Using Double Taxation Agreements (DTAs) to Optimise Tax for UK–UAE Businesses

Trade and investments between the United Arab Emirates (UAE) and the United Kingdom have been increasing at an unprecedented rate in recent times.  

The UAE has put in place a federal corporate tax framework, with the UK still imposing withholding taxes on some cross-border payments. It is therefore essential that businesses with operations in both countries learn how to avoid being taxed twice for the same revenue.  

The UK-UAE Double Taxation Agreement (2016), refreshed via the OECD Multilateral Instrument (MLI), is one of the key instruments for this. Properly applied, it can reduce tax expenses, enhance cash flow, and bring certainty on where profits are to be taxed. 

What is a Double Taxation Agreement (DTA) and why is it important?

A Double Taxation Agreement is a treaty between two nations that prevents income from being taxed twice in both nations. It operates by dividing taxing rights, limiting or abolishing withholding tax, and establishing rules of how businesses and persons will be handled when they are connected to both nations.  

The UK–UAE treaty, for its part, addresses income taxes like corporation tax, income tax, and capital gains tax in the UK and all corporate income taxes charged in the UAE. 

For companies, this treaty minimises the exposure to double taxation upon income transfer between the UK and the UAE. It also assists in determining whether a company is regarded as resident in either state or not, and whether operations within one state constitute a permanent establishment.  

In addition to this, the treaty provides access to the Mutual Agreement Procedure (MAP), a procedure for settling tax disputes between tax administrations. 

How has the UAE tax environment evolved since 2023?

Previously, the UAE had been commonly referred to as a “tax-free” jurisdiction. That characterisation changed in June 2023 with the enactment of the Federal Corporate Tax Law, which established a harmonised system among all emirates.  

The law taxes taxable income in excess of AED 375,000 at a rate of 9% and 0% for amounts less than that amount. Free zones also have a significant function, those qualifying as Qualifying Free Zone Persons (QFZPs) are able to maintain a 0% rate on “Qualifying Income,” subject to rigorous substance and activity tests. 

The other big shift is the establishment of a withholding tax regime. Although the law does formally authorise withholding taxes on some cross-border transactions, as it stands, the UAE Cabinet has put the rate at 0%. Accordingly, dividends, interest, and royalties paid out of the UAE to foreign recipients are not withheld for the time being. 

The UAE Federal Tax Authority (FTA) has released comprehensive guidance on foreign-source income, such as participation exemptions, and the rules related to foreign tax credits. This means that UAE companies with investments abroad must now pay closer attention to structuring income streams in a tax-effective manner. 

How does the treaty determine tax residence?

One of the key roles of a DTA is to determine residence when both nations might have taxing rights. For individuals, the agreement provides tie-breaker rules: first considering where an individual has a permanent home, followed by the centre of vital interests, habitual abode, nationality, and lastly resolution by the two governments if it comes to that. 

For businesses, the regulations have changed with the MLI. In the past, residence was resolved on the “place of effective management.”  

Today, dual-resident companies are subject to a mutual agreement procedure between UK and UAE tax administrations, which considers a wider set of factors. This makes it more difficult to survive on paper-only structures, substance and actual management location are essential. Locally, the UAE provides Tax Residency Certificates (TRCs) to business entities and individuals who qualify under its circumstances. Individuals typically qualify after 183 days of physical presence, or 90 days if they possess a residence visa and show connections.  

Companies qualify if they are established in the UAE or have effective management within the UAE. A TRC is typically necessary to obtain treaty relief. 

What is a Permanent Establishment (PE) and why is it significant?

A Permanent Establishment (PE) occurs when a foreign enterprise has a material presence in another nation. According to the UK–UAE treaty, this would normally be a branch, an office, a factory, or a building contract that continues for more than 12 months. Alternatively, it can be established if a dependent agent in one nation habitually enters into contracts on behalf of the foreign enterprise. PE status is crucial because it determines whether business profits are taxable in the source state.  

For example, a UK company without a PE in the UAE will generally only be taxed in the UK, but once a PE exists, the UAE can tax the profits attributable to that PE. With the UAE’s corporate tax now in force, this has become a real financial consideration for international groups. 

How does the treaty address withholding taxes?

Cross-border payments are usually subject to withholding tax (WHT) in the source country. The UK imposes withholding of 20% on most payments of royalties and interest, but this can be lowered or waived under a treaty. For dividends, the UK does not usually charge WHT, except in some cases, like Real Estate Investment Trust (REIT) distributions. 

The position of the UAE is simpler. It charges 0% WHT for outbound dividends, interest, and royalties under existing regulations. It is thus a desirable location for holding companies. 

The UK–UAE treaty also offers relief. As an instance, it assigns taxing rights such that royalties are taxable in only the recipient’s residence country, hence exempting them from UK withholding tax when paid to a UAE resident. Interest relief is limited to specific cases (e.g., payments to certain government bodies, banks/financial institutions, etc.), and otherwise the UK may still withhold 20% unless HMRC grants treaty relief to a qualifying recipient. 

