

I. Dividends :

(a) 5% of the gross amount of the dividends if the beneficial owner is a company which owns at least 10% of the shares of the company paying the dividends.

(b) 5% of the gross amount of the dividend in all other cases.

II. Interest :
(a) 5% of the gross amount of the interest if such interest is paid on a loan granted by a bank carrying on a bona fide banking business or by a similar financial institution.

(b) 12.5% of the gross amount of the interest in all other cases

III. Royalties: 10% of the gross amount.

(iv) It is essential that the above rates which are enshrined in the Double Taxation Avoidance Agreement between India and the Dubai are strictly adhered to so as to avoid unnecessary harassment of the taxpayers.

Dubai DTAA &  Legal Pronouncements in India

A.     Rafique’s case : It was observed by the AAR, in M. A. Rafique’s case (213 ITR 317)

I. Under such circumstances the very fact that such a comprehensive treaty was considered necessary can only mean that the DTAA was intended to encourage inflow of funds from Dubai to India for investment. In this context, it is necessary to remember that Dubai provides one of the largest export markets for India in West Asia market. Thanks to their oil resources, the Emirates of Dubai represent a very prosperous region in West Asia. There is not much of a possibility for Indian companies carrying on trade or business in or foreign companies carrying on trade in Dubai having income in India. The attraction of Dubai lies in the vast surplus funds it has for investment outside the country. It is common knowledge that there is competition for its surplus funds from the USSR, as well as several European and Asian countries. India is also in the process of looking out for foreign countries interested in investing in India and must have considered the DTAA as providing an opportunity to improve the economic relations between the two countries and to encourage the flow of funds from Dubai. Any incentive offered in respect of Dubai would also attract investments from other countries in the region which could hope for DTAA on similar lines".

II. "Dubai has sizable expatriate Indian population and a little concession could go a long way in inducing flow of substantial funds to India. The preamble to the DTAA is indicative of these considerations. Given the clear knowledge on the part of India that individual Indian investors in Dubai have to pay no tax, or only a nominal income tax on their income, the only purpose for the DTAA was clearly to provide some benefits to all Dubai investors in India. Read against this background Article 10 (Dividends) Article 11 (Interest) clearly envisage a lower rate of income tax to all Dubai investors on such investments and Article 13 clearly leaves it to the Dubai to deal with the capital gains on movable property realised by all Dubai investors.

The very fact the DTAA was signed with full knowledge that there was no tax on individuals in the Dubai, and the presence of number of Articles (10, 11, 13, to 21) indicate that the DTAA was an agreement intended to be applicable to individuals from the very date of its coming into force and was not intended to be a dead letter until appropriate legislation to tax the same in Dubai’’.

III. "Article 4(1) (‘Resident’) is to be interpreted in this background. A person is liable to tax in the state by reason of his domicile, residence, place of incorporation or place of management or any other criterion of similar nature does not connote an actual taxation measure but connotes a person who is liable to be subjected to tax by the taxation laws of that state, because of a nexus existing between him and the state, of one of the kinds mentioned in the Article. 

If the relevant criterion was only to be the person actually subject to tax the Article would have used the words ‘a person who is subjected to tax in that state’ or would have stopped with the words ‘liable to tax under the laws of that state’. The further words namely ‘by reason of his domicile ...’ would be pure surplus age. Moreover several Articles in the DTAA concerning the individuals would make no sense at all if individuals living in Dubai are treated as excluded from the benefit of agreement because they are not currently subjected to tax in Dubai.

It is difficult to conceive of a large number of such provisions being inserted in the agreement merely to meet a situation which does not arise on the date of agreement but may arise in future (when tax is levied on individuals)’’.

IV. The structure of the agreement indicates that it is more a tax avoidance agreement than a tax relief agreement. Many of the Articles are so structured as to ensure that the income arising to a person out of activities in both states is taxed in one or the other states but not both (refer Articles 6, 7, 8, 13, 15, 18, 19, 22). However with regard to items like dividends, interest and royalty (Articles 10, 11, 12) they are taxed in both the states but the rate is pegged low in source country so as to attract more capital. This is a clear pointer of the intention of entering into treaty by the contracting States".

V. "If individuals from Dubai are excluded it makes the agreement devoid of all contemporary relevance. Hence, the interpretation which considers the treaty as a whole, all its Articles, and gives a full meaning to all the words employed in Article 4(1) of the Treaty would be more appropriate which considers individuals living in Dubai earning income there as resident of Dubai, though at present not liable to tax but certainly liable to be called upon to pay tax under laws of that State.

VI. Based on the above factors the residential status is determined as under :

"If the applicant is resident in both the States, under the tie breaker tests, he is to be considered as resident of Dubai as his personal and economic ties are closer to Dubai rather than India".   

"The applicant will therefore be entitled to take advantage of Articles 10, 11 and 13 of DTAA".      

