Professional Insight

03 Apr 2023

Understanding the Concept and Its Impact on Businesses

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Double taxation is a term used to describe a scenario where the same income or profits are taxed twice by two different tax authorities. This situation may arise when a company or individual operates in more than one country and is subject to taxation in both jurisdictions. Double taxation can result in substantial financial losses for businesses and individuals, reducing the incentive for international trade and investment.

In the United Arab Emirates (UAE), double taxation is a significant concern for many companies and individuals that are subject to taxation in multiple countries. For instance, a UAE-based company that operates in the United States and generates income in both jurisdictions may be subject to taxation by both the UAE and the US governments, leading to significant financial losses for the company and reducing its competitiveness in both markets.

Ways to avoid double taxation

One way to mitigate double taxation is through tax treaties. These treaties are agreements between two or more countries that regulate taxation of cross-border transactions. The UAE has signed several tax treaties with other countries, including the US, UK, France, and India, to name a few. These treaties provide rules for determining which country has the right to tax specific types of income or profits, and offer mechanisms for avoiding double taxation. For example, the UAE-US tax treaty provides for a foreign tax credit, allowing UAE companies operating in the US to claim a credit against their US tax liability for taxes paid in the UAE.

Despite tax treaties, double taxation remains a concern for many businesses and individuals operating in multiple countries. It is essential to understand the tax laws in each country where one operates and seek professional advice to ensure compliance with local regulations and reduce the risk of double taxation.

Double taxation can also occur in real estate transactions when a property owner is subject to taxation in both the country where the property is located and their home country. To avoid double taxation in real estate transactions, it is crucial to understand the tax laws in both countries and take advantage of tax treaties where applicable. For example, the UAE has signed tax treaties with several countries, including the UK, which provide rules for determining which country has the right to tax rental income and capital gains from real estate transactions. By understanding these rules and seeking professional advice, property owners can reduce the risk of double taxation and maximize the return on their investment.

In conclusion, double taxation is a complex issue that can have significant financial implications for businesses and individuals. It is crucial for businesses to comprehend the concept of double taxation and how it can affect their operations. By taking measures to mitigate the impact of double taxation, businesses can minimize their tax burden, increase profits and earnings, and remain competitive in the global marketplace.

“Double taxation is an evil which ought to be avoided as far as possible.” – Andrew Mellon, former United States Secretary of the Treasury

Further reading

  • Bittker, B., & Eustice, J. (2014). Federal Income Taxation of Corporations and Shareholders. Warren, Gorham & Lamont.
  • Oster, S. M., & Conway, T. R. (2015). The Real Estate Investor’s Handbook: The Complete Guide for the Individual Investor. Wiley.
  • Rosenthal, J. A., & Mintz, J. M. (2017). Taxation of Corporate Reorganizations. Bloomberg BNA.

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