The Diploma in International

Taxation – Relevant Treaty

Articles

by Mr Hiten Shah
Contents

► Article 10 – Dividend
► Article 11 – Interest

Page 2
Dividend

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Key definitions / provisions under the Income-tax Act, 1961
(the Act)
Section Relevant provisions

Definition

Section 2(22) - Inclusive definition under the Act

Dividend
Specific Inclusions:

a)Distribution by company to its shareholders of all or part of assets;

b)Distribution by company to its shareholders of debentures, debenture-
stock, or deposit certificates etc. and bonus to preference shareholders;
c)Distribution made on liquidation
d)Distribution by way of reduction in share capital
e)Distribution by company in which public is not substantially interested by
way of advance or loan

(to the extent of accumulated profits)

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Key definitions / provisions under the Act

Section Relevant provisions

Definition

Section 2(22) - Specific Exclusions:

Dividend
a)Advance or loan in ordinary course of business
b)Any dividend paid which is set off against sum treated as dividend under
section 2(22)(e)
c)Any payment made on purchase of its own shares
d)Any distribution pursuant to demerger by the resulting company to the
shareholders of the resulting company

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Key definitions / provisions under the Act

Section Relevant provisions

Basis of charge

Section 8 a) any dividend declared by a company or distributed or paid by it within

the meaning of sub-clause (a) or sub-clause (b) or sub- clause (c) or
sub-clause (d) or sub-clause (e) of clause (22) of section 2 shall be
deemed to be the income of the previous year in which it is so
declared, distributed or paid, as the case may be;

b) any interim dividend shall be deemed to be the income of the previous

year in which the amount of such dividend is unconditionally made
available by the company to the member who is entitled to it.

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Key definitions / provisions under the Act

Section Relevant provisions

Income deemed to accrue or arise in India

Section 9(1)(iv) a) a dividend paid by an Indian company outside India

Exemption

Section 10(34) any income by way of dividends referred to in section 115-O;

Provided that nothing in this clause shall

apply to any income by way of dividend chargeable to tax in accordance
with the provisions of section 115BBDA;
Section 10(35) any income by way of,—

a)income received in respect of the units of a Mutual Fund specified under

clause (23D); or
b)income received in respect of units from the Administrator of the
specified undertaking; or
c)income received in respect of units from the specified company:

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Key definitions / provisions under the Act

Section Relevant provisions

Presumptive taxation (In the hands of the recipient shareholder)

Section 115A Dividends of non-residents other than dividend referred to in section 115-O
liable to tax @ 20% (plus applicable surcharge and cess) at gross basis

Section 115BBD Dividend received by an Indian Company from a foreign company, in which
Indian company holds 26% or more of equity share capital) shall be liable
to tax @ 15% (plus applicable surcharge and cess) on gross basis

Section 115BBDA Where the total income of an assessee, being an individual, Hindu
undivided family or a firm, resident in India, includes any income in
aggregate exceeding ten lakh rupees, by way of dividends declared,
distributed or paid by a domestic company or companies, such dividend
shall be liable to tax @ 10% (plus applicable surcharge and cess) on gross
basis

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Key definitions / provisions under the Act

Section Relevant provisions

Distribution tax (In the hands of domestic company)

Section 115-O Any amount declared, distributed or paid by such company by way of
dividends (whether interim or otherwise) on or after the 1st day of April,
2003, whether out of current or accumulated profits shall be charged to
additional income-tax (hereafter referred to as tax on distributed profits) at
the rate of fifteen per cent (plus applicable surcharge and cess).

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Article 10 – Dividend

The term “dividends” as used in Article 10 of UN model commentary includes:

► shares, “jouissance” shares or “jouissance” rights, mining shares,
► founders’ shares or other rights, not being debt-claims,
► participating in profits,
► as well as income from other corporate rights which are subjected to same taxation treatment as
income from shares by the laws of the State of which the company making the distribution is a
resident

Right to tax dividend paid by resident of one country to the resident of an other country
► Dividends paid by a company situated in a one country (India) may be taxed in the country (USA)
of the recipient of dividend situated in some other country (USA)
► However, such dividends may also be taxed in the source country (India) of which the company
paying the dividends is a resident (India) and according to the laws of that State (India), but if the
recipient is the beneficial owner of the dividends, the tax so charged shall not exceed……

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Interpretation of term – “may be taxed”

► Article 3(2) - terms not defined in Tax Treaty - meaning as per domestic tax laws

► Section 90(3) of the Act provides that meaning may be assigned by Central Government to
a term used but not defined in the Act or DTAA. The said provision was inserted Finance
Act 2003 with effect from 1st day of April 2004

► Explanation 3 to section 90(3) of the Act inserted by the Finance Act, 2012 with
effect from 1 October 2009

► “Explanation 3: For the removal of doubts, it is hereby declared that where any term is
used in any agreement entered into under sub-section (1) and not defined under the said
agreement or the Act, but is assigned a meaning to it in the notification issued under sub-
section (3) and the notification issued thereunder being in force, then, the meaning
assigned to such term shall be deemed to have effect from the date on which the
said agreement came into force.”

