Nilesh Shah Highlights Tax Strategy Using UAE's DTAA Loophole

Post by: Layla Badr

Nilesh Shah, the Managing Director of Kotak Mahindra Asset Management Company (AMC), recently shared a tax strategy that involves moving to the United Arab Emirates (UAE) for 183 days to avoid paying capital gains tax in India. This method takes advantage of a loophole in India's tax system, specifically the Double Taxation Avoidance Agreement (DTAA) between India and the UAE.

According to the DTAA, if you are considered a resident of the UAE (meaning you stay there for at least 183 days in a year), India will not tax your capital gains on certain investments like:

• Mutual funds
• Government bonds
• Corporate bonds

Why is this possible? The reason is that the UAE doesn’t charge personal income tax. The DTAA states that capital gains tax is only paid in the country where you are a resident. Since the UAE doesn’t have an income tax, if you qualify as a resident there, your capital gains can be completely tax-free.

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What’s the advice?

Nilesh Shah pointed out that if someone has a large capital gains tax bill in India, and they spend over 183 days in the UAE, they could legally avoid paying capital gains tax in India. He funnily explained this, using a famous line from the Bollywood movie Sholay:

“You get the mangoes and the seeds,” meaning you get multiple benefits at once.

He also joked that the money saved on taxes could help pay for a family holiday abroad.

How it compares to the US

Nilesh also compared this to the tax system in the United States. In the US, if someone gives up their citizenship or becomes a non-resident, they are charged an "Exit Tax." This tax makes sure that they pay taxes on their wealth before leaving the US tax system. In contrast, India is encouraging high-net-worth individuals to move abroad and legally avoid taxes, even if only for a short time.

Shah mentioned that many wealthy individuals are using tax treaties with countries like Singapore, UAE, Mauritius, Netherlands, and Portugal. These treaties allow them to avoid paying taxes on capital gains from investments like mutual funds in India, as long as they are residents of those countries.

In a case in Mumbai, the Income Tax Appellate Tribunal (ITAT) ruled in favor of a Singapore resident. The person had over Rs 1.35 crore in capital gains and claimed exemption under the DTAA. The tribunal said that mutual fund units, which are issued by trusts (not companies), were not taxable under India’s capital gains laws when such treaties are in place.

But Nilesh Shah warned that this could become a bigger issue in the future. He said, “Right now, it may be a small amount, but later it could open the floodgates.” He added that India should update its tax laws to ensure that taxes are paid in the country where the person lives, and credit should be taken in the country where the tax is due.

A counterpoint

Investor Samir Arora gave a response on Twitter, saying that this strategy only works if you invest through NRE (Non-Resident External) funds, not regular NRO (Non-Resident Ordinary) accounts. Also, you need to be a non-resident at the time of investing, not just when you sell the investment. So, it might not be as simple to exploit as it seems. However, Shah's concern about tax fairness and the potential for future abuse remains important.

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