Indian arms of French, Swiss, Dutch cos cannot claim low tax benefit citing tax treaties with other OECD members

The Central Board of Direct Taxes has clarified that Indian branch of French, Swiss and Dutch companies would now not be eligible for low tax rate of 5 per cent while remitting dividends to their overseas parents.

Taxpayers from these countries cannot apply for the benefits available under tax treaties with entered into by India with Columbia, Slovenia making use of the ‘most favoured nation’ clause, the board clarified thorough a circular.

It said that unilateral decree of a treaty partner does not represent a shared understanding on the applicability of the Most Favoured Nation (MFN) clause and the third state should be the member of OECD on the date of conclusion of the DTAA (Double Taxation Avoidance Agreement) with India.

Concessional rate

Further it said that concessional rate or restricted scope to apply from the date of entry into force of the DTAA with the third state and not from the date on which such third state becomes an OECD member. As per ruling by the Supreme Court in Azadi Bachao Andolan, a notification under Section 90 is required and states that India has not issued any notification for importing the beneficial provisions from DTAAs with Slovenia, Lithuania & Colombia to the DTAAs with France, the Netherlands or Switzerland.

Import of concessional rates by invoking MFN clause cannot be done selectively and the benefit of lower rate or restricted scope of source taxation will available only when the conditions specified in the Circular are met, it said.

According to Vinita Krishnan, Director with Khaitan & Co, the Income Tax department has clarified its stand that to interpret a tax treaty, an MFN clause in a treaty with some other country cannot be imported if such other country became OECD member post signing its tax treaty with India.

This may be relevant for taxpayers from jurisdictions like France, Netherlands where such benefit has been claimed for inter-alia dividend received from Indian companies. “All eyes will now be on the Supreme Court where similar issue is pending for adjudication. Until then, it would be interesting to see the interplay with the position adopted by taxpayers (especially on withholding tax end), considering the non-binding nature of CBDT circulars. Moreover, the impact of such an interpretation of MFN clauses may also need to be seen for incomes such as royalty, interest etc,” she said.

MFN clause

Sudin Sabnis, Partner at Nangia Andersen LLP, said this circular assumes significance as there were recent High Court rulings in favour of the taxpayers on this issue which upheld the applicability of lower withholding tax rates using the MFN clause based on the principle of common interpretation. Though the circular clarifies that existing rulings already rendered in favor of the taxpayer would not be affected, taxpayers staking refund claims or seeking to obtain lower withholding tax certificates would stand impacted by this circular.

“The said high court rulings are also being appealed by the Revenue in the apex court and this circular could give a new dimension on whether the interpretation in unilateral decrees of the Netherlands, France etc. really reflected a common interpretation,” he said.

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