Delhi High Court directed withholding tax at 5% on dividend from India to Netherlands, enforces MFN
- TransEdge
- Apr 25, 2021
- 2 min read
Delhi High Court directed that lower withholding tax @5% on dividend declared by Indian entity to Dutch entity shall be applicable as per Most Favored Nation clause provided in India-Netherlands DTAA's Protocol. This would impact taxation on dividend declared to Dutch shareholders (>10% shareholding) who are also 4th largest FDI contributor currently.
The Issue
Through Finance Act, 2020, dividend taxation regime has been changed and dividends are now taxable in the hands of shareholders as against in the hands of companies previously.
Post this amendment, Indian companies paying dividends to non-resident shareholders are required to deduct tax on such dividend at applicable rate as provided in domestic act read-with relevant DTAA. Since, new regime has been introduced very recently, this issue of withholding tax was not important.
India has signed DTAA with Netherlands whereby 10% withholding tax rate is provided on dividend declared by Indian entity. Such rate, through MFN, would reduce to 5% owing to the fact that India has executed such rate with Slovenia, Lithuania & Colombia. This reduced rate can be applied only if these countries are OECD members. Issue arises as to whether such countries should mandatorily be required to be OECD members at the time of signing DTAA itself. Interestingly, none of these countries were OECD members when such DTAA specifying reduced rate of 5% was signed.
The Ruling
The Hon'ble Delhi High Court observed the facts and upheld that 5% rate shall be applicable irrespective of the fact that such countries were not OECD members at the time of signing DTAA. The court also reiterated the principle that DTAA needs to be read liberally without too much technical stipulation.
The Impact
The Netherlands contributes roughly 7% of total FDI in India ranking 4th out of all countries. Apart from Netherlands, India has signed such MFN clause with other countries as well.
This judgement will have bearing on all such jurisdictions with which India has negotiated similar MFN clause.
Treaty access is, of course, subject to applicable MLI provisions.
Detailed analysis in this regard is as follows -
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