For companies, the takeaway is this: UK-source interest and royalty payments are the greatest potential tax leakages. To avoid unnecessary withholding tax, relief under the treaty must be requested actively from HMRC. 

How is double taxation actually avoided?

The treaty prescribes ways of avoiding double taxation. The UK employs the credit method in most cases, which allows enterprises to set off foreign tax paid against UK tax payable. The UAE supports exemptions (for eligible foreign dividends and capital gains) and foreign tax credits to the extent of UAE tax on the same income payable. 

For instance, when a UAE company remits UK tax on the royalties it gets from a UK subsidiary, the UAE will credit the tax against its corporate tax bill. Likewise, the receipt by a UK parent of dividends by a UAE subsidiary can avail the UK’s participation exemption, such that the income is not taxed at all. 

What is the function of Tax Residency Certificates (TRCs)?

Proving residence is necessary to access treaty benefits. In the UAE, this is the form of a TRC issued by the FTA. Applications are submitted online via the EmaraTax portal and usually involve company documents (e.g., trade licences, audited accounts, and utility bills) or, for individuals, passports, Emirates IDs, and proof of physical presence. In the UK, companies and individuals can obtain a Certificate of Residence from HMRC if they must demonstrate their tax status for treaty purposes. In the absence of certificates, treaty claims will normally be denied. 

What are the anti-abuse rules and the Principal Purpose Test?

One of the most important changes brought about by the MLI is the Principal Purpose Test (PPT). The provision permits tax administrations to refuse treaty benefits if it seems that one of the main aims of an arrangement was to obtain those benefits. 

In operation, this requires businesses to show substance and commercial logic. A “letterbox” UAE company created only to receive royalties from the UK would likely not pass the PPT, particularly if it has no employees, offices, or decision-making authority in the UAE. In contrast, a UAE company with genuine operations, managerial presence, and economic activity is far more likely to pass the scrutiny. 

Practical examples 
Take an example of a UK parent and a UAE free zone subsidiary. Dividends repatriated to the UK are not liable to WHT in either country, and foreign dividends are also exempt in the UK. This is an effective structure for profit remittance. 

Now, suppose a UAE parent lends to a UK subsidiary. In the absence of treaty relief, UK-source interest payments would be subject to 20% WHT. Treaty benefits for interest are available only where the UAE lender fits an eligible category under the treaty, many corporate lenders will not qualify automatically.  

In practice, 20% UK WHT often applies unless the lender falls within a qualifying category and HMRC has granted clearance. 

In yet another situation, a UAE firm that is licensing intellectual property to the UK would be subject to 20% WHT on royalties without relief under the treaty. But under the treaty, royalties are taxable only in the UAE, which currently imposes no WHT. 

Finally, consider a UK construction company working in the UAE for 10 months. Under the treaty, no PE arises because the 12-month threshold is not met. However, UAE domestic rules on non-residents and PE still need to be checked carefully. 

What happens if you’re taxed twice anyway?

Where double taxation occurs despite the treaty, companies can approach the Mutual Agreement Procedure (MAP). This enables HMRC and the UAE Ministry of Finance or FTA to discuss a settlement.  

MAP can resolve residence disputes, allocation of profits to a PE, or withholding tax reliefs mistakenly withheld. Though the procedure may take some time, it provides a priceless safety net for cross-border enterprises. 

Common pitfalls and best practices

A frequent error is thinking the UAE is still fully tax-free. While withholding taxes are 0%, corporate tax is applicable to most UAE entities, and non-residents can be taxed on UAE-source income.  

Another common mistake is not claiming treaty relief in the UK, with unwanted 20% withholding on royalties and interest. Companies also encounter issues when they put in place structures that have minimal or no substance, leaving them vulnerable under the PPT. 

The optimal course is to have clear documentation: tax residency certificates, board minutes indicating where the decisions are made, intercompany agreements that evidence arm’s-length pricing, and detailed transfer pricing records. They not only underpin treaty claims but also ready the business for audits or disputes. 

Final Thoughts

The UK–UAE Double Taxation Agreement continues to be an important instrument for businesses that want to operate effectively in both jurisdictions. With the UAE’s corporate tax regime now implemented and global standards on treaty abuse being adhered to, tax planning will need to be substance-based, compliance-driven, and documentation-oriented. 

Practically, the greatest tax risks on the UK side come from the UK withholding taxes on interest and royalties, which can be addressed by an appropriate application of treaty relief. On the UAE side, the lack of WHT maintains structures efficient, but PE and corporate tax rules need to be considered with caution. 

For entrepreneurs and CFOs, the road ahead is simple: obtain tax residency certificates, request treaty relief where required, create substance in UAE operations, and have documentation strong enough to pass inspections. With proper planning, the UK–UAE treaty can turn cross-border taxation into a winning strategy. 

Seek our professional on-the-ground guidance, contact us via mail at info@radiantbiz.com or WhatsApp & call us at +44 7398 573313!