These are learned observations of the AAR Justice Shri S. Ranganathan. They are relevant and valid as they are based on the internationally accepted conventions and practices.

B.   Cyril Pereira’s case : After a gap of nearly three years, there followed the contrary decision of the AAR on identical facts in the matter of Cyril Pereira in AAR No. 385/1997(239 ITR 650). The gist of the decision is given below:

Facts : Cyril Pereira is an individual who is not resident of India but is residing in Dubai. He is employed in Dubai. He is non resident under the Income-tax Act, 1961. He has income from dividend from shares and units of mutual funds, Interest on investment on bonds and other interest from funds lent from NRE Account. The investments were made from the Non Resident Accounts. Tax at the rate of 20% was deducted on income from investments (dividend and interest).

Point at issue : The applicant claims that he being non resident and a resident of Dubai, he is eligible for the benefits of DTAA between Dubai and India. As a result dividends should be taxed at a concessional rate of 15% and interest should be taxed at 12.5%.

Decision of the AAR : The decision of the AAR after considering the aforesaid facts and the law is given below in a nutshell:

(i) U/s.90(1) of the Income-tax Act, 1961, the Central Government may enter into an agreement with the Government of any country outside India

(a) For granting of relief in respect of income on which have been paid both income tax under this Act and income tax in that country, or

(b) For the avoidance of double taxation of income under this Act and under the corresponding law in force in that country, or

(c) For exchange of information for the purpose of information for the prevention of evasion or avoidance of income tax chargeable under this Act or under the corresponding law in force in that country or investigation of cases of such evasion or avoidance or

(d) For recovery of income tax under this Act and under the corresponding law in force in that country and may by notification in the Official Gazette, make such provisions as may be necessary for implementing the agreement.  

In view of this position the Central Government does not have the power to enter into DTAA with Dubai as there is no tax on individuals and companies except certain category of companies. However the Central Government can enter into DTAA with Dubai as the Dubai does levy tax on certain categories of companies.

But the individuals and other entities who do not pay any tax in the Dubai at present cannot access the Treaty which is a precondition for accessing a Treaty.

(ii) In terms of Article 4(1) Resident of a Contracting State means 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 AAR held that unless actual tax has been paid by the person in the Dubai one is not regarded as Resident.   

In view of this position, Cyril Pereira, though residing in the Dubai and domiciled in the Dubai and having close economic ties with the Dubai, cannot be termed as the Resident of Dubai for accessing the DTAA between the Dubai and India. The decision of Rafique was held to be incorrect in view these factors. This is because no tax is paid by Cyril Pereira in the Dubai.

(iii) The term ‘liable to tax’ is equated with the term ‘Subject to Tax’ (actual payment of tax).

(iv) The contention that the Dubai has not granted immunity from taxation and has kept its right to tax alive and that the subject is liable to tax was not accepted by the AAR.   

The AAR held that Cyril Pereira was not entitled to the benefits of DTAA between Dubai and India as there is no tax on individuals in the Dubai.

Though the decision is applicable only to Cyril Pereira, it has wide ramifications in view of the observations of the AAR and the conclusions arrived there from.

AAR Observations on Ruling - Cyril Pereira Case
(i) S. 90(1) is alternative and not cumulative. Clause (c) of S. 90(1) provides for exchange of information between the two states entering into DTAA and S. 90(1) is the enabling Section to enter into treaty. It is submitted with respect that the AAR appears to have overlooked Clause (c) of S. 90(1). Under this Clause individuals and other classes of persons are covered.

(ii) Resident of a Contracting State is one who is liable to tax. The term ‘Liable to tax’ is much wider than the term ‘subject to tax’. Equating both the terms to mean the same thing is not the spirit of the international convention. Dubai is not a tax haven. It has not given up its right to tax its residents. It has retained its right to tax at any time it so feels, though presently it does not subject its residents to tax.

It has not given any exemption from tax even for a limited period let alone immunity from tax. Its residents remain exposed to ‘liability to tax’ without any notice.

(iii) It is generally accepted that the AAR would be consistent in giving its views and not air divergent views, for the sake of uniformity, consistency, harmony and non discrimination.

For instance the decision in the matter of Cyril Pereira acts adversely as compared to the decision in the matter of Rafique.           

This would adversely discriminate Cyril Pereira as compared to Rafique on identical issues.

(iv) On balance and after considering the above points and well accepted international convention, the decision in the matter of Mohd. Rafique appears to represent the correct view.

C. ITAT Rulings - Capital Gains: In an interesting decision involving interpretation of the India-UAE Double Tax Avoidance Agreement (“Indo-UAE DTAA”), the Income Tax Appellate Authority (“ITAT”) laid down the principle that once the right to tax an assessee, in a specified circumstance, was vested in one Contracting State under a DTAA, then whether such right was exercised or not, was a prerogative of such Contracting State. Further, if the resultant effect of the Treaty leads to double non-taxation of such income, then it had to be accepted by such other State as a fact of international taxation and due respect given to the treaty that provided for it.

