Capital Gains Tax Between India and Luxembourg Under DTAA

Quick answer: Article 13 of the India-Luxembourg DTAA (signed 2 June 2008, in force from 9 July 2009, effective in India from 1 April 2010) allocates capital gains taxing rights by asset type rather than setting a single rate. Critically, Article 13(5) lets India tax a Luxembourg resident's gains on shares of an Indian company at any shareholding level -- there is no minimum-holding threshold and no residence-only exemption for share sales. Only gains on property falling outside paragraphs 1 to 5 of Article 13 -- for example most debt instruments, goodwill or intellectual property -- are taxable exclusively in the seller's residence State under the Article 13(6) residual clause. India taxes listed-share LTCG at 12.5% above INR 1.25 lakh, listed-share STCG at 20%, and unlisted-share LTCG at 12.5% without indexation.

Key takeaways:

• Article 13 allocates taxing rights by asset type; it does not set one capital gains rate.
• Article 13(5): India may tax a Luxembourg resident's gains on shares of an Indian company, at any shareholding level -- no treaty shelter exists for share exits.
• Article 13(6), the residual clause, applies only to property outside paragraphs 1-5; it does not cover shares.
• Ships and aircraft gains are taxable only in the alienator's residence State (Article 13(3)) -- not where effective management sits, unlike the OECD Model.
• Listed-share LTCG is 12.5% above INR 1.25 lakh; listed STCG is 20%; unlisted-share LTCG is 12.5% without indexation.

Capital Gains Tax Between India and Luxembourg

The India-Luxembourg Double Taxation Avoidance Agreement -- formally an agreement for the avoidance of double taxation with respect to taxes on income and on capital -- addresses capital gains in Article 13. Unlike dividends, interest and royalties, where the treaty fixes a single withholding ceiling, Article 13 works by allocating the right to tax a given category of gain between India and Luxembourg; the taxing State then applies its own domestic rate to that gain.

This distinction matters enormously for Luxembourg-based investment funds, holding companies and private equity vehicles that hold Indian company shares. Unlike India's older treaties with Mauritius and Singapore -- which, before their 2016 protocols, gave the residence State exclusive taxing rights over share gains and were widely used to shelter exits from Indian investments -- the India-Luxembourg treaty was negotiated in 2008 with a source-State taxing right over share gains built in from the start. There has never been a residence-only shelter for Luxembourg investors selling Indian shares under this treaty. See the India-Luxembourg DTAA complete guide and the withholding tax rates page for the treaty's other provisions.

Article 13's Asset-by-Asset Map

Article 13 contains six paragraphs, each allocating taxing rights for a different category of asset:

Immovable Property -- Article 13(1)

"Gains derived by a resident of a Contracting State from the alienation of immovable property ... and situated in the other Contracting State may be taxed in that other State." A Luxembourg resident selling Indian real estate is taxable in India at domestic rates.

PE Movable Property -- Article 13(2)

Gains from the alienation of movable property forming part of the business property of a permanent establishment (or of a fixed base used for independent personal services) may be taxed in the State where the PE or fixed base is located, including gains from alienating the PE itself.

Ships and Aircraft -- Article 13(3)

"Gains from the alienation of ships or aircraft operated in international traffic, or movable property pertaining to the operation of such ships or aircraft, shall be taxable only in the Contracting State of which the alienator is a resident." This is a genuine departure from the OECD Model's usual place-of-effective-management test: under this treaty, the alienator's residence -- not where the shipping or airline business is effectively managed -- decides which country has the exclusive right to tax.

Land-Rich Company Shares -- Article 13(4)

"Gains from the alienation of shares of the capital stock of a company the property of which consists directly or indirectly principally of immovable property situated in a Contracting State may be taxed in that State." Shares of an Indian company that is principally an immovable-property holding vehicle are taxable in India regardless of the general share rule in paragraph 5.

All Other Shares -- Article 13(5)

"Gains from the alienation of shares other than those mentioned in paragraph 4 in a company which is a resident of a Contracting State may be taxed in that State." This is the operative rule for an ordinary trading or holding company: gains from selling shares of an Indian company may be taxed in India, whatever the seller's shareholding percentage. There is no substantial-holding threshold and no carve-out for portfolio investors -- the source State's taxing right under paragraph 5 is unqualified.

Residual Property -- Article 13(6)

"Gains from the alienation of any property other than that referred to in paragraphs 1, 2, 3, 4 and 5, shall be taxable only in the Contracting State of which the alienator is a resident." This residual clause is exclusive to property outside paragraphs 1-5 -- typically debt instruments, goodwill, or other intangible assets not falling within the royalty definition. It does not apply to shares of any kind: shares are already dealt with in paragraph 4 (land-rich companies) or paragraph 5 (all other companies), so paragraph 6 can never be read as sheltering a share sale. A Luxembourg resident selling shares of an Indian company always falls under paragraph 4 or 5, never paragraph 6.

