Bringing profits home from a UAE company: dividends, salary, loans and what each costs in India

The UAE company is profitable, the tax there is 0% or 9%, and the promoter in Mumbai wants to use the money in India. This is the moment when a well-planned structure either delivers or unravels, because India taxes the promoter — not the UAE company — and the route chosen decides the rate. There are four routes; only two of them are usually sensible.

1. Dividends

The UAE levies no withholding tax on dividends paid abroad. In India, a dividend from a foreign company is taxable in the resident shareholder's hands at slab rates for an individual, or at the company rate — with the concessional 15% rate for dividends from a foreign company in which an Indian company holds 26% or more having been withdrawn with effect from assessment year 2023-24. If the UAE company paid corporate tax at 9%, the Indian shareholder cannot credit it against Indian tax on the dividend, because the UAE tax was on the company's profits and the Indian tax is on the shareholder's dividend — different taxpayers. The India–UAE treaty's 10% dividend rate limits UAE tax, which is nil anyway, and does not reduce Indian tax. Dividends are simple and clean; the cost is the full Indian rate.

2. Salary and director's fees

If the promoter works for the UAE company, a salary for that work is deductible to the company and taxed in India in the promoter's hands at slab rates — if the promoter is resident in India. Salary for services rendered outside India by an individual who is non-resident is not taxable in India at all, so promoters who genuinely relocate to Dubai pay no Indian tax on salary for work done there; pay for days worked in India is Indian-source and taxable in India unless the India–UAE treaty's short-stay exemption for employment applies. For a resident promoter, the treaty's employment article taxes the salary in the UAE only if the work is physically performed there, so a Mumbai-based promoter's "UAE salary" is fully Indian income. Director's fees follow a similar analysis. The salary route is efficient only where the work is real and the promoter's residence matches the facts.

3. Loans — the route to avoid

A loan from the UAE company to its Indian promoter looks tax-free. It is the route most likely to go wrong. Section 2(40)(e) (2(22)(e)) treats a loan by a closely held company to a shareholder holding 10% or more as a deemed dividend, taxable in full, and on its face the section is not limited to Indian companies. A loan from the UAE company to the promoter's Indian company is an external commercial borrowing, permitted only within the ECB framework — recognised lender, minimum maturity, all-in-cost ceilings, end-use restrictions and Form ECB reporting to the RBI. An informal transfer described as a loan fails on both counts. Loans in the other direction — from the promoter to the UAE company — are also restricted: an individual investing under LRS may hold equity only, not lend.

4. Capital reduction, buy-back and liquidation

Returning capital reduces the UAE company's share capital and is reported to the AD bank as a partial disinvestment in Form FC, with proceeds repatriated within 90 days. Amounts received above the original cost are taxed in India as capital gains or deemed dividends depending on the form. This is the route for winding down, not for regular extraction.

Crediting UAE corporate tax

Where the Indian taxpayer itself paid tax in the UAE — for example, an Indian company with a UAE branch, or a promoter taxed in the UAE on the same income — the treaty allows a credit in India for the UAE tax, claimed by filing Form 67 by the end of the assessment year (where the return is filed by the due date or as a belated return) with proof of payment. The credit is limited to the Indian tax on the same income. It is claimed by the person who paid the foreign tax on the same income; it does not flow from company to shareholder.

The reporting that goes with every route

Every year: the shareholding, the dividends received and any loans or guarantees in Schedule FA of the promoter's return; the Annual Performance Report to the AD bank by 31 December, which discloses dividends repatriated; and, for the UAE company, the corporate tax return within nine months of year-end and, for a free zone company, the qualifying-income position. Dividends and other dues from an ODI holding must be realised and repatriated to India within 90 days of falling due — they cannot simply be left in a foreign account.

Questions we are asked

Is there withholding tax on dividends paid by a UAE company to an Indian shareholder? No UAE withholding. The UAE levies no withholding tax on dividends paid abroad, but India taxes the dividend in a resident individual shareholder's hands at slab rates.

Is the 15% concessional rate still available on dividends from a foreign subsidiary to an Indian company? No. The concessional 15% rate for dividends from a foreign company in which an Indian company holds 26% or more was withdrawn with effect from assessment year 2023-24.

Is a UAE salary taxable in India if the promoter has genuinely moved to Dubai? No, if the promoter is non-resident. Salary for services rendered outside India by a non-resident individual is not taxable in India, so promoters who genuinely relocate to Dubai pay no Indian tax on salary for work done there; pay for days worked in India is Indian-source and taxable in India unless the India–UAE treaty's short-stay exemption for employment applies.

Within how many days must dividends from a UAE ODI holding be brought back to India? 90 days. Dividends and other dues from an ODI holding must be realised and repatriated to India within 90 days of falling due and cannot simply be left in a foreign account.

Ibrahim Khan · I. H. Khan and Associates
Tax, GST and business setup advisors — Mumbai and Thane. Contact us to discuss your situation.

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