The facts involve an individual assessee, resident of the UAE, who claimed the benefit of Article 13(3) under the Indo-UAE DTAA. Article 13(3)1 of the Indo-UAE DTAA provides that capital gains earned on alienation of shares are ‘taxable only in the Contracting State of which the alienator is resident’. In this regard, the issue at hand was that since UAE did not impose any taxes on an individual, whether capital gains on alienation of shares realized by a resident of UAE would be exempt from tax in India under Article 13(2) of the Indo-UAE DTAA.

The assessee’s claim was denied by the Assessing Officer on the basis of AAR ruling in Cyril Eugene Pereira’s case, which provides that an individual not liable to a tax under UAE law, is not eligible to claim relief for that tax payable in India under the provisions of Indo-UAE DTAA. He further went on to say that the provisions of the said DTAA did not apply to income which may come under the purview of double non-taxation. The same conclusion was reached by the Commissioner of Income Tax (Appeals) on appeal.

Subsequently, the question came up before the ITAT bench on appeal made by the assessee. While allowing the assessee’s appeal, the ITAT relied on an earlier decision of the ITAT in a similar case,ADIT v Green Emirates Shipping and Travels2, which laid down the position that actual payment of tax in one of the contracting States is not a condition precedent to avail the benefits of the DTAA in another contracting State because a tax treaty prevents not only ‘current’ taxation but also ‘potential’ double taxation.

The ITAT, while reiterating the principle laid down by the Hon’ble Supreme Court judgement in Azadi Bachao Andolan3 and Klaus Vogel’s Commentary on Double Taxation Conventions, held that if two contracting States consciously entered into a DTAA which left scope for double non-taxation, then the same had to be interpreted by the judicial forums as they exist.

Interestingly, the ITAT also relied upon a foreign court decision given in a similar case by a Dutch Court of Appeal, which had confirmed the decision given in ADIT v Green Emirates Shipping and Travels, a few months after it was pronounced. While according a persuasive value to the reasoning and the decision applied by the Dutch Court to the case on hand, the ITAT observed that reference to similar foreign cases involving interpretation of international tax treaties could achieve consistency in judicial interpretation under different tax regimes.

Some Other International DTAA with Dubai

Cyprus, South Africa, Belgium, France, China, Singapore, Oman - Later that year, the DFSA signed MoUs with the Securities and Exchange Commission of Cyprus, the Financial Services Board of South Africa, the Irish Financial Services Regulatory Authority, the Banking, Finance and Insurance Commission of Belgium, the Malta Financial Services Authority, the supervisory arm of the Banque de France, the China Securities Regulatory Commission, the Monetary Authority of Singapore, and the Capital Market Authority of Oman.

In August 2009, the Dubai Financial Services Authority entered into a Memorandum of Understanding (MoU) with the Bank Supervision Department of the South African Reserve Bank. According to the DFSA, the MoU should encourage more South African financial institutions with operations in the Middle East to establish in the Dubai International Financial Centre (DIFC). “This initiative reflects each agency’s commitment to co-operation in relation to prudential oversight and inspections,” Koster stated.

The MoU adopts the model for information sharing developed by the Basel Committee on Banking Supervision and follows similar arrangements the DFSA has with other significant banking supervisors in the UK, Germany, France, the US, Singapore, and China. Last year, the DFSA also signed an MoU with the Reserve Bank’s fellow financial regulator, the Financial Services Board of South Africa.

“In these recently turbulent times the importance of effective coordination and cooperation between banking supervisors cannot be overstated,” said Koster. “We are looking for better ways of working together to resolve current problems and prevent their repetition. Agreements such as this will make a difference,” he concluded. On October 29, 2009, the DFSA entered into a Memorandum of Understanding (MoU) with the Securities and Exchange Board of India (SEBI). The Securities and Exchange Board of India was established in 1992 to regulate the securities markets in India, to protect the interest of the investors and to promote the development of, and to regulate the securities market. The DFSA further bolstered regulatory cooperation between the Emirate and third countries with the signing of a Memorandum of Understanding on February 23, 2010, with the Qatar Financial Centre (QFC) Regulatory Authority.

The QFC Regulatory Authority was established in 2005 as the independent regulatory body of the Qatar Financial Centre. It has been established to regulate firms that conduct financial services in or from the QFC. The AMF is France’s independent public body responsible for: safeguarding investments in financial instruments and in all other savings and investment vehicles; for ensuring that investors receive material information; and for maintaining orderly financial markets. The AMF also lends its support to financial market regulation at European and International levels.