India's Domestic Capital Gains Rates

Because Article 13 allocates the taxing right rather than fixing a rate, once India has the right to tax under paragraph 1, 2, 4 or 5, its own domestic rates apply:

• Listed-share STCG (holding up to 12 months): 20% under section 196 of the Income-tax Act, 2025 (section 111A of the Income-tax Act, 1961).
• Listed-share LTCG (holding over 12 months): 12.5% on gains exceeding INR 1.25 lakh in a year, under section 198 of the Income-tax Act, 2025 (section 112A of the Income-tax Act, 1961).
• Unlisted-share LTCG (holding over 24 months): 12.5% without indexation, under section 197 of the Income-tax Act, 2025 (section 112 of the Income-tax Act, 1961), following the Finance Act 2024 amendment effective 23 July 2024.
• Immovable property gains follow the same LTCG/STCG framework depending on the holding period.

Who Qualifies for Treaty Protection

Tax Residency

Treaty protection under Article 13 requires Luxembourg tax residency under Article 4, evidenced by a Tax Residency Certificate from the Administration des Contributions Directes (ACD).

Anti-Abuse: MLI Principal Purpose Test and GAAR

The India-Luxembourg DTAA is a Covered Tax Agreement under the MLI, and the Principal Purpose Test applies to Indian tax from FY 2020-21 -- though for the residual clause of Article 13(6), the PPT is largely academic given that shares are never within its scope in the first place. India's domestic General Anti-Avoidance Rules, effective April 2017, can independently override treaty benefits: section 159(6) of the Income-tax Act, 2025 (section 90(2A) of the Income-tax Act, 1961) makes the GAAR provisions apply notwithstanding the treaty-override rule in section 159(4) (section 90(2) of the Income-tax Act, 1961). Because Article 13(5) already gives India an unqualified taxing right over Indian share gains, GAAR's practical relevance here is smaller than for treaties that do offer a residence-only shelter -- there is little for GAAR to override on ordinary share sales. The treaty also carries its own Limitation of Benefits provision. Article 29 preserves each State's domestic anti-evasion rules, denies the benefits of the Agreement to an enterprise whose creation had obtaining those benefits as its main purpose or one of its main purposes, and expressly covers legal entities without bona fide business activities. Article 30 goes further: the Agreement does not apply at all to holding companies governed by the special Luxembourg laws it names, or to other companies enjoying a similar special fiscal treatment under Luxembourg law, nor to income an Indian resident derives from such companies. A Luxembourg vehicle established under a special fiscal regime should therefore confirm its treaty eligibility before relying on the reduced rate.

Indirect Transfers

Where a Luxembourg entity's value derives substantially from Indian assets but the shares actually transferred are of a third-country (non-Indian) holding company, India's indirect-transfer provisions -- in section 9(2)(d) read with section 9(10) of the Income-tax Act, 2025 (Explanations 5 and 6 to section 9(1)(i) of the Income-tax Act, 1961), which deem a share in a foreign company to be situated in India where it derives its value substantially from Indian assets, meaning those assets exceed INR 10 crore and represent at least 50% of the company's total assets -- can still bring the gain into the Indian tax net, separately from Article 13(5)'s direct-share rule.

Documentation and Withholding Procedure

Tax Residency Certificate and Form 41

A TRC from the ACD is required under section 159(8) of the Income-tax Act, 2025 (section 90(4) of the Income-tax Act, 1961). Form 41 (formerly Form 10F) must be filed electronically if the TRC lacks any prescribed particular.

TDS on Share Transfers

Under section 393(2) of the Income-tax Act, 2025 (Table, Sl. No. 17; section 195 of the Income-tax Act, 1961), the Indian buyer of shares from a Luxembourg-resident seller must deduct tax at source on the capital gains component at the applicable domestic rate, since Article 13 allocates the taxing right rather than prescribing its own rate.

Lower Withholding Certificate

The Luxembourg seller can apply for a lower-withholding certificate under section 395(1) of the Income-tax Act, 2025 (section 197 of the Income-tax Act, 1961), or, for section 393(2) sums, under section 395(2) of the Income-tax Act, 2025 (section 195(2) and (3) of the Income-tax Act, 1961) -- useful where the actual gain is small relative to the sale consideration.

Forms 145 and 146 for Remittance

The Indian buyer must file Form 145 electronically before remitting sale proceeds abroad, with a Chartered Accountant's Form 146 required for remittances exceeding INR 5 lakh.

