Overview of Double Tax Avoidance Agreement (DTAA) –
Where a person resident in India earns income which is also taxable in a foreign country, he may be liable to pay tax on such income in India as well. This results in a double taxation of the same income.
To avoid such double taxation, the assessee can claim credit for the taxes paid outside India as Foreign Tax Credit (FTC).
Where an assessee has paid taxes in a country or specified territory with which India has entered into a Double Taxation Avoidance Agreement (DTAA), the relief in respect of such taxes shall be allowed in accordance with the provision of Section 90 and Section 90A. This relief is allowed under a bilateral treaty.
Unilateral relief is allowed in respect of taxes paid in the country or specified territory with which no DTAA exists. Such relief is allowed under Section 91.
What is the Double Tax Avoidance Agreement?
The Double Tax Avoidance Agreement (DTAA), also known as a tax treaty, is an agreement between two countries aimed at avoiding or mitigating double taxation. This means that income earned in one country by a resident of another country is not taxed twice by both countries. Here’s how they work —-
-
- When an individual or business earns income in one country but is a resident of another, they may face taxation in both countries.
- DTAA ensures that the same income isn’t taxed twice by allowing taxpayers to claim relief or exemptions.
- For instance, if you’re an Indian resident earning income in the United States, the DTAA between India and the U.S. would determine how your income is taxed.
Objectives of the Agreement
A double taxation agreement (DTA), also known as a double tax treaty, is an agreement signed by two countries to address tax complications for their citizens and businesses. DTAs serve two main objectives:
1. Avoiding Double Taxation – When residents (individuals, corporations, or enterprises) of two different countries engage in cross-border transactions, the same income can be subject to tax in both countries. DTAs aim to prevent this territorial double taxation by specifying rules for taxing income.
For example, if a person based in Country A transacts business with someone in Country B, the DTA ensures that the income is not taxed twice—once in each country.
2. Avoiding Tax Evasion – DTAs provide clear guidelines on which country has the right to tax specific types of income. By doing so, they help prevent tax evasion and encourage international trade and investment.
These agreements create a more conducive environment for cross-border trade by minimizing the overall tax burden on income earned in foreign countries.
DTAA Rates
Withholding Tax Rates
|
Country |
Dividend |
Interest |
Royalty |
Fee for Technical Services |
|
Albania |
10% |
10% |
10% |
10% |
|
Armenia |
10% |
10% |
10% |
10% |
|
Australia |
15% |
15% |
10%/15% |
10%/15%
|
|
Austria |
10% |
10% |
10% |
10% |
|
Bangladesh |
a) 10% (if at least 10% of the capital of the company paying the dividend is held by the recipient company); b) 15% in all other cases |
10% |
10% |
No separate provision |
|
Belarus |
a) 10%, if paid to a company holding 25% shares; b) 15%, in all other cases |
10% |
15% |
15% |
|
Belgium |
15% |
15% (10% if loan is granted by a bank) |
10% |
10% |
| Bhutan | 10% | 10% | 10% | 10% |
|
Botswana |
a) 7.5%, if shareholder is a company and holds at least 25% shares in the investee-company; b) 10%, in all other cases |
10% |
10% |
10% |
|
Brazil |
15% |
15% |
a) 25% for use of trademark; b) 15% for others |
No separate provision |
|
Bulgaria |
15% |
15% |