Both the AMF and the DFSA are signatories to the IOSCO multilateral MoU, having satisfied the highest standards of co-operation and assistance among IOSCO members. Under the latest agreement, cooperation between the agencies will be further enhanced on a bilateral level. The Reserve Bank of India (RBI) signed a Memorandum of Understanding with the Dubai Financial Services Authority (DFSA) in June 2011 during a visit of Paul Koster, Chief Executive of the DFSA and other senior DFSA officials to Mumbai. Speaking after the signing, Mr Koster commented: "Indian banks have a significant and growing presence in the Dubai International Financial Centre (DIFC), so this enhancement of information sharing and assistance between the RBI and the DFSA is a critical step to ensuring confidence in each of our regulatory regimes.

The DFSA entered into a Memorandums of Understanding with the Swiss Financial Markets Supervisory Authority (FINMA) on July 28, 2011. DFSA Chief Executive, Paul Koster, commented: "As active members of the International Organization of Securities Commissions and the International Association of Insurance Supervisors, FINMA and the DFSA strive to embrace best practice and seek to reflect the resolutions of the international standard-setters. This initiative should be seen as an affirmation of a mutual willingness to co-operate and share information to those standard.

Korea - In April 2006, the DFSA announced that it had reached an agreement with the Financial Supervisory Commission of the Republic of Korea (FSC).

The MoU formalized arrangements for cooperation and information sharing between the two regulators, and recognized the reliance placed by each regulator on the quality of regulatory standards administered in the other’s jurisdiction.

Egypt - In September 2006, meanwhile, the Capital Market Authority of Egypt (CMA) and the Dubai Financial Services Authority (DFSA) revealed that they had signed an important Memorandum of Understanding (MoU), designed to enhance bilateral cooperation between the two regulators. In particular the MoU covered the gathering and sharing of information to enable each authority to assess the suitability of its authorized firms, to work with its exchange in the supervision of trading, and to ensure compliance with its laws.

Germany - Finally that year, the DFSA announced that it had entered into a Memorandum of Understanding (MoU) with the Bundesanstalt fur Finanzdienstleistungsaufsicht (BaFin), the Federal Financial Supervisory Authority of Germany.

Malaysia - Of particular significance was the mutual recognition agreement between the DFSA and the Securities Commission of Malaysia (SC), as a result of which DIFC domestic funds were the first foreign funds permitted to be sold into Malaysia. Under the mutual recognition framework, the first of its type to be concluded by either regulator, Islamic funds that have been approved by the SC may be marketed and distributed in the DIFC with minimal regulatory intervention, following the inclusion of Malaysia on the DFSA’s list of Recognised Jurisdictions. Similarly, Islamic funds which have been registered or notified with the DFSA will be able to access Malaysian investors. Supported by a bilateral memorandum of understanding, both regulators will also work closely in the areas of supervision and enforcement of securities laws to ensure adequate protection for investors.

Switzerland and Luxembourg - Another noteworthy development was the conclusion of Memoranda of Understanding with the national banking and securities regulators of Switzerland and Luxembourg, which followed Knott's visit to Berne on April 30, and Luxembourg on May 2 that year. “Switzerland and Luxembourg have long been regarded as among Europe’s leading international financial centres,". “There are already a number of significant Swiss financial institutions operating from the DIFC and there is a level of interest from financial entities in Luxembourg. In addition, there is a possibility of the development of additional business between traded markets in the DIFC and Luxembourg. These two bilateral relationships will assume increasing importance as each regulator relies on the quality of regulatory standards administered in the other’s jurisdiction.

The MoUs have put in place arrangements facilitating the exchange of information and investigative cooperation between the DFSA, the Swiss Federal Banking Commission (the SFBC), and Luxembourg’s Commission de Surveillance du Secteur Financier (CSSF).

United States - In October 2007, the DFSA entered into an historic Memorandum of Understanding with United States banking supervisors. The signing coincided with a visit of David Knott to Washington, where the International Monetary Fund (IMF) had held its annual meeting that year. The four federal US agencies principally responsible for banking supervision in the United States - the Federal Reserve, the Office of the Comptroller of the Currency (OCC), the Federal Deposit Insurance Corporation (FDIC) and the Office of Thrift Supervision (OTS) - all joined as parties to a comprehensive statement of co-operation with the DFSA.

This agreement adopted the model for information sharing developed by the Basel Committee on Banking Supervision, and follows similar arrangements the DFSA has with other significant banking supervisors, such as the UK Financial Services Authority (FSA) and Germany’s Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin).

Also in 2007, the DFSA signed MoUs with the Greek Hellenic Capital Market Commission (HCMC), the Guernsey Financial Services Commission (GFSC), the Icelandic FME, the Japanese Financial Services Agency (FSA), the Dutch Financial Markets Authority (AFM), and the New Zealand Securities Commission (NZSC).

