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Dividend and Interest
7 June 2013
Article 10 of the UN MC – A snapshot
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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
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Dividend and Interest
Article 10(1) – Distributive Rule
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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
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Dividend and Interest
‘Paid’ – Meaning
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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’
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Dividend and Interest
Article 10(2) – Taxing Rights of Source
Country
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Source Country can also tax the dividend
Taxation in source country according to its domestic law
Exception 
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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
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Dividend and Interest
Article 10(3) – Meaning of ‘dividend
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Income from:
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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
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Dividend and Interest
Article 10(4) - Exclusion in case of PE
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Provisions of Paragraphs 1 and 2 not to apply if:
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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’
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Dividend and Interest
Article 10(5) – Prohibition of Extra Territorial
Taxation
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Right of a country to tax dividend declared by a nonresident company restricted
Also prevents imposition of tax on the undistributed profits
of a non-resident company
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Dividend and Interest
Article 11 of the UN MC – A snapshot
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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
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Dividend and Interest
Article 11(1) – Distributive Rule
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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:
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Arising
Paid
Dividend and Interest
‘Paid’ – Meaning
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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’
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Dividend and Interest
Article 11(2) – Source Country’s right of
taxation
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Source Country may also tax the interest
Taxation according to source country’s domestic law
Exception:
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Beneficial owner of interest is resident…
Limited right of source country to tax interest on ‘gross’ basis
Mode of application of this limitation
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Dividend and Interest
Article11(3) – Definition
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Income from ‘debt claim of every kind’
Income from government securities and from bonds and
debentures
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Includes premium and prizes attached
Excludes penalties/charges for late payment
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Dividend and Interest
Domestic Law Definitions
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Interest under section 2(28A) of the Act…
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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…
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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
Dividend and Interest
Article 11(4) – Exclusion in case of PE
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Provisions of Paragraphs 1 and 2 not to apply if:
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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’
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Dividend and Interest
Article 11(5) – Source of Interest
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Interest ‘deemed to arise’ in a Contracting State if:
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Exception:
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Payable by a resident of that state wherever actually arising
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
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Dividend and Interest
Section 9(1)(v) of the Act – Deeming fiction
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Interest is deemed to accrue or arise in India if payable
by:
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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
Dividend and Interest
Article 11(6) – Related Party Transactions
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Adjustment of the amount of interest paid when:
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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
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Thank you