Cross-Border Structuring Across India, the UAE and the USA: A Practical Primer

A business that moves profit across India, the UAE and the USA has to satisfy three tax systems at once: India at about 25%, the UAE at 9% with a 0% free-zone regime, and the US at 21% plus a tax on the profits of foreign subsidiaries. Treaties and credits prevent the same income being taxed twice, but only where residence, substance and reporting hold up in each country. This primer sets out the rules that drive most structures and the patterns we see most often.

Five rules that decide most outcomes

1. Where a company is managed beats where it is registered. India treats a foreign company as resident if its effective management is in India. The UAE treaty requires a UAE company to be managed and controlled wholly in the UAE. See POEM risk for a Dubai company.
2. Treaty rates need treaty residence. A tax residency certificate, real activity and beneficial ownership are conditions, not paperwork. See India-UAE DTAA withholding rates.
3. Related-party prices are tested in every country. All three countries apply the arm’s length standard. See transfer pricing between India and the UAE.
4. Money leaving India is regulated. Overseas investment by residents needs reporting under FEMA before remittance, with limits for individuals. See ODI vs LRS.
5. The US taxes foreign profits as they arise. A US parent includes its Indian or UAE subsidiary’s income each year. See GILTI becomes NCTI.

Pattern 1: Indian group with a UAE trading or regional company

The Indian company sets up a UAE subsidiary to serve Gulf and African customers. It works when the UAE company has its own people who find customers, negotiate and carry risk, and when prices between the two are benchmarked. It fails when the UAE company is an invoicing layer run from India: India can then tax it as a resident, deny the margin under transfer pricing, or both. Profits returning to India as dividends are taxed in the Indian company, with a deduction available when they are distributed onward to its own shareholders.

Pattern 2: Indian founder who relocates to the UAE

The founder becomes UAE resident and holds the Indian company’s shares from there. Dividends from India bear 10% under the treaty instead of 20% and more. Gains on sale of Indian company shares remain taxable in India. The founder must actually spend 183 days a year in the UAE, must watch the 120-day and deemed residence rules in India, and must not continue to run a UAE company from India during visits. See UAE tax residency certificate for Indians.

Pattern 3: US parent with an Indian operating company

This is the classic venture-backed structure, reached by incorporating in Delaware first or by a flip. The Indian company is paid cost plus a mark-up for development and support, and pays Indian tax on that margin. The US parent includes the Indian profit in its own income each year but usually owes little after crediting Indian tax. Dividends up bear 15% Indian withholding, which is largely a final cost. See Delaware flip for Indian startups and, for the return journey, reverse flip to India.

Pattern 4: UAE holding company between India and the US

Some groups place a UAE company above the Indian business or alongside a US entity, aiming for treaty rates and a 0% or 9% rate on holding income. The UAE participation exemption can exempt dividends and gains from a 5% or larger holding. The limits are the treaty’s limitation of benefits article, India’s general anti-avoidance rule, Indian tax on gains from Indian shares regardless of the treaty, and US rules that look through foreign holding companies owned by US persons. A UAE holding company needs a commercial reason and real management to be worth its cost.

Sequence matters

Most expensive mistakes are errors of order, not of design:

• File the FEMA overseas investment form before paying for the foreign company.
• Put intercompany agreements and pricing in place before the first invoice.
• Fix residence, by days and by management, before the income arises.
• Restructure before a funding round, not after, because tax on share swaps follows valuation.
• Register for tax in each country on time. Late registration penalties are small; the loss of reliefs that depend on timely filing is not.

What to model before you incorporate

1. Tax on operating profit in each country
2. Withholding tax on each flow: dividends, interest, royalties and service fees
3. Tax in the owner’s hands when cash finally reaches them
4. Tax on exit, for a share sale at each level
5. Annual compliance cost in each country
6. What breaks if the founders, the customers or the investors move

Our India, UAE and India-US teams build this model as one piece of work, so the structure is tested in all three countries before it is set up.

More reading: US LLC for Indian residents, NRI residential status for Indians in the UAE and all guides by topic.

Written by Vijay Dhawan, Managing Partner, LexVerge LLP. This article is general information, not tax or legal advice. Rates, thresholds and form numbers change; confirm the current position for your facts before acting.