Hong Kong - The DFSA continued to expand its network of cooperation agreements with foreign regulators in 2008. In April of that year, it signed a joint regulatory initiative with the Hong Kong Securities and Futures Commission to enhance access to Islamic financial products in Hong Kong and the Dubai International Financial Centre. The initiative came in the context of a Memorandum of Understanding (MoU) between the two regulators signed earlier in Hong Kong.

Whereas the annexed Second Protocol amending the Agreement between the Government of the Republic of India and the Government of the United Arab Emirates for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and on capital (hereinafter referred to as “Protocol”) signed on the 16th day of April, 2012 shall enter into force on the 12th day of March, 2013, being the date of the later of the notifications after completion of the procedures as required by the laws of the respective countries for the entry into force of the Protocol, in accordance with Article 2 of the said Protocol.

Now, therefore, in exercise of the powers conferred by section 90 of the Income-tax Act, 1961 (43 of 1961), the Central Government hereby directs that all the provisions of the Protocol annexed hereto shall be given effect to in the Union of India with effect from the 12th day of March, 2013.

The Government of the Republic of India and the Government of the United Arab Emirates desiring to amend the Agreement between the Government of the Republic of India and the Government of the United Arab Emirates for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and on capital signed at New Delhi on the 29th April, 1992 as amended by the Protocol signed on 26th March, 2007 between the Government of the Republic of India and the Government of United Arab Emirates (in this Protocol referred to as the Agreement),

ARTICLE 1 - The Agreement is amended by omitting Article 28 and substituting:


1. The competent authorities of the Contracting States shall exchange such information as is foreseeably relevant for carrying out the provisions of this Agreement or to the administration or enforcement of the domestic laws concerning taxes of every kind and description imposed on behalf of the Contracting States, or of their political subdivisions or local authorities, insofar as the taxation there under is not contrary to the Agreement.

2. Any information received under paragraph 1 by a Contracting State shall be treated as secret in the same manner as information obtained under the domestic laws of that State and shall be disclosed only to persons or authorities (including courts and administrative bodies) concerned with the assessment or collection of, the enforcement or prosecution in respect of, the determination of appeals in relation to the taxes referred to in paragraph 1, or the oversight of the above. Such persons or authorities shall use the information only for such purposes. They may disclose the information in public court proceedings or in judicial decisions.

3. In no case shall the provisions of paragraphs 1 and 2 be construed so as to impose on a Contracting State the obligation:

(a) to carry out administrative measures at variance with the laws and administrative practice of that or of the other Contracting State;

(b) to supply information which is not obtainable under the laws or in the normal course of the administration of that or of the other Contracting State;

(c) to supply information which would disclose any trade, business, industrial, commercial or professional secret or trade process, or information the disclosure of which would be contrary to public policy (ordre public).

4. If information is requested by a Contracting State in accordance with this Article, the other Contracting State shall use its information gathering measures to obtain the requested information, even though that other State may not need such information for its own tax purposes. The obligation contained in the preceding sentence is subject to the limitations of paragraph 3 but in no case shall such limitations be construed to permit a Contracting State to decline to supply information solely because it has no domestic interest in such information.

5. In no case shall the provisions of paragraph 3 be construed to permit a Contracting State to decline to supply information solely because the information is held by a bank, other financial institution, nominee or person acting in an agency or a fiduciary capacity or because it relates to ownership interests in a person.”


The Contracting States shall notify each other in writing through diplomatic channel of the completion of their domestic requirements for the entry into force of this Protocol. The Protocol, which shall form an integral part of the Agreement, shall enter into force on the date of the last notification, and thereupon shall have effect from the date of entry into force of this Protocol.


DUBAI: The new amendments in India-UAE tax treaty, which will allow taxation on investments back home is causing concern among the Indian community here. The situation has caused panic since details of the amendments are yet to be made public. India and the UAE signed several agreements, including amending the Agreement for Avoidance of Double Taxation and Prevention of Fiscal Evasion with respect of taxes on income, during the visit of Shaikh Mohammed bin Rashid Al Maktoum, prime minister of the UAE to India on March 25-26.

Amendments are being made to the UAE Double Taxation Avoidance Agreement (DTAA) as per which UAE-based NRIs will be taxed for future capital gains (income) earned from investments in India. There are nearly over a million NRIs in the UAE a majority of them have investments in the stock markets. The amendments will directly hit not only individual investors, but also investment companies that use UAE as a base to make investments in Indian stock markets. "We are very keen to know the outcome of the newly-signed Indo-UAE Double Taxation Avoidance Agreement," said K V Shamsudin, Director of Barjeel Securities, a major UAE-based brokerage house.

As per the DTAA that India has with the UAE, capital gains earned in India would be liable to tax only in the UAE. In other words, such capital gains are not to be taxed in India at all. However, since there is no tax in the UAE, the capital gains go tax-free altogether. This double non-taxation had become the bone of contention. The amendments now also define an individual who resides in UAE for at least 183 days in a calendar year as the 'resident' of that country.

