dividend and interest

Dividend and Interest

7 June 2013


Article 10 of the UN MC – A snapshot

Article 10(1) – Distributive Rule Article 10(2) –Taxing rights of Source Country Article 10(3) – Definition of ‘Dividend’ Article 10(4) – Exclusion in case of PE Article 10(5) – No Extra-territorial taxation


Article 10(1) – Distributive Rule

Country of residence of the ‘beneficial owner’ has the right to tax

Right is not exclusive – Source Country also can tax it in certain circumstances

Taxation is of dividend ‘paid’ – necessary to consider meaning of the term


‘Paid’ – Meaning

Means the fulfillment of the obligation to put funds at the disposal of the shareholder in a manner required by contract or custom

Definition very wide Section 43(2) of the Income-tax Act – ‘Paid’ means

actually paid or incurred according to the method of accounting upon the basis of which the profits or gains are computed under the head ‘Profits and Gains of Business or Profession’


Article 10(2) – Taxing Rights of Source Country

Source Country can also tax the dividend Taxation in source country according to its domestic law Exception -

Beneficial owner is the resident Limited right to tax in source country on gross basis Direct Investment by companies Investment other than direct investment

Does not impact Company’s taxation


Article 10(3) – Meaning of ‘dividend

Income from: Shares …. Or other rights, not being debt claims, participating in profits Other corporate rights which is treated as dividend in the source

country Country of residence to follow definition in country of

source


Article 10(4) - Exclusion in case of PE

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 in that country The holding of shares/rights is effectively connected with the

PE/Fixed base Dividend taxable as ‘Business Profit’ Meaning of ‘Effectively Connected’


Article 10(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


Article 11 of the UN MC – A snapshot

Article 11(1) – Distributive Rule Article 11(2) – Taxing Rights of Source Country Article 11(3) - Definition of ‘interest’ Article 11(4) – Exclusion in case of PE Article 11(5) – ‘Source’ of interest Article 11(6) – Related Party Transactions


Article 11(1) – Distributive Rule

Interest ‘arising’ in a Contracting State and ‘paid’ to a resident of the other State…

Home Country’s right not exclusive – Source Country may also tax the interest

Need to consider meaning of: Arising Paid


‘Paid’ – Meaning

Means the fulfillment of the obligation to put funds at the disposal of the creditor in a manner required by contract or custom

Definition very wide Section 43(2) of the Income-tax Act – ‘Paid’ means

actually paid or incurred according to the method of accounting upon the basis of which the profits or gains are computed under the head ‘Profits and Gains of Business or Profession’


Article 11(2) – Source Country’s right of taxation

Source Country may also tax the interest Taxation according to source country’s domestic law Exception:

Beneficial owner of interest is resident… Limited right of source country to tax interest on ‘gross’ basis

Mode of application of this limitation


Article11(3) – Definition

Income from ‘debt claim of every kind’ Income from government securities and from bonds and

debentures Includes premium and prizes attached

Excludes penalties/charges for late payment


Domestic Law Definitions

Interest under section 2(28A) of the Act… Interest payable in any manner in respect of moneys borrowed or

debt incurred (including a deposit, claim or other similar right or obligation) and includes any service fee or other charges in respect of any credit facility that has not been utilized

Interest on Securities under section 2(28B) of the Act… Interest on any security of the Central Government or State

Government Interest on debentures or other security for money issued by or on

behalf of a local authority or a company or a corporation established under a Central, State or Provincial Act


Article 11(4) – Exclusion in case of PE

Provisions of Paragraphs 1 and 2 not to apply if: Beneficial owner of interest Carries on business/performs independent personal services in

the source country Through a PE/Fixed base in that country The debt claim in respect of which interest is paid is effectively

connected with the PE/Fixed base Interest taxable as ‘Business Profit’ Meaning of ‘Effectively Connected’


Article 11(5) – Source of Interest

Interest ‘deemed to arise’ in a Contracting State if: Payable by a resident of that state wherever actually arising

Exception: Payer has a PE Liability to pay connected to the PE Payment ‘borne’ by PE

If these fulfilled, interest is deemed to arise in the country where PE is situated

Contrast with deeming fiction in Section 9(1)(v) of the Act


Section 9(1)(v) of the Act – Deeming fiction

Interest is deemed to accrue or arise in India if payable by: The Government A resident except where the borrowing/debt Is utilized for the

purposes of a business carried on by such resident outside India A non-resident only if borrowing/debt is utilized for the purpose of

a business carried on in India or earning of a source of income in India


Article 11(6) – Related Party Transactions

Adjustment of the amount of interest paid when: There is a special relationship between payer of interest and the

beneficial owner of the interest or between the two of them and a third person

There is an excess payment on account of that special relationship Arm’s length interest (only) to be taxed in a limited

manner in the Source Country Excess to be fully taxed in Home Country as per it’s

domestic tax law

Thank you

dividend and interest

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