a) 15% of royalty relating to literary, artistic, scientific works other than films or tapes used for radio or television broadcasting; b) 20%, in other cases |
20% |
|
Canada |
a) 15%, if at least 10% of the voting powers in the company, paying the dividends, is controlled by the recipient company; b) 25%, in other cases |
15% |
10%-20% |
10%-20% |
|
China |
10% |
10% |
10% |
10% |
| Columbia | 5% | 10% | 10% | 10% |
| Croatia | a) 5% (if at least 10% of the capital of the company paying the dividend is held by the recipient company);
b) 15% in all other cases |
10% | 10% | 10% |
|
Cyprus |
10% |
10% |
10% |
10% |
|
Czech Republic [Note5] |
10% |
10% |
10% |
10% |
|
Denmark |
a) 15%, if at least 25% of the shares of the company paying the dividend is held by the recipient company; b) 25%, in other cases |
a) 10% if loan is granted by bank; b) 15% for others |
20% |
20% |
|
Estonia |
10% |
10% |
10% |
10% |
|
Ethiopia |
7.5% |
10% |
10% |
10% |
|
Finland |
10% |
10% |
10% |
10% |
|
Fiji |
5% |
10% |
10% |
10% |
|
France |
10% |
10% |
10% |
10% |
|
Georgia |
10% |
10% |
10% |
10% |
|
Germany |
10% |
10% |
10% |
10% |
|
Greece |
20% |
20% |
10% |
No separate provision |
| Hongkong |
5% |
10% |
10% |
10% |
|
Hungary |
10% |
10% |
10% |
10% |
|
Indonesia |
10% |
10% |
10% |
10% |
|
Iceland |
10% |
10% |
10% |
10% |
|
Iran |
10% |
10% |
10% |
10% |
|
Ireland |
10% |
10% |
10% |
10% |
|
Israel |
10% |
10% |
10% |
10% |
|
Italy |
a) 15% if at least 10% of the shares of the company paying dividend is beneficially owned by the recipient company; b) 25% in other cases |
15% |
20% |
20% |
|
Japan |
10% |
10% |
10% |
10% |
|
Jordan |
10% |
10% |
20% |
20% |
|
Kazakhstan |
10% |
10% |
10% |
10% |
|
Kenya |
10% |
10% |
10% |
10% |
|
Korea |
15% |
10% |
10% |
10% |
|
Kuwait |
10% |
10% |
10% |
10% |
|
Kyrgyz Republic |
10% |
10% |
15% |
15% |
|
Libyan Arab Jamahiriya |
20% |
20% |
30% |
No separate provision |
|
Latvia |
10% |
10% |
10% |
10% |
|
Lithuania |
5%, 15% |
10% |
10% |
10% |
|
Luxembourg |
10% |
10% |
10% |
10% |
|
Malaysia |
5% |
10% |
10% |
10% |
|
Malta |
10% |
10% |
10% |
10% |
|
Mongolia |
15% |
15% |
15% |
15% |
|
Mauritius |
a) 5%, if at least 10% of the capital of the company paying the dividend is held by the recipient company; b) 15%, in other cases |
7.5 |
15% |
10% |
|
Montenegro |
5% (in some cases 15%) |
10% |
10% |
10% |
|
Myanmar |
5% |
10% |
10% |
No separate provision |
|
Morocco |
10% |
10% |
10% |
10% |
|
Mozambique |
7.5% |
10% |
10% |
No separate provision |
| Macedonia | 10% | 10% | 10% | 10% |
|
Namibia |
10% |
10% |
10% |
10% |
|
Nepal |
5%, 10% |
10% |
15% |
No separate provision |
|
Netherlands |
10% |
10% |
10% |
10% |
|
New Zealand |
15% |
10% |
10% |
10% |
|
Norway |
10% |
10% |
10% |
10% |
|
Oman |
a) 10%, if at least 10% of shares are held by the recipient company; b) 12.5%, in other cases |
10% |
15% |
15% |
|
Philippines |
a) 15%, if at least 10% of the shares of the company paying the dividend is held by the recipient company; b) 20%, in other cases |
a) 10%, if interest is received by a financial institution or insurance company; b) 15% in other cases
|
15% if it is payable in pursuance of any collaboration agreement approved by the Government of India |
No separate provision |
|
Poland |
10% |
10% |
15% |
15% |
|
Portuguese Republic |
10%/15% |
10% |
10% |
10% |
|
Qatar |
a) 5%, if at least 10% of the shares of the company paying the dividend is held by the recipient company; b) 10%, in other cases |
10% |
10% |
10% |
|
Romania |
10% |
10% |
10% |
10% |
|
Russian Federation |
10% |
10% |
10% |
10% |
|
Saudi Arabia |
5% |
10% |
10% |
No separate provision |
|
Serbia |