ABU DHABI: An amended double taxation avoidance agreement (DTAA) between the UAE and India is likely to plug the loopholes in a previous agreement that enabled tax authorities in India to sometimes unnecessarily go after non-resident businessmen and individuals for alleged tax evasion, say experts. "The amended treaty will enable tax authorities in India to get a clearer view and now they will not unnecessarily tax an income which is covered under DTAA and not liable for tax in India," Prakash Chandra Mehta, an Abu Dhabi-based chartered accountant told Gulf News. The previous DTAA was non-operative in India as individuals residing in the UAE aren't subjected to income tax and, therefore, Indian individuals couldn't furnish proof to the Indian tax authorities of any tax deductions in the UAE.

Specific Relief - Under the Income Tax Act 1961 of India, there are two provisions, Section 90 and Section 91, which provide specific relief to taxpayers to save them from double taxation. Section 90 is for taxpayers who have paid the tax to a country with which India has signed DTAA, while Section 91 provides relief to taxpayers who have paid tax to a country with which India has not signed a DTAA. When there is a DTAA in place, capital gains arising from the sale of shares are taxable in the country of residence of the shareholder and not in the country of residence of the company whose shares have been sold. Therefore, a company resident in the UAE selling shares of an Indian company will not pay tax in India. Since there is no capital gains tax in the UAE, the gain will escape all tax. 

Date : 24th January, 2013 Updated on 15th November, 2013


Hearty Congratulations

Date: 23rd January, 2012

We congratulate to all the successful candidates joining CA profession after clearing their final examination.

An analysis of recent CA (Final Examination) Results:

  1. Passing percentage of students appearing in Both Group is 12.97%. 3,800 students have successfully passed both groups which is lowest among last 4 terms. There is 25% decrease in number of students passed both group in comparison to last term.
  1. Passing percentage of students appearing in 2nd Group is 21.85%.  11,300 students have successfully passed both groups which is also lowest among last 4 terms. There is 31% decrease in number of students passed both group in comparison to last term.
  1. Passing percentage of students appearing in 2nd Group is 27.30%, which is highest among last three terms. 1st Time in History, no. of Students passed 1st Group has crossed 13,000 marks.   
  1. More than 1.20 lakh students appeared [Consecutive four terms] both as well as Individual groups in aggregate.

Companies Bill: Breeding a different species of auditor
By Sai Venkateshwaran

Auditors are likely to become extremely conservative, risk averse and short-term focused in their relationship with clients. The biggest changes in audit regulations worldwide have often been in response to major accounting scams. The Companies Bill 2012 is no exception. The proposed changes discussed below have the potential to bring a tectonic shift in the audit profession; both in its structure as well as auditor behaviour.


Mandatory rotation: For the first time in India, periodic rotation of audit firms is now mandated for all listed companies. Audit firms now have a maximum tenure of 10 years, and a three-year period to comply with the new requirements. It also empowers shareholders to determine the frequency for rotation of audit partner and team.

Rotation has been introduced, together with a five-year term to provide tenure protection and shield auditors from dismissal after completion of any given year’s audit and prevent replacement without good cause. Whether this objective is achieved remains to be seen. Perhaps an approval from the Central Government or SEBI, instead of annual ratification by shareholders, would serve the objective better.

Limits: A limit of 20 audits per partner, without any distinction between public and private companies, as against the current ICAI imposed limit of 30 audits. This significantly reduces the amount of work a firm can take on and does not take into account the size and complexity of the audit as well as the capabilities within the audit firm. In addition, the limit of 20 partners per partnership imposed by the Partnership Act makes this a ‘double whammy’, unless long-pending hurdles are cleared for firms to convert to LLPs (limited liability partnership).

Other services: The auditor is prohibited from providing several non-audit services to the audit client or its holding or any subsidiary companies including investment advisory, investment banking and management services. This is wide open to interpretation and may limit auditors from providing services that do not pose any risk to independence. As a result, if any prohibited services are provided even to an immaterial entity in a group, the audit firm could be precluded from auditing any entity within the group.

Penalties: For contravention of duties, an auditor is liable (including unlimited personal liability in some situations) to pay damages to the company or ‘any other person’ for losses arising from incorrect or misleading statements in the audit report or for misleading statements in a prospectus. Further, the firm and the partners are jointly and severally liable (whether civil or criminal) for any fraudulent actions of even a single partner.

Class action suits, a new concept introduced by the Bill, can be filed against auditors to claim damages or compensation or demand any other suitable action for improper or misleading statement of particulars in the audit report or for fraudulent, unlawful or wrongful actions. In all these provisions, there doesn’t appear to be any concept of proportionality or linkage between the potential liability and the auditors’ involvement.

