Capital Gains Tax Between India and the Netherlands Under DTAA

Capital Gains Tax Rate Between India and the Netherlands

The India-Netherlands Double Taxation Avoidance Agreement (DTAA), signed on 30 July 1988 and effective from 21 January 1989, contains unique and highly favourable capital gains provisions under Article 13 that distinguish it from most other Indian tax treaties. Unlike the India-Mauritius or India-Singapore DTAAs (which underwent significant amendments in 2017 and 2024 respectively), the India-Netherlands treaty retains original capital gains exemptions that make the Netherlands one of the most attractive jurisdictions for structuring Indian investments.

Under Article 13 of the India-Netherlands DTAA, the taxation of capital gains depends on the nature of the asset being alienated, the percentage of shareholding, the identity of the buyer, and whether the transaction occurs in the course of a corporate reorganisation. The treaty provides several scenarios in which capital gains on share sales are exempt from Indian tax, making it a critical planning tool for Dutch investors.

Treaty Rate vs Domestic Rate: Detailed Comparison

India's domestic capital gains tax regime for non-residents (as amended by the Finance Act, 2024, effective from 23 July 2024) is as follows:

Under the India-Netherlands DTAA, certain capital gains on shares can be entirely exempt from Indian taxation under Article 13, providing significantly greater relief than mere rate reduction. This exemption-based approach contrasts sharply with treaties like the India-USA DTAA where India retains full source-country taxation rights on capital gains.

Key Capital Gains Scenarios Under Article 13

Who Qualifies for the Reduced Rate

The capital gains exemptions under Article 13 of the India-Netherlands DTAA are available to Dutch residents who satisfy the following conditions:

• Tax Residency: The alienator must be a tax resident of the Netherlands, verified by a valid Tax Residency Certificate (TRC) issued by the Dutch Belastingdienst (tax administration).
• Beneficial Ownership: The gains must accrue to the beneficial owner, not a mere agent, nominee, or conduit. India's General Anti-Avoidance Rules (GAAR) can override treaty benefits if the arrangement lacks commercial substance.
• Shareholding Threshold Conditions: The specific exemption depends on the percentage of shares held. For the portfolio exemption (less than 10% holding), the Dutch shareholder must hold fewer than 10% of the shares in the Indian company at the time of alienation.
• Buyer Identity: For certain exemptions, the shares must be sold to a buyer who is not a resident of India.
• MLI Compliance: The Principal Purpose Test (PPT) under the Multilateral Instrument applies. Treaty benefits can be denied if one of the principal purposes of the arrangement was to obtain a tax benefit.

Limitation of Benefits and Substance Requirements

Following the Supreme Court's October 2023 ruling on the MFN clause and India's intensified focus on substance-over-form principles, Dutch entities claiming capital gains exemption must demonstrate genuine economic substance in the Netherlands. Shell companies or entities with no employees, no real office, and no decision-making authority in the Netherlands face a heightened risk of being denied treaty benefits under both GAAR and the MLI's PPT provision.

Capital Gains-Specific Treaty Provisions

Article 13(1): Immovable Property

Gains derived by a resident of the Netherlands from the alienation of immovable property situated in India may be taxed in India. This follows the standard international principle that the source country retains taxation rights on gains from real property. The term "immovable property" is defined by reference to Article 6 and includes agricultural and forestry property.

Article 13(2): Movable Property of PE

Gains from the alienation of movable property forming part of the business assets of a permanent establishment that a Dutch enterprise has in India may be taxed in India. This includes gains realised on the alienation of the PE itself.

Article 13(3): Ships and Aircraft

Gains from the alienation of ships or aircraft operated in international traffic, or movable property pertaining to such operations, are taxable only in the state where the enterprise's place of effective management is situated.

Article 13(4): Shares in Immovable Property-Rich Companies

Gains from the alienation of shares in a company whose capital is not listed on a recognised stock exchange and whose assets consist principally (more than 75%) of immovable property situated in India may be taxed in India, provided the Dutch shareholder holds 25% or more of the company's capital stock. This threshold is notably higher than many other DTAAs, which use 10% or no threshold at all.

Article 13(5): Other Shares

For shares not covered by Article 13(4), the treaty provides specific exemptions. Capital gains on shares are exempt from Indian taxation (taxable only in the Netherlands) where:

• The Dutch shareholder holds less than 10% of the capital of the Indian company, OR
• The shares are sold to a purchaser who is not a resident of India, OR
• The gains are realised in the course of a corporate reorganisation (amalgamation, division, or similar transaction) where the buyer or seller owns at least 10% of the capital of the other party.

