Double Taxation Avoidance Agreements (DTAAs)
Designed to ease burden of double taxation of income by providing various tax reliefs.
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- Double Taxation Avoidance Agreements (DTAAs)
India has entered into a DTAAs with several countries to eliminate the burden of double taxation and prevent tax evasion.
In relation to an FPI to whom the DTAA applies, section 90(2) of the Act provides that the provisions of the Act or the provisions of the DTAA entered into between India and taxpayer’s country of residence, whichever is more beneficial, will apply.
To avail beneficial provisions of the DTAA, an FPI will have to:
- Obtain a Tax Residency Certificate (TRC) confirming its tax residency under the respective DTAA from the home country tax authorities
- File a declaration in Form 10F electronically on the income tax e-filing portal
- Qualify as a ‘person’, ‘resident’ and ‘beneficial owner’ under the respective DTAA to claim benefits along with other conditions as may be applicable.
- Limitation of Benefits (LOB): Many DTAAs include an LOB clause to prevent treaty shopping. If the conditions under the LOB clause are not met, treaty benefits may be denied.
- Most Favoured Nation (MFN) Clause: The MFN clause ensures that the parties to one agreement are not subjected to a treatment which is less favourable than the treatment provided by the source state to OECD member country under similar agreements.
- General Anti-Avoidance Rule (GAAR): Effective from April 1, 2017, GAAR empowers Indian tax authorities to deny treaty benefits if an arrangement is found to be ‘impermissible avoidance arrangement’(IAA).
Under GAAR, an arrangement may be declared to be an IAA if the primary test and any one of the secondary tests are fulfilled:
Primary test: An arrangement (or a step in or part thereof) is entered into by a taxpayer whose ‘main purpose’ is to obtain a tax benefit.
Secondary tests: The secondary test would be fulfilled if the arrangement satisfies:
- rights or obligations test; or
- misuse or abuse test; or
- commercial substance test; or
- bona fide purposes test.
Certain scenarios where GAAR provisions are not applicable are as follows:
GAAR shall not apply where the aggregate tax benefit to all parties to any arrangement in the relevant AY does not exceed INR 30 million.
- GAAR shall not apply where the aggregate tax benefit to all parties to any arrangement in the relevant AY does not exceed INR 30 million
- GAAR shall not apply to FPIs which have not claimed benefits under a tax treaty and have invested in listed or unlisted securities with prior permission of the competent authority in accordance with the applicable regulations.
- GAAR shall not apply to non-resident investors in relation to investments by way of an ODI or otherwise, directly or indirectly, in an FPI.
- Multilateral Instrument (MLI): MLI allows governments to modify application of its network of bilateral tax treaties in a synchronized manner without renegotiating each of these treaties bilaterally. The MLI changes shall apply only to a Covered Tax Agreement (CTA). A CTA is tax treaty in force between the parties (countries) to the MLI and for which both parties have made a notification that they wish to modify the agreement using the MLI framework. Upon coming into effect, the MLI will not replace the existing tax treaties completely. Instead it will be applied alongside the existing tax treaties and either modify, supersede, supplement, or complement their application so as to bring them in line with the measures to address base erosion.
| Particulars | FPI (no treaty benefits) | USA | Singapore | Luxembourg | Ireland | Mauritius | UK | |
|---|---|---|---|---|---|---|---|---|
| Taxability of capital gains on on-market sale of equity shares in India | Long-term | 12.50% | 12.50% | 12.50%ii | 12.50% | 12.50% | 12.50%ii | 12.50% |
| Short-term | 20% | 20% | 20%ii | 20% | 20% | 20%ii | 20% | |
| Capital gains on sale of other securities in India (including derivatives, bonds, AIF units, mutual fund units etc.) | Long-term | 12.50% | 12.50% | Exempt under treaty | Exempt under treaty | Exempt under treaty | Exempt under treaty | 12.50% |
| Short-term | 30% | 30% | 30% | |||||
| Tax on interest from securities | 20% | 10%/15%viii | 10%/15%iv | 10% | 10% | 7.50% | 10%/15%vi | |
| Dividend | 20% | 15%/25%ix | 10%/15%v | 10% | 10% | 5%/15%iii | 10%/15%vii | |
Notes:
- The above tax rates are exclusive of applicable surcharge and health & education cess
- Capital gains on transfer of shares acquired prior to April 01, 2017, are exempt from tax.
- Beneficial owner of dividends is a company that holds directly ≥ 10% of the capital of the company paying dividends – 5%; Others - 15%
- Interest is paid on a loan granted by a bank carrying on a bona fide banking business or by a similar financial institution (including an insurance company) – 10%; Other cases – 15%
- Beneficial owner of dividend is a company which owns ≥ 25% of shares of the company paying the dividend – 10%; Other cases – 15%
- Interest is paid to a bank carrying on a bona fide banking business which is a resident of the other Contracting State and is the beneficial owner of the interest – 10%; Other cases– 15%
- Dividends paid out of income (including gains) derived directly or indirectly from immovable property within the meaning of Article 6 by an investment vehicle which distributes most of this income annually and whose income from such immovable property is exempted from tax – 15%; Other cases – 10%
- Interest paid on a loan granted by a bank carrying on a bona fide banking business or by a similar financial institution (including an insurance company) – 10%; Other cases – 15%
- Beneficial owner of dividends is a company which owns ≥ 10% of voting stock of the company paying dividends – 15%; Other cases – 25%