How Free Zones Help Businesses Avoid Double Taxation

Introduction

Venturing a business outside the country usually has the risk of double taxation where a single income is taxed in two nations. To address this, the UAE has signed over 140 Double Tax Treaties (DTTs) with nations all over the globe. For businesses based in Dubai, particularly those in Free Zones, these treaties offer a means of lawful tax avoidance and maximize profitability.

But how can the businesses  in Dubai really apply these treaties? Let's examine the types of DTT relief and the step-by-step process of availing benefits.

Types of Double Tax Relief

There are two types of DTTs:

1. Exemption Method – Income is taxed in a single country, and exempt in another.

2. Credit Method – Tax incurred in one country can be credited against tax owed in the other country.

For example,If a Dubai Free Zone company earns income in India, India may withhold some tax, but the UAE tax system (with 0–9% rates) ensures that profits are not taxed again.

 Steps to Process DTT in the UAE

Step 1: Register a Legal Entity in UAE

Establish a Mainland or Free Zone company. This qualifies you for UAE tax residency.

Step 2: Have Economic Substance

Have actual presence in the UAE with:

• Office rental (Ejari or flexi-desk).

• Local bank account.

• Employees or outsourced personnel (depending on license).

Step 3: Apply for a Tax Residency Certificate (TRC)

•  Apply via the UAE Ministry of Finance.

•  Provide documents like trade license, tenancy agreement, bank statement, and copies     of passport.

• TRC is valid for 1 year.

Step 4: Determine the Relevant Treaty

Verify whether the UAE has a DTT with the nation where your income is being derived. Every treaty includes whether exemption or credit.

Step 5: File TRC with Foreign Tax Authority

Pass on your TRC to the foreign tax authority so they charge reduced or zero withholding tax in accordance with the treaty.

Step 6: Claim Benefits

• Pay lower withholding taxes on dividends, royalties, or services.

• Comply with UAE's Corporate Tax Law, ESR, and transfer pricing provisions.

Example 

A Dubai South Free Zone logistics company earns income from Germany. Normally, Germany would deduct tax at source. But since UAE and Germany have a DTT, and the company holds a TRC, Germany applies a reduced rate. Meanwhile, in Dubai, the company pays 0% tax on qualifying Free Zone income . 

Conclusion

For entrepreneurs in Dubai, Double Tax Treaties + Free Zone benefits provide a smart way to protect global profits. By setting up a company, applying for a Tax Residency Certificate, and leveraging treaties, businesses can reduce or eliminate double taxation while staying compliant.

Dubai’s strategic network of treaties makes it one of the world’s most attractive hubs for international business.

Want to prevent double taxation and establish your company in Dubai? Get expert support on Free Zone and DTT structuring from E-startup today.