Dividend Withholding Tax under article 10 of the Dutch Indian tax treaty, 10 or 5%?
The Dutch Indian double tax convention(furtherDIDTC) provides a maximum withholding tax rate under article 10 of 10%. However the protocol with the DIDTC, which is according to the preamble of the treatyan integral part of the treaty,states that:
“The Protocol to the Convention contains a most-favored-nation clause in relation to Articles 10, 11 and 12 (Article IV, paragraph 2). This provision shall apply if, after the signing of the Convention in a treaty with another State which is a member of the OECD, India lowers the rate in respect of its taxation at source below the rate provided for in the Convention or when India has a more limited scope for the withholding tax provisions of Articles 10, 11 and 12.”
After the closing of the DIDTC,three states concluded a tax treaty with India, amongst others Slovenia in 2005. Slovenia became a member of OECD from 2010, reason why the Dutch Ministryof Finance announced a little later that under the DIDTC the lower percentage of 5% is applicable.
However the Indian tax authorities didnot agree on this interpretation. Only those states which were already a member of OECD at the moment that the DIDTC was concluded would fall under the scope of this provision.
Two Dutch corporations wanted to apply the 5% withholdingtax and this was rejected. These companies, Concentrix BV and Optum Global Solutions InternationalBV,went to the Indian High Court of new Delhi and have won the case. The same did Nestle under the Indian Swiss tax convention in a comparable situation and,with a reference to the Dutch cases,Nestle also won the case.
The words of the High Court were clear:
“Thus, we are not impressed with the argument advanced on behalf of the revenue that since Slovenia, Lithuania, and Columbia became members of the OECD, not only after the subject DTAA came into force but also after their own DTAAcame into force, and therefore, lower rate of withholding tax, i.e., 5% on dividends would not apply to recipients in the Netherlands, who are otherwise covered under the subject DTAA -as that is not how the other contracting State, i.e., the Netherlandshas interpreted Clause IV (2) of the protocol appended to the subject DTAA. “
So how to act if you want to repatriate dividends from India to the Netherlands or Switzerland? Please contact us and we will discuss with yourcompany the best strategy to have a successful discussion with the Indian tax authorities.
Prof. dr. Hans van den Hurk
Cygnus Tax Strategy BV and Herreveld& Van den Hurk International Tax Dispute Resolution
For direct information please call +31 6 204 385 68.