a) 5%, if recipient is company and holds 25% shares; b) 15%, in any other case |
10% |
10% |
10% |
|
Singapore |
a) 10%, if at least 25% of the shares of the company paying the dividend is held by the recipient company; b) 15%, in other cases |
a) 10%, if loan is granted by a bank or similar institute including an insurance company; b) 15%, in all other cases |
10% |
10% |
|
Slovenia |
a) 5%, if at least 10% of the shares of the company paying the dividend is held by the recipient company; b) 15%, in other cases |
10% |
10% |
10% |
|
South Africa |
10% |
10% |
10% |
10% |
|
Spain |
15% |
15% |
10%/20%
|
20% |
|
Sri Lanka |
7.5% |
10% |
10% |
10% |
|
Sudan |
10% |
10% |
10% |
10% |
|
Sweden |
10% |
10% |
10% |
10% |
|
Swiss Confederation |
10% |
10% |
10% |
10% |
|
Syrian Arab Republic |
a) 5%, if at least 10% of the shares of the company paying the dividend is held by the recipient company; b) 10%, in other cases |
10% |
10% |
No separate provision |
|
Taipei |
12.5% |
10% |
10% |
10% |
|
Tajikistan |
a) 5%, if at least 25% of the shares of the company paying the dividend is held by the recipient company; b) 10%, in other cases |
10%[Note1] |
10% |
No separate provision |
|
Tanzania |
5%, 10% |
10% |
10% |
No separate provision |
|
Thailand |
10% |
10% |
10% |
No separate provision |
|
Trinidad and Tobago |
10% |
10% |
10% |
10% |
|
Turkey |
15% |
a) 10% if loan is granted by a bank, etc.; b) 15% in other cases
|
15% |
15% |
|
Turkmenistan |
10% |
10% |
10% |
10% |
|
Uganda |
10% |
10% |
10% |
10% |
|
Ukraine |
a) 10%, if at least 25% of the shares of the company paying the dividend is held by the recipient company; b) 15%, in other cases |
10% |
10% |
10% |
|
United Arab Emirates |
10% |
a) 5% if loan is granted by a bank/similar financial institute; b) 12.5%, in other cases |
10% |
No separate provision |
|
United Mexican States |
10% |
10% |
10% |
10% |
|
United Kingdom |
15%/10%
|
a) 10%, if interest is paid to a bank; b) 15%, in other cases
|
10%/15%[Note 2] |
10%/15% |
|
United States |
a) 15%, if at least 10% of the voting stock of the company paying the dividend is held by the recipient company; b) 25% in other cases |
a) 10% if loan is granted by a bank/similar institute including insurance company; b) 15% for others |
10%/15% |
10%/15% |
|
Uruguay |
5% |
10% [Note1] |
10% |
10% |
|
Uzbekistan |
10% |
10% [Note1] |
10% |
10% |
|
Vietnam |
10% |
10% [Note1] |
10% |
10% |
|
Zambia |
a) 5%, if at least 25% of the shares of the company paying the dividend is held by a recipient company for a period of at least 6 months prior to the date of payment of the dividend; b) 15% in other cases |
10% [Note1] |
10% |
10% |
Application of DTAA
Application of Double Taxation Avoidance Agreements (DTAA).
- Comprehensive DTAA –
- Under a comprehensive DTAA, tax benefits are provided on all sources of income. This means that the agreement covers various types of income, including:
- Income: Such as salary, interest, dividends, royalties, and rental income.
- Capital Gains: Profits from the sale of assets like stocks, real estate, or other investments.
- Other Income: Any other income not specifically mentioned above.
- Under a comprehensive DTAA, tax benefits are provided on all sources of income. This means that the agreement covers various types of income, including:
- Limited DTAA –
- In contrast, a limited DTAA provides tax reliefs in specific areas. These areas may include:
- Income from Shipping: Tax benefits related to income earned by shipping companies.
- Income from Air Transport: Similar to shipping, this covers income from airlines and air transport services.