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Interpretation of term – “may be taxed”

► Notification No.91/2008 dated 28 August 2008 which provides that if any income of a
resident of India “may be taxed” in the other country, such income shall be included in his
total income chargeable to tax in India in accordance with the provisions of the Act, and
relief shall be granted in accordance with the method for elimination or avoidance of
double taxation provided in such agreement

► OECD commentary - No exclusive right of taxation of dividend either to country A or

country B
► Contrary view - Dividend income taxable only in country S - not taxable in country R
► Turquoise Investment and Finance Ltd. (202 CTR 395)(MP)

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Dividend

Paragraph 1
Applicability of Article 10:
► Article 10 can apply only to the residents of the contracting states of the DTAA (State S and R)
► Company having a PE in State P and is a resident of other State R. The DTAA between state S
and State R will be considered

The term “paid” as used in Article 10 of UN model commentary includes:

► Means the fulfilment of the obligation to put funds at the disposal of the shareholder in a manner
required by contract or custom
► As per Supreme Court (‘SC’) in J Dalmia Vs CIT (53 ITR 83), the term paid is when the company
discharges its liability and makes the amount of dividend unconditionally available to the
shareholder

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Dividend

Paragraph 2
Who can be regarded as the beneficial owner of the dividend:
• A beneficial owner is one who is free to decide:
• Whether or not the capital or other assets should be used or made available for the use by others; or

• On how the yields therefrom should be used; or

• Both

• Therefore, an agent or nominee cannot be regarded as a beneficial owner of dividends as they do

not exercise voting power in its own capacity

Difference in UN and the OECD Model commentary:

Sl. No Particulars UN Model OECD Model

1 Withholding tax rate on gross dividends The percentage to be established Restricts the tax in state S to 5% for
through bilateral negotiation “direct investment dividend” and 15% for
portfolio investment dividend

2 Minimum direct ownership necessary for reduced 10% of capital 25% of capital
withholding tax on “direct investment dividends”

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Interpretation of term – “Beneficial owner”

► Beneficial owner’ not defined in Model Convention and in most Tax Treaties
► To be understood in light of object and purpose of Tax Treaties
► Anti tax avoidance provision

► Explanation to section 139 (Inserted by Finance Act 2015 w.e.f. 1 April 2016)
► Explanation 4 – For the purpose of this section, “beneficial owner” in respect of an asset means
an individual who has provided, directly or indirectly, consideration for the asset for immediate or
future benefit, direct or indirect, of himself or any other person
► Explanation 5- For the purpose of this section “beneficiary” in respect of an asset means an
individual who derives benefit from the asset during the previous year and the consideration for
such asset has been provided by any other person other than the beneficiary.

► CBDT Circular no. 789 dated April 13, 2000

► Certificate of residence issued by Mauritian authorities - sufficient evidence for accepting status of
residence as well as beneficial ownership for applying India- Mauritius Tax Treaty
► Validity of Circular no. 789 upheld by SC in case of Azadi Bachao Andolan (263 ITR 706)

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Dividend

Paragraph 3
The definition of dividend also includes interest on loan on the basis of the following facts:
► The loan heavily outweighs the share capital
► The loan is not matched by redeemable assets of the borrower and makes it impossible to repay
the loan
► Repayment of loan is subordinated to the claim of other creditors
► The quantum of interest payable to lender depends on the profit of the borrower
► The loan agreement does not specify a date for repayment

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Dividend

Paragraph 4
Provisions of Paragraphs 1 and 2 not to apply if beneficial owner of dividend:
► Carries on business/performs independent personal services in the source country through a
PE/Fixed base
► The holding of shares/rights is effectively connected with the PE/Fixed base
► Dividend taxable as ‘Business Profit’

Paragraph 5
Prohibition of Extra Territorial Taxation
►Right of a country to tax dividend declared by a non-resident company restricted
►Also prevents imposition of tax on the undistributed profits of a non-resident company

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Certain treaty scenarios

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Dividend Article - India-Mauritius treaty

Article 10 of India-Mauritius tax treaty

How to read a treaty?

► Article 10(1)
► Dividends paid by a company which is a resident of a Contracting State (India) to a resident of
the other Contracting State (Mauritius) may be taxed in that other State (Mauritius)

► Article 10(2)
► However, such dividends may also be taxed in the Contracting State (India) of which the
company paying the dividends is a resident (India) and according to the laws of that State
(India), but if the recipient is the beneficial owner of the dividends the tax so charged shall not
exceed……

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Dividend Article - India-Singapore treaty 1

Article 10 of India-Singapore tax treaty

(3) Notwithstanding the provisions of paragraph 2 of this Article, as long as Singapore does not
impose a tax on dividends in addition to the tax chargeable on the profits or income of a company,
dividends paid by a company which is a resident of Singapore to a resident of India shall be exempt from
any tax in Singapore which may be chargeable on dividends in addition to the tax chargeable on the
profits or income of the company.
Singapore gave away its right to tax the dividend if the profit is already taxed

(7) (b) Dividends shall be deemed to arise in Singapore:

(i) …..; or

(ii) if they are paid by a company which is a resident of Malaysia out of profits arising in
Singapore and qualifying as dividends arising in Singapore under Article VII of the Agreement for the
Avoidance of Double Taxation between Singapore and Malaysia signed on 26th December 1968.

Dividend paid by Malaysian company can be taxed in Singapore if the income arises in Singapore

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