Practical Examples and Calculations

Example 1: Luxembourg Holding Company Selling Shares of an Indian Subsidiary

Lux Invest S.a r.l. sells its entire, wholly-owned shareholding in an unlisted Indian company for INR 12 crore, against an original cost of INR 5 crore, held for three years.

• Gain: INR 7 crore, long-term (unlisted shares held over 24 months).
• India's right to tax: Yes -- Article 13(5), since the Indian company is not principally an immovable-property holder (which would instead trigger Article 13(4)).
• Indian tax: 12.5% LTCG without indexation = INR 87.5 lakh, plus applicable surcharge and cess.
• Luxembourg relief: Article 24(2)(a) requires Luxembourg to exempt income that may be taxed in India, while letting it take the exempt gain into account in fixing the rate on Lux Invest's remaining income. The credit method in Article 24(2)(b) is reserved for income under Articles 10, 11, 12 and 17, so it does not reach an Article 13 capital gain.

Example 2: Luxembourg Company Selling Listed Indian Shares

Lux Growth Investments S.a r.l., a Luxembourg company fully subject to Luxembourg corporation tax, sells listed shares of an Indian company on the NSE for INR 40 lakh, against a cost of INR 25 lakh, held for 18 months.

• Gain: INR 15 lakh, long-term (listed shares held over 12 months).
• India's right to tax: Yes -- Article 13(5).
• Indian tax: 12.5% LTCG on the gain exceeding INR 1.25 lakh = approximately INR 1.72 lakh.
• STT: Securities Transaction Tax of 0.1% also applies on the sale value.

Example 3: Ships Operated in International Traffic

A Luxembourg-resident shipping company sells a vessel it operates in international traffic, including routes calling at Indian ports. Under Article 13(3), the gain is taxable only in Luxembourg, the alienator's State of residence -- regardless of where the vessel's operations are effectively managed, and regardless of any Indian port calls. India has no taxing right over this gain at all.

Example 4: Sale of a Debt Instrument (Residual Clause)

A Luxembourg investor sells a non-convertible debenture issued by an Indian company, realising a gain that does not fall within the interest definition of Article 11. Because a debt instrument is not a "share" for Article 13(4) or 13(5) purposes, the gain falls into the residual Article 13(6) clause and is taxable only in Luxembourg, the alienator's residence State -- a materially different outcome from a share sale, which India could tax under paragraph 5.

Frequently Asked Questions

Can India tax a Luxembourg resident's gains on Indian company shares?

Yes, at any shareholding level. Article 13(5) of the India-Luxembourg DTAA gives India the right to tax gains from the alienation of shares in a company resident in India, with no minimum-holding threshold and no residence-only exemption. India applies its domestic rates: 12.5% LTCG (listed shares over 12 months, unlisted shares over 24 months) or 20% STCG (listed shares).

Does Article 13(6) exempt gains on shares?

No. Article 13(6) is a residual clause covering only property outside paragraphs 1 to 5 of Article 13 -- typically debt instruments, goodwill or other intangibles. Shares are always dealt with under paragraph 4 (land-rich companies) or paragraph 5 (all other companies), so paragraph 6 never applies to a share sale.

How are gains on ships and aircraft taxed?

Article 13(3) taxes gains from ships or aircraft operated in international traffic exclusively in the alienator's State of residence -- not the state of effective management, which is the more common OECD Model test. A Luxembourg-resident airline or shipping company's gains on such assets are taxable only in Luxembourg, even where the assets call at or fly through India.

What are India's current domestic capital gains rates for non-residents?

Following the Finance Act 2024 (effective 23 July 2024), listed-share short-term gains are taxed at 20% (section 196 of the Income-tax Act, 2025 / section 111A of the 1961 Act), listed-share long-term gains at 12.5% above INR 1.25 lakh (section 198 / section 112A), and unlisted-share long-term gains at 12.5% without indexation (section 197 / section 112).

Does the MLI's Principal Purpose Test affect capital gains claims?

The India-Luxembourg DTAA is a Covered Tax Agreement, and the PPT applies to Indian tax from FY 2020-21. Because Article 13(5) already gives India an unqualified taxing right over share gains, the PPT has limited additional bite there; it is more relevant to structures relying on the narrower residual clause in Article 13(6) for non-share assets, and to India's domestic GAAR, which independently overrides treaty benefits for impermissible avoidance arrangements.

Are indirect transfers of Indian assets through a Luxembourg structure taxable?

Potentially yes, separately from Article 13(5). India's indirect-transfer provisions -- section 9(2)(d) read with section 9(10) of the Income-tax Act, 2025 (Explanations 5 and 6 to section 9(1)(i) of the 1961 Act) -- can tax gains on shares of a non-Indian holding company that derive substantial value from Indian assets, even where Article 13(5) itself only reaches direct Indian-company shares.