- Income from Estate, Gift, or Inheritance: Tax relief for estate taxes, gift taxes, or inheritance taxes.
- In contrast, a limited DTAA provides tax reliefs in specific areas. These areas may include:
What is the purpose of a DTAA?
The primary purpose of a DTAA is to:
- Eliminate double taxation on income earned in both treaty countries.
- Promote and foster economic trade and investment between the two countries.
- Provide certainty and tax stability to taxpayers operating in both jurisdictions.
- Prevent tax evasion and avoidance by promoting exchange of information between tax authorities.
How does a DTAA work?
A DTAA allocates taxing rights between the countries involved, specifying which country has the right to tax certain types of income. This is typically achieved through –
- Exemptions: One country agrees to exempt certain income from tax.
- Tax Credits: One country allows the taxpayer to deduct the tax paid in the other country from their own tax liability.
- Reduced Tax Rates: Lower tax rates on certain income types, like dividends, interest, and royalties.
What types of income covered under a DTAA?
DTAA usually covers a wide range of income types, including –
- Salaries and wages
- Dividends
- Interest
- Royalties
- Business profits
- Capital gains
- Income from immovable property
- Pensions and social security payments
How to Apply for DTAA Benefits –
- Determine Applicability – DTAA applies when a transaction is taxable in both India and another country, involving a non-resident or foreign company.
- Identify Relevant DTAA – Based on the non-resident party’s residential status, find the applicable DTAA between India and that country.
- Submit Required Documents –
- Form 10F
- Tax Residency Certificate (TRC)
- Self Declaration from NRI
- Self-attested PAN Card copy
- Self-attested Passport and VISA/PIO Card copy
Tax Reliefs under DTAA
Reliefs under DTAA can be categorized as unilateral or bilateral tax reliefs –
1. Bilateral Relief under Section 90 of the Income Tax Act, 1961 –
-
- Bilateral relief applies when India has signed a DTAA treaty with another country. Currently, India has such treaties with over 80 countries.
- There are two methods for bilateral tax relief:
- Exemption method: In this approach, international income is either taxed in one country or a specific portion of the income is taxed in both countries.
- Tax credit method: Under this method, income is taxed in both countries. You then receive a tax credit in your resident country for the tax already paid in the income source country. For example, if you earned income in the USA and paid tax there, you’d get a deduction for that tax when calculating your Indian tax liability.
- The DTAA provisions take precedence over the Income Tax Act, allowing you to choose the more beneficial provision.
2. What is Unilateral Relief?
-
- Unilateral relief comes into play when there is no Double Taxation Avoidance Agreement (DTAA) between the home country (India) and the country where the income originates.
- In the absence of a DTAA, the home country (India) takes responsibility for offering tax relief to prevent double taxation.
a. Eligibility Criteria for Unilateral Relief – To qualify for unilateral relief under Section 91:
-
-
- You must be an Indian resident in the year the income is earned.
- The income should be earned outside India.
- The income must be taxable in a foreign country, and you should have paid tax on it there.
-
b. How Unilateral Relief Works –
-
- Under this method, the income could potentially be doubly taxed (both in India and the source country).
- However, India allows a deduction from the Indian income tax to prevent this double taxation.
- The deduction rate is the lower of –
- The average tax rate in India.
- The average tax rate in the source country.
- The average tax rate is calculated as the tax paid divided by the total income, multiplied by 100.
- If both tax rates are equal, the Indian tax rate is allowed as a deduction.
Documents required to claim the foreign tax credit
The assessee needs to furnish the following documents to claim the credit of foreign tax:
(a) A statement specifying income offered to tax in the foreign country for the previous year and foreign tax which has been deducted or paid on such income in Form No. 67.
(b) A certificate or statement specifying the nature of income and the amount of tax deducted therefrom or paid by the assessee from the tax authority of the foreign country or the person responsible for the deduction of such tax.
It should be signed by the assessee and accompanied by the following –
- An acknowledgement of online payment or bank counterfoil or challan for payment of tax, where the payment has been made by the assessee;
- Proof of deduction, where tax has been deducted.
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