This provision is one of the most generous capital gains exemptions in India's treaty network and is a primary reason why the Netherlands has emerged as a preferred holding jurisdiction for Indian investments.

Article 13(6): Residual Clause

Gains from the alienation of any property other than those described in paragraphs 1 through 5 are taxable only in the state of residence of the alienator (Netherlands).

Documentation Required

Dutch investors claiming capital gains exemption under Article 13 must provide the following documentation to the Indian payer or tax authorities:

1. Tax Residency Certificate (TRC): Issued by the Belastingdienst, confirming the Dutch entity is a tax resident of the Netherlands for the relevant period. The TRC must include name, status, nationality, taxpayer identification number (BSN or RSIN), period of residency, and registered address.
2. Form 10F: Filed electronically on India's Income Tax e-filing portal, providing additional information about the non-resident's tax status, domicile, and basis of residency.
3. Self-Declaration of Beneficial Ownership: Confirming that the Dutch entity is the beneficial owner of the capital gains and not acting as a nominee, agent, or conduit for a third-country investor.
4. No PE Declaration: Confirmation that the shares being alienated are not effectively connected with a permanent establishment in India.
5. Shareholding Certificate: Documentary evidence of the percentage of shares held in the Indian company at the time of alienation, to establish whether the 10% or 25% thresholds apply.
6. Transaction Documents: Sale agreement, share transfer forms, and details of the buyer (particularly residency status, to claim the non-Indian buyer exemption).

Withholding Procedure for Indian Payers

When a Dutch shareholder sells shares in an Indian company, the Indian buyer or the company (in case of buyback) must follow the Section 195 TDS compliance procedure:

Step 1: Verify Treaty Eligibility

The Indian payer must verify the Dutch seller's TRC, Form 10F, beneficial ownership declaration, and shareholding details to determine if the capital gains qualify for exemption under Article 13.

Step 2: Determine TDS Obligation

If the capital gains are exempt under the DTAA, no TDS is required. However, the Indian payer must still obtain documentary evidence supporting the exemption claim. If the documentation is insufficient, TDS at domestic rates (12.5% for LTCG on listed shares, 20% for STCG) must be deducted.

Step 3: File Form 15CA/15CB

For remittance of sale proceeds to the Netherlands:

• Form 15CA Part A: For remittances up to INR 5 lakh
• Form 15CA Part C + Form 15CB: For remittances exceeding INR 5 lakh (Form 15CB is a CA certificate confirming the nature of remittance, applicable treaty provision, and TDS compliance)
• Form 15CA Part B: Where a Section 197 nil/lower TDS certificate has been obtained

Step 4: Section 197 Application

Dutch shareholders may apply to the Assessing Officer under Section 197 for a nil withholding certificate or lower TDS certificate, citing the DTAA exemption under Article 13. This is particularly recommended for large-value share transactions where the buyer may be unwilling to rely solely on documentation for zero TDS.

Common Disputes and Judicial Precedents

GAAR vs DTAA: Supreme Court Ruling (2025)

In a landmark ruling, the Supreme Court of India held that India's General Anti-Avoidance Rules (GAAR) can override DTAA capital gains exemptions where the arrangement is found to be an Impermissible Avoidance Arrangement (IAA). This is particularly relevant for Dutch holding structures that lack genuine economic substance. The court clarified that GAAR operates as an independent anti-avoidance mechanism that is not subordinate to treaty provisions.

Netherlands as "New Mauritius" — Regulatory Scrutiny

Following the 2017 amendments to the India-Mauritius and India-Singapore DTAAs (which removed capital gains exemptions), the Netherlands emerged as a preferred jurisdiction for routing Indian investments. This has attracted increased scrutiny from Indian tax authorities. The Central Board of Direct Taxes (CBDT) has flagged investments routed through Dutch entities without genuine commercial substance, and several assessments have challenged treaty benefits under the treaty shopping provisions.

MFN Clause — Supreme Court October 2023 Ruling

While the MFN clause controversy primarily affected dividend and interest rates, the Supreme Court's ruling in Assessing Officer vs Nestle SA established an important principle: MFN benefits cannot be claimed automatically and require a separate notification under Section 90(1). Although this ruling did not directly alter capital gains provisions, it signalled a more restrictive interpretation of treaty benefits generally, which may influence future capital gains assessments.

