Selling an Indian Subsidiary From Dubai: What the Treaty Leaves to India

A common structure for an Indian group expanding abroad puts a Dubai company on top of the Indian operating subsidiaries. The UAE taxes companies at 9%, has no withholding tax on outbound payments, and exempts qualifying gains on shareholdings. From that, a belief has formed that a sale of the Indian subsidiary by the Dubai company is tax-free. The treaty says otherwise, and it says so in one sentence.

Article 13: India keeps the right to tax the gain

Article 13 of the India–UAE agreement allocates capital gains. Three of its paragraphs decide a share sale.

Paragraph 4 is the one that applies to a Dubai company selling an Indian operating subsidiary: "Gains from the alienation of shares other than those mentioned in paragraph 3 in a company which is a resident of a Contracting State may be taxed in that State." An Indian subsidiary is resident in India, so India may tax the gain. The residence-only rule in paragraph 5 — the one that would have favoured the Dubai seller — is expressly limited to property other than that in paragraphs 1 to 4.

The UAE side: the participation exemption

The Dubai company is a UAE Resident Person, so the gain is within UAE Corporate Tax unless an exemption applies. Article 23 of the Corporate Tax Law exempts income from a Participating Interest, and Article 23(5)(b) lists gains on the transfer, sale or other disposition of a Participating Interest derived after the minimum holding period. A Participating Interest requires all of the following.

1. An ownership interest of 5% or more in the shares or capital of the company.
2. Holding for an uninterrupted period of at least 12 months, or the intention to do so.
3. The company is subject to Corporate Tax or a similar tax in its country of residence at a rate of not less than 9%.
4. Entitlement to at least 5% of the profits available for distribution and at least 5% of liquidation proceeds.
5. Not more than 50% of the company's direct and indirect assets consist of interests that would not themselves qualify for the exemption.

Ministerial Decision No. 302 of 2024 fills in the subject-to-tax condition. Under Article 6, it is met where the company is tax resident throughout the Tax Period in a country levying a tax applied on a similar basis to Corporate Tax at a statutory rate of not less than 9%. Differences in reductions and reliefs, lower rates on certain brackets of income, targeted incentives or exemptions of a temporary nature, and alternative taxes on income or profits do not stop a tax from being on a similar basis. Whether a particular Indian company clears the test turns on the Indian tax regime it is subject to.

Put together: one tax, not two — but not none

Where the participation exemption applies, the UAE does not tax the gain. India may. The treaty's credit mechanism does not change that result: Article 25(3) obliges the UAE to credit Indian tax only up to the UAE tax attributable to the income, and Article 47 of the Corporate Tax Law caps the Foreign Tax Credit at the Corporate Tax due on the relevant income. On an exempt gain, both are zero.

The Dubai holding company therefore avoids a second layer of tax in the UAE. It does not remove the Indian layer. Where the exemption does not apply — a holding below 5%, a sale inside twelve months, or a subsidiary that fails the subject-to-tax test — the gain is taxable in the UAE at 9%, with a credit for Indian tax up to the UAE tax on that gain.

Dividends on the way up

The same holding receives dividends long before any sale. Under Article 23(5)(a), dividends from a foreign Participation are not taken into account in the UAE where the conditions continue to be met. In India, Article 10(2) of the treaty caps tax on dividends paid to a UAE-resident beneficial owner at 10% — and here, unlike capital gains, treaty residence of the Dubai company does change the Indian figure.

Where the Dubai holding company is a Qualifying Free Zone Person, holding shares is a separate question with its own conditions, including a twelve-month holding requirement for the income to qualify.

What to check

1. Classify the Indian company under Article 13: property-rich under 13(3), or ordinary shares under 13(4).
2. Assume India may tax the gain, and take Indian advice on whether and how it does.
3. Confirm the Dubai company holds at least 5% and is entitled to at least 5% of profits and liquidation proceeds.
4. Time any sale after twelve months of uninterrupted holding.
5. Test the Indian company against MD 302's subject-to-tax condition for the period in which the gain arises.
6. Check the 50% asset condition where the Indian company itself holds investments.
7. Model the Foreign Tax Credit only where the exemption fails — on an exempt gain there is nothing to credit.
8. Treat the treaty residence of the Dubai company as decisive for dividends, not for share gains.

The treaty text quoted here is the consolidated text published by India's Income Tax Department, incorporating the 2007 and 2012 Protocols. Indian capital gains tax — rates, computation and withholding by the buyer — is outside this article and needs Indian advice.