Whistleblower: The auditor should immediately inform the Central Government if she/he has reason to believe a fraud has been committed against the company by its officers or employees. There is no clarity on whether only material frauds are to be reported or even an embezzlement by a rogue employee.

Reporting: For all companies, an auditor is required to comment on the adequacy of the internal financial controls and their effectiveness, including orderly conduct of the company’s business. These requirements are more onerous than those under the Sarbanes Oxley Act, and need to be proportionate to the extent of public interest in companies, perhaps based on market capitalisation or some such metric.

The flip side
While these changes are steps in the right direction, there can be other unintended consequences. With rotation, we will move from a state where auditor changes are uncommon to one where the changes are frequent due to low tolerance level between auditor and company. There is bound to be concentration of more work towards the largest firms, which is not a bad objective as we are, perhaps, the only country where nearly 1,200 audit firms serve at least one public interest entity.

As the scope of auditor services is restricted and reporting responsibilities have been significantly enhanced, auditors are likely to become extremely conservative, risk averse and short-term focused in their relationships with clients. Auditors will be answerable not just to shareholders and regulators, but also a wide range of stakeholders, leading to increased professional scepticism.

While auditors found guilty should be penalised, the current provisions are vague and subject to wide interpretations. Accordingly, the risk associated with audits increases significantly, severely impacting the cost of professional indemnity insurance and, hence, audit fees. To make auditors more accountable, there is need for greater monitoring rather than additional penalties. The latter has the unintended consequence of making the profession less attractive to newcomers.


By CA A. K. Jain

The Companies Act, 2012 passed by the Lok Sabha provides for the concept of an OPC. Sec 2(1)(zzk) of the Companies Bill, 2009 brought in the concept of a “One Person Company”. It is essentially a legal entity which functions on the same principle as a Company, but with only one member and one shareholder. It was an alternative for Indians, who typically operate using the risky concept of a proprietorship.

One person company - As the name suggests, it means a company which has only one person as a member and where legal and financial liability is limited to the company only and not to that person. (i.e. liability is limited).

A New Concept - The reason why the old Companies Act of 1956 had made it compulsory for a Company to have a minimum of two members was so that it could be clearly separated from a sole proprietorship, a corporate structure which is categorically excluded from the Act. However, the duplicity of this provision was blatant and rampant. People started forming companies by adding a nominal member/ director, allotting them one single share, which is the minimum requirement for a director as per the Act, and retaining the rest of the shares themselves. Thus a person could enjoy the status and benefits of a Company while operating and functioning like a proprietary concern for all practical purposes. Hence, to make things clearer and more logical, an option has been created wherein a person can form a company as a one person entity.

Draft Companies Bill, 2009- OPC
The Draft Companies Bill, 2009, (Bill No. 59 of 2009), as introduced in Lok Sabha on 3rd August 2009, introduces the OPC concept for the first time in India. Some of the the provisions in the Draft Bill are as follows.

One Person Company is defined under section 2(1) (zzk) as: ‘One Person Company’ means a company which has only one person as a member”.

Chapter II deals with the Incorporation of the Companies. Section 3(1) (c) deals with the formation of One Person Company. It states, “One person, where the company to be formed is to be a One Person Company, by subscribing their names or his name to a memorandum in the manner prescribed and complying with the requirements of this Act in respect of registration. Provided that the memorandum of a One Person Company shall indicate the name of the person who shall, in the event of the subscriber’s death, disability or otherwise, become the member of the company. Provided further that it shall be the duty of the member of a One Person Company to intimate the Registrar the change, if any, in the name of the person referred to in the preceding proviso and indicated in the memorandum within such time and in such form as may be prescribed, and any such change shall not be deemed to be an alteration of the memorandum”

Section 5(1) deals with the memorandum of the One Person Company. It states “The memorandum of a company shall state— the last letters and word “OPC Limited” in the case of a One Person limited company”. Section 13(1) a, b, c deals with alteration of articles including the conversion of Private Companies, Public Companies to One Person Companies and vice-versa. One very important feature of the OPC concept is the conduction of Annual General Meeting.

Section 85(1) of the Draft Bill excludes One Person Company from holding Annual General Meeting at least once in a year. Section 171 is perhaps the most important provision to look out for. It states,

1. Where a One Person Company limited by shares or by guarantee enters into a contract with the sole member of the company who is also director of the company, the company shall, unless the contract is in writing, ensure that the terms of the contract or offer are contained in a memorandum or are recorded in the minutes of the first meeting of the Board of Directors of the company held next after the entering into the contract. Provided that nothing in this sub-section shall apply to contracts entered into by the company in the ordinary course of its business.

2. The company shall inform the Registrar about every contract entered into by the company and recorded in the minutes of the meeting of its Board of Directors under sub-section (1) within fifteen days of the date of approval by the Board of Directors with such fee as may be prescribed, or with such additional fee as may be prescribed within the time specified, under section 364.