Beneficial Ownership and Conduit Arrangements

Indian courts have examined numerous cases involving Dutch SPVs (Special Purpose Vehicles) claiming capital gains exemption. The key test is whether the Dutch entity exercises genuine control over investment decisions, has its own employees and office space, maintains independent books of accounts, and is not contractually obligated to pass gains to a third-country beneficiary. The ITAT has denied treaty benefits in several cases where Dutch entities were found to be mere letterbox companies.

Practical Examples and Calculations

Example 1: Portfolio Investor (Less Than 10% Holding)

A Dutch investment fund holds 3% of shares in an Indian listed company. The fund sells the shares after holding them for 18 months, realising a capital gain of INR 5,00,00,000 (INR 5 crore).

The Dutch fund claims the exemption under Article 13(5) because it holds less than 10% of the Indian company's capital.

Example 2: Strategic Investor (10%+ Holding, Non-Indian Buyer)

A Dutch BV holds 30% of an Indian unlisted company (not immovable property-rich). It sells the entire stake to a Singapore-based acquirer, realising a capital gain of INR 20,00,00,000 (INR 20 crore).

Example 3: Corporate Reorganisation

A Dutch parent company merges its wholly-owned Indian subsidiary with another group company through a court-approved amalgamation scheme. The capital gain deemed to arise on transfer is INR 10,00,00,000.

Example 4: Immovable Property-Rich Company (No Exemption)

A Dutch BV holds 40% of an unlisted Indian company whose assets consist principally (80%) of immovable property in India. The BV sells the shares realising a gain of INR 8,00,00,000.

Frequently Asked Questions

Are capital gains on Indian shares exempt for Dutch investors under the DTAA?

It depends on the specific circumstances. Under Article 13(5) of the India-Netherlands DTAA, capital gains are exempt from Indian tax if the Dutch shareholder holds less than 10% of the Indian company, or if the shares are sold to a non-Indian buyer, or if the transaction is part of a corporate reorganisation. However, gains on shares in immovable property-rich unlisted companies (where the Dutch holder owns 25%+ of capital) are taxable in India under Article 13(4).

What is the 10% shareholding threshold under Article 13?

The 10% threshold is a key determinant for capital gains treatment. If a Dutch shareholder holds less than 10% of the capital of the Indian company at the time of sale, the capital gains are exempt from Indian taxation and taxable only in the Netherlands, regardless of the identity of the buyer. For holdings of 10% or more, other conditions must be met for exemption (such as selling to a non-Indian buyer or transacting as part of a corporate reorganisation).

How does GAAR affect capital gains exemption under this treaty?

India's General Anti-Avoidance Rules (GAAR) can override the DTAA capital gains exemption if the arrangement is classified as an Impermissible Avoidance Arrangement. The Supreme Court has confirmed that GAAR prevails over treaty provisions. Dutch entities must demonstrate genuine commercial substance — real employees, office space, independent decision-making, and non-tax business rationale — to defend against GAAR challenges.

Is the India-Netherlands DTAA capital gains treatment better than the India-Mauritius or India-Singapore DTAA?

Yes, currently. The India-Mauritius DTAA capital gains exemption was removed in 2017 (with a 2-year grandfathering period), and the India-Singapore DTAA capital gains provisions were amended by a Third Protocol effective from April 2024, removing the exemption. The India-Netherlands DTAA retains its original capital gains exemptions under Article 13, making it one of the few remaining Indian treaties with significant capital gains benefits for share sales.

What documents does a Dutch investor need to claim capital gains exemption?

A Dutch investor must provide a Tax Residency Certificate from the Belastingdienst, Form 10F filed on India's e-filing portal, a beneficial ownership declaration, a no-PE declaration, shareholding certificates, and transaction documents showing the buyer's residency status. For large transactions, it is advisable to obtain a nil/lower TDS certificate under Section 197.

Can India renegotiate the capital gains provisions of this treaty?

Yes. India has demonstrated willingness to renegotiate capital gains provisions — it did so with Mauritius (2016), Singapore (2024), and France (2026). Given the Netherlands' increasing prominence as an investment routing jurisdiction, tax experts anticipate that India may seek to amend the capital gains article in future treaty negotiations. However, no formal renegotiation has been announced as of March 2026.

Does the MLI's PPT affect capital gains claims under this treaty?

Yes. The Principal Purpose Test (PPT) applies to the India-Netherlands DTAA since both countries have ratified the MLI. If one of the principal purposes of an investment structure through the Netherlands was to obtain a capital gains exemption under Article 13, India can deny the treaty benefit. Dutch entities must demonstrate that their investment decisions were driven by genuine commercial considerations, not primarily by tax optimisation.