Other BriefingsIndia-Spain DTAA Notification: Lowered Tax Rates and Key Provisions
Under the terms of the India-Spain double taxation avoidance agreement (DTAA), India has declared that the tax rates on royalties and fees for technical services (FTS) will be limited to 10 percent, as outlined in the India-Germany DTAA, and invoking the most-favored nation clause. As per the March 2024 notification, royalties and FTS may also be liable to taxation in the contracting state of origin, pursuant to its domestic regulations.
Relief for taxpayers under India-Spain DTAA and MFN clause
As per notification No. 33/2024, issued by the Income Tax Department of India, “If the recipient qualifies as the beneficial owner of the royalties or fees for technical services, the tax imposed shall not exceed 10 percent of the total amount of royalties or fees for technical services.” In contrast, the domestic law allows for tax rates of up to 20 percent as of AY 2024-25.
The DTAA between India and Spain covers individuals and entities residing in either or both of the contracting states. It encompasses various taxes in each country, including income tax, corporation tax, and capital tax in Spain, and income tax along with wealth tax in India.
MFN clause does not automatically apply
The automatic applicability of the most-favored nation (MFN) clause in double taxation avoidance agreements has been a matter of dispute. The Central Board of Direct Taxes has clarified that specific conditions must be met for the MFN clause to apply, including the sequence of DTAA signings and OECD membership of the involved countries. Also, India needs to issue a separate notification to import the benefits of the second DTAA into the first DTAA.
In 2023, the Supreme Court ruled on the matter and said that it is mandatory to issue a notification under section 90 of the Income Tax Act to implement changes in DTAA provisions. The Supreme Court had considered the MFN clause provided in the respective DTAAs between India and France, the Netherlands, and Switzerland.
The March 2024 notification by the Income Tax Department aligns with this ruling, extending the benefit of a lower tax rate from the India-Germany DTAA to taxpayers under the India-Spain DTAA.
While other DTAAs with OECD member countries may offer both lower rates and restricted scopes, in this case, only the rate has been adopted. There’s anticipation regarding whether similar adjustments will be made for other OECD member countries in light of the Supreme Court decision.
Understanding the MFN clause
In the event that the first state in its tax treaty with a different third state offers preferential treatment over what is specified in its own tax treaty, the most favorably treated nation (MFN) clause requires one state to commit to giving its treaty partner preferential tax treatment. To apply, the MFN provision requires that both the second and the third states be OECD members. This provision was included in the tax treaties with the same country to guarantee that all OECD members are treated equally.
Essentially, this clause ensures that any country granted MFN status cannot be subjected to less favorable treatment compared to other nations within the World Trade Organization (WTO). The WTO advocates for the equal treatment of all countries concerning trade pacts.
Key features of the DTAA with Spain are as follows:
- Exchange of information: The competent authorities of both countries exchange confidential information to enforce the DTAA provisions.
- Effective dates: The amending protocol’s provisions apply to different taxes depending on their effective dates.
- Assistance in revenue collection: Both countries are committed to aiding each other in revenue collection as per international standards and OECD provisions.
- Withholding tax rates: The DTAA outlines specific rates for withholding taxes on dividends, interest, and royalties.
- Taxation of business profits: Business profits are taxable in the state of operation unless a permanent establishment exists in the other state.
The insertion of a Limitation of Benefits section in the protocol is a significant improvement aimed at preventing tax misuse. The treaty is different from the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI), to which both nations have signed, even though it incorporates domestic General Anti-Avoidance Rule (GAAR) provisions. On April 1, 2020, the MLI came into effect in India.
What is a double taxation avoidance agreement?
India has signed DTAAs with 88 nations, of which 86 are now operational. These tax treaties indicate preferential tax rates and jurisdiction based on specific types of income.