3. Where the company fails to inform the Registrar under sub-section (2) before the expiry of the period specified under section 364 with additional fee, the company shall be punishable with fine which shall not be less than twenty-five thousand rupees but which may extend to one lakh rupees and every officer who is in default shall be punishable with imprisonment for a term which may extend to six months or with fine which shall not be less than twenty-five thousand rupees but which may extend to one lakh rupees, or with both.

Advantages - This will bring the unorganised sector of proprietorship into the organised version of a private limited company. The organised version of OPC will open the avenues for more favourable banking facilities. Proprietors always have unlimited liability. If such a proprietor does business through an OPC, then liability of the member is limited. This will open all options for Indian entrepreneurs, with pros and cons, and leave it in the hands of such promoters to decide the best options. It will help many foreign companies, which just need to appoint nominees for the sake of a minimum two members, when they form a wholly-owned subsidiary (in India). Various small and medium enterprises, doing business as sole proprietors, might enter into the corporate domain. The concept would boost the flow of foreign funds into India, as the requirement for a nominee shareholder would be done away with. However, the mandatory clause that a resident Indian director should be on the board could be a bottleneck.

Formation of  One - Person-Company - Firstly, the person is to give a separate name and legal identity to the Company, under which all the activities of the business are to be carried on. This ensures that a separate legal entity is formed. Secondly, the person has to nominate a name with that person’s written consent as a nominee to the OPC. This person will be the default and ad hoc member in case of the existing sole member’s death or disability. This provision will ensure perpetuity and continuity to the life of the Company. The golden rule of “members may come and go, but the Company must live on” holds good. Finally, every One Person Company should bear the letters “OPC” in brackets after it’s registered name, wherever it may be printed, affixed or engraved.

It also provides that the memorandum of One Person Company shall indicate the name of the other person as nominee, with his prior written consent in the prescribed form, who shall, in the event of the subscriber's death become the member of the company and the written consent of such person shall also be filed with the Registrar at the time of incorporation along with its Memorandum and Articles.

OPC In Other Countries
Various countries permit this kind of a corporate entity. China introduced it in October 2005 in which the promoting individual is both the director and the shareholder. The amended company law of Pakistan permits one person to form a single-member company by filing with registrar, at the time of incorporation, a nomination in the prescribed form indicating at least two individuals to act as nominee director and alternate nominee director. In US, several states permit the formation and operation of a single-member Limited Liability Company (LLC). In China, one person is allowed to apply for opening a limited company with a minimum capital of 1, 00,000 Yuan. The amended law of China prescribes that the owner should pay the investment capital at one time and bars him from opening a second company of the same kind. In most countries, the law governing companies enables a single-member company to have more than one director and grants exemptions to such companies from holding AGMs, though records and documents are to be maintained. The concept is also very popular in Singapore.

Conclusion :
OPC will give greater flexibility to an individual or a professional to manage his business efficiently and at the same time enjoy the benefits of a company. Company law experts see a rise in registrations of one-person companies once the Bill is enacted into law. The concept of OPC will also help many foreign companies, which need to appoint a minimum of two nominees now when they form a wholly-owned subsidiary. OPC will open the avenues for more favourable banking facilities, particularly loans, to such proprietors. Besides, the concept will boost flow of foreign funds in India as the requirement of nominee shareholder would be done away with.

Experts feel the key challenge for such a company will be to ensure that supporting legislations also recognise such a company as an entity and not just an extension of a sole proprietorship.



Over 1400 One-Man Companies In 9 Months

New Delhi: Press Trust of India

February 02, 2015. More than 1,400 one-person companies, a majority of them engaged in business services, have been set up in just nine months starting April 2014 when regulations allowing such entities came into force.On an average, the figure translates to 155 new one person companies (OPCs) being established every month from April-December 2014 period. The concept of OPC was introduced through the new Companies Act, which came into force from April 1, 2014. These entities are expected to facilitate easier access to funding sources for entrepreneurs.

Latest data compiled by the corporate affairs ministry shows that till December 31, 2014, a total of 1,403 OPCs were registered with it and their collective authorised capital stood at ` . 31.31 crore. In terms of economic activity, as many as 775 OPCs have been registered in the business servicescategory followed by 196 such entities in the community,personal and social services segment.There were 135 OPCs intrading and 106 in manufacturing categories, according to the ministry, which is implementing the Act.

In December last alone, 277 OPCs were set up and their total authorised capital stood at 5.90 crore. Overall, there were little over 10 lakh active companies in the country at the end of December last year whereas total count of registered entities stood at more than 14.39 lakh.

Out of the registered ones, more than 1.39 lakh companies have been classified as 'dormant'.


Note: Information placed here in above is only for general perception. This may not reflect the latest status on law and may have changed in recent time. Please seek our professional opinion before applying the provision. Thanks.