Taking into account the globalization of the economy and the active development of international business relations, taxation issues are becoming especially relevant for entrepreneurs working at the junction of different jurisdictions. One of the most interesting areas for Russian business today is the United Arab Emirates. One of the main factors contributing to this interest is a favorable tax policy, which provides many advantages for foreign entrepreneurs. In this article, we will look at the main aspects of corporate profit taxation in the UAE and their impact on Russian business.
Agreement on Avoidance of Double Taxation
One of the key documents regulating taxation between the Russian Federation and the UAE is the Agreement on Avoidance of Double taxation (SIDN). It is designed to simplify relations between the two countries and reduce the tax burden on businesses. The agreement applies to both individuals and legal entities and is aimed at eliminating the situation when the income of the same person is taxed twice.
The Sydney Convention stipulates that taxes on wages, salaries, etc. must be paid in the country of residence. That is, if the physical a person works in the Emirates, but is a resident of the Russian Federation, then taxes on his income will be paid in Russia if the activity is not carried out in the UAE.
According to the agreement, the parties undertake to exchange data on taxes related to income and capital. This applies to all forms of taxation, regardless of how they are levied. However, it is worth noting that the transfer of data should not contradict the laws of the countries, and also should not disclose any confidential information.
The agreement provides for a list of taxes that are subject to it:
— In the UAE: income and corporate taxes.
— In the Russian Federation: on the profits of organizations, on the income of individuals. persons, on the property of organizations and on the property of individuals.
So, if a UAE resident earns income or owns assets that, according to the law, are subject to taxation in Russia, he has the right to use the tax deduction system. In practice, this means that when calculating obligations in the Emirates, a deduction equal to the amount of tax already paid in the Russian Federation can be provided. Such a mechanism can be applied to both income and capital taxes, if such obligations arise. As a result, the workload is not duplicated, but distributed among jurisdictions in a more equitable manner.
A similar principle applies in the opposite direction. Russian tax residents who receive income or own capital that is taxed in the UAE can also benefit from a tax deduction. In this case, the amount paid in the Emirates is taken into account when calculating obligations in Russia and reduces the total amount of tax payable to the Russian budget.
Such mechanisms significantly simplify the conduct of international business and make cross-border investments more predictable. Thanks to the agreement, companies and private investors have the opportunity to plan financial flows more effectively, reduce the risk of double payments and increase overall economic efficiency.
Taxation of corporate profits
When Russian companies enter the UAE market, it is important to take into account the specifics of corporate taxation and the rules of profit distribution between jurisdictions. If an organization from Russia opens a branch or representative office in the Emirates, taxation of profits is usually carried out in the country where the business is actually conducted. In this case, the presence or absence of a so-called permanent representative office in another jurisdiction becomes a key factor.
If the company does not establish a representative office outside the place of incorporation, profits are taxed only in the relevant jurisdiction. However, if the business is conducted through a permanent establishment in another location, that part of the profit directly related to the work of this unit is subject to taxation.
When determining the financial result of a permanent establishment, the principle of an «independent company» is applied. This means that such a division is considered as a separate business unit operating on market conditions. Accordingly, all transactions between the parent company and its divisions must comply with transfer pricing rules. Calculations in this case are based on market prices and conditions that could be applied between independent parties.
The legislation also allows for the inclusion of certain administrative and general administrative costs in expenses. Such expenses may include management services, administrative support and other related costs, if they are justified and comply with the requirements of the tax legislation of the relevant country.
It is important to note that foreign companies operating in the Emirates are taxed on the same terms as local businesses. This approach creates uniform and transparent rules for all market participants and ensures equal business conditions for international and national companies.
In addition, the legislation provides for the possibility of accounting for payments between companies from different countries. Interest, royalties, and other forms of remuneration paid under international commercial relations may be counted as deductions on terms similar to domestic payments. This simplifies cross-border financial transactions, makes the structure of international settlements more transparent and reduces risks for companies operating in the global market.
Features of tax residency
The Emirates are clearly distinguished by the fact that such types of personal income as wages, dividends, interest on investments and other income, as a rule, are not subject to taxation in the country. That is why many professionals and business owners consider moving to this region as an opportunity to optimize personal finances and improve the efficiency of profit management.
Nevertheless, when planning a financial structure, it is important to take into account international tax obligations. If a person living in Dubai retains sources of income in the Russian Federation, such income may be subject to taxation in the Russian jurisdiction. In this regard, when building financial flows, investment activities and business management, it is recommended to analyze the possible consequences in advance and take into account the requirements of the legislation of different countries.
To determine in which country an individual is considered a tax resident, several basic criteria are usually checked:
1. Availability of permanent housing
First of all, the state where a person has their main place of residence is taken into account — for example, their own housing or a long-term lease.
2. The center of vital and economic interests
Next, it analyzes where the main personal and business connections of a person are concentrated. Such factors may include where the family lives, running a business, working, bank accounts, or active economic activity.
3. Usual place of stay
If it is difficult to determine the center of vital interests, the place where a person spends most of his time and where he actually lives on a regular basis is taken into account.
4. Citizenship
In situations where the previous criteria do not allow unambiguous determination of residency, the nationality of an individual may be taken into account.
It is also important to keep in mind the widely used international rule of «183 days». In most cases, the status is determined by the actual time of residence in the country. If a Russian citizen stays in the UAE for more than 183 days during a consecutive 12-month period, he can usually be recognized as a tax resident of this country.
At the same time, in order to correctly determine the status and comply with all legal requirements of different jurisdictions, it is recommended to consult with Makebiz specialists in advance.
The signed agreement between Russia and the UAE opens up new horizons for Russian business. It not only simplifies many procedures, but also creates a favorable environment for doing business in both countries. Understanding the basic principles of taxation, as well as determining tax residency, will help Russian entrepreneurs effectively plan their activities and minimize risks.
Thus, Russian companies considering the possibility of working in the Emirates have the right to count on more transparent and favorable conditions, which in turn contributes to the development of bilateral economic ties and strengthening the position of business in the international arena.
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