|
Country |
Royalty |
Fee for Technical Services |
|
Albania |
10% |
10% |
|
Austria |
10% |
10% |
|
Armenia |
10% |
10% |
|
Australia |
10%/15% |
10%/15% |
|
Belarus |
15% |
15% |
|
Bangladesh |
10% |
No separate provision |
|
Botswana |
10% |
10% |
|
Belgium |
10% |
10% |
|
Bulgaria |
15% of royalty relating to literary, artistic, or scientific work, other than films or tapes used for television or radio broadcasting. 20% in other cases |
20% |
|
Canada |
10%/15% |
10%/15% |
|
Brazil |
15% |
No separate division |
|
China |
25% for use of trademarks 15% for others |
No separate division |
|
Denmark |
20% |
20%< |
|
Hashemite Kingdom of Jordan |
20% |
20% |
|
Czech Republic |
10% |
10% |
|
Germany |
10% |
10% |
|
Ethiopia |
10% |
10% |
|
Estonia |
10% |
10% |
|
Italy |
20% |
20% |
|
France |
10% |
10% |
|
Georgia |
10% |
10% |
|
Finland |
10% |
10% |
|
Fiji |
10% |
10% |
|
Greece |
As per agreement |
|
|
Indonesia |
10% |
10% |
|
Hungary |
10% |
10% |
|
Israel |
10% |
10% |
|
Kyrgyz Republic |
15% |
15% |
|
Ireland |
10% |
10% |
|
Iceland |
10% |
10% |
|
Kuwait |
10% |
10% |
|
Kazakhstan |
10% |
10% |
|
Kenya |
10% |
10% |
|
Japan |
10% |
10% |
|
Libya |
As per agreement |
|
|
Mauritius |
15% |
10% |
|
Morocco |
10% |
10% |
|
Namibia |
10% |
10% |
|
Lithuania |
10% |
10% |
|
Montenegro |
10% |
10% |
|
Netherlands |
10% |
10% |
|
Mozambique |
10% |
No separate division |
|
Myanmar |
10% |
No separate division |
|
New Zealand |
10% |
10% |
|
Luxembourg |
10% |
10% |
|
Malta |
10% |
10% |
|
Malaysia |
10% |
10% |
|
Oman |
15% |
15% |
|
Mongolia |
15% |
15% |
|
Norway |
10% |
10% |
|
Trinidad and Tobago |
10% |
10% |
|
Uzbekistan |
10% |
10% |
|
Zambia |
10% |
10% |
|
Vietnam |
10% |
10% |
|
Nepal |
15% |
No separate division |
|
Tajikistan |
10% |
No separate division |
|
Turkmenistan |
10% |
10% |
|
United Mexican States |
10% |
10% |
|
Uganda |
10% |
10% |
|
Ukraine |
10% |
10% |
|
UK |
10% if interest is paid to bank 15%, in other cases |
|
|
USA |
10%/15% |
10%/15% |
|
Tanzania |
12.50% |
No separate division |
|
UAE |
10% |
No separate division |
|
Thailand |
25% |
No separate division |
|
Syrian Arab Republic |
7.50% |
No separate division |
|
Turkey |
15% |
15% |
|
Sweden |
10% |
10% |
|
Swiss Confederation |
10% |
10% |
|
Sudan |
10% |
10% |
|
South Africa |
10% |
10% |
|
Sri Lanka |
10%/20% |
20% |
|
Slovenia |
10% |
10% |
|
Saudi Arabia |
10% |
No separate division |
|
Russia |
10% |
10% |
|
Qatar |
10% |
10% |
|
Portuguese Republic |
10% |
10% |
|
Serbia |
10% |
10% |
|
Philippines |
15% |
No separate division |
|
Singapore |
10% |
10% |
|
Poland |
15% |
15% |
|
Romania |
10% |
10% |
|
Spain** |
10% |
10% |
In order to avoid discouraging foreign economic activity, countries frequently adopt double taxation in situations of cross-border revenue flows.
Also, non-resident Indians (NRIs) who work abroad are able to avoid paying taxes on their income twice—once in their place of residency and once in their home country—thanks to DTAAs.
If the individual’s residing nation has not entered into a DTAA with India, relief from double taxation can be obtained under Section 91 of the Income Tax Act. India therefore offers exemption from double taxation to both categories of taxpayers. The approach to avoiding double taxation varies from one country to another.
DTAAs address various aspects, including:
1. Methods to prevent double taxation of income in either India or a foreign country.
2. Determination of withholding tax rates, procedures for tax deduction, and provision of tax credits.
3. Procedures for recovering income tax under the Indian Income Tax Act and the corresponding laws in foreign countries.
4. Mechanisms for exchanging information between countries to prevent income tax evasion or avoidance.
5. Protocols for investigating cases of tax evasion or avoidance.
Amendments announced in the Finance Budget, 2023
In India’s Financial Budget 2023, Finance Minister Nirmala Sitharaman, announced certain amendments to the Finance Act 2023 on March 31, 2023.
A notable amendment was the tax rate increase for royalties or fees for FTS earned by non-resident taxpayers or foreign companies in India. Previously, such income was taxed at 10 percent under Section 115A of the Income-tax Act. The amendment proposed to increase this special tax rate to 20 percent (plus surcharge and health and education cess as applicable) effective April 1, 2023, provided the income is not linked to a permanent establishment or fixed place in India.
As per the amendment, non-resident individuals can explore the tax benefits offered by tax treaties between India and other countries. These treaties often provide for lower tax rates, such as 10 percent or 15 percent, on royalty income and FTS earned by non-residents in India.
To claim benefits under a tax treaty, non-residents must satisfy various anti-abuse provisions, such as the Principal Purpose Test (PPT), Limitation of Benefits (LOB), and beneficial ownership test. To access the benefits of DTAAs, NRIs must meet the residency requirements of the foreign country and acquire a Tax Residency Certificate (TRC) from the foreign tax authorities. In cases where the TRC lacks certain details, a separate Form 10F must be submitted alongside the TRC copy.
Provisions within DTAAs regarding “Dependent Personal Services” typically provide exemptions from Indian taxation on employment income earned within India, contingent upon specific conditions. These conditions encompass physical presence in India, residency in the foreign country, salary costs covered by an Indian entity, or the overseas entity’s deemed taxable presence in India.
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