The tax on dividend distributed to foreign shareholder in India is 20%. This is subject to the provisions of the relevant Double Taxation Avoidance Agreement (DTAA). If there is a DTAA between India and the country of residence of the foreign shareholder, the tax rate may be lower.
The tax is deducted by the company that is distributing the dividend. This is known as withholding tax. The company is required to deduct the tax and remit it to the government.
The foreign shareholder can claim a refund of the withholding tax if they are resident in a country with which India has a DTAA. To claim a refund, the foreign shareholder must submit a tax return to the Indian government.
Here are some additional things to keep in mind:
- The dividend income is taxable in the hands of the foreign shareholder, even if they do not have a permanent establishment in India.
- The dividend income is not eligible for any deductions or exemptions.
- The foreign shareholder is responsible for paying any taxes that are due.
Overview of Dividend Taxation under Double Taxation Avoidance Agreements
Understanding the intricacies of international taxation can be a challenging task for businesses operating across borders. One area of particular importance is how dividends are taxed under Double Taxation Avoidance Agreements (DTAAs). These treaties between two countries aim to avoid or mitigate the double taxation of the same income. Today, we’ll be taking a closer look at the dividend tax implications under DTAAs between India and several other countries: the USA, UK, Germany, France, Singapore, and Malaysia.
Dividend Taxation under DTAA: India-USA
The DTAA between India and the USA provides that dividends are taxed at a rate of 15% if the beneficial owner is a company (other than a partnership) that owns at least 10% of the shares of the Indian company paying the dividends. For all others, the tax rate is 25%. The USA-based company should include this income in its tax return and can typically claim a foreign tax credit for taxes paid in India.
Dividend Taxation under DTAA: India-UK
Under the DTAA between India and the UK, dividends paid to a company that holds at least 10% of the shares of the Indian company paying the dividend are subject to a maximum tax rate of 15%. In all other cases, the rate is 10%. The UK company can claim a credit for the taxes paid in India when filing its tax return in the UK.
Dividend Taxation under DTAA: India-Germany
The India-Germany DTAA allows for a 10% tax rate on dividends if the beneficial owner is a company that holds at least 10% of the capital of the company paying the dividends. For all other cases, the tax rate is 15%. German companies can then offset this tax against their tax liability in Germany.
Dividend Taxation under DTAA: India-France
The DTAA between India and France has a similar framework. Dividends are taxed at a rate of 10% if the beneficial owner is a company which owns at least 10% of the capital of the company paying the dividends. In other cases, the rate is 15%. French companies should account for this income and can claim a tax credit in France for the tax paid in India.
Dividend Taxation under DTAA: India-Singapore
The India-Singapore DTAA stipulates a 15% tax rate on dividends if the beneficial owner is a company that owns at least 25% of the capital of the company paying the dividends. In all other cases, the tax rate is 10%. Singaporean companies can claim a tax credit for the tax deducted at source in India.
Dividend Taxation under DTAA: India-Malaysia
As per the DTAA between India and Malaysia, dividends are subject to a maximum tax rate of 10%. Malaysian companies can also claim a tax credit for the tax deducted in India.
In all these cases, the foreign company typically does not need to file a tax return in India for the dividends received, as the Indian company should withhold the tax at source.
However, these rates are subject to changes based on amendments to the DTAAs.
In conclusion, understanding the nuances of DTAAs and their implications on dividend taxation is critical for businesses operating internationally. Ensuring compliance with these regulations not only allows companies to avoid double taxation but also aids in strategic financial planning.