Capital Gains Tax Between India and Sweden Under DTAA

Capital Gains Tax Rate Between India and Sweden

The Double Taxation Avoidance Agreement (DTAA) between India and Sweden, signed on February 28, 1997, and effective from January 1, 1998, contains detailed provisions on capital gains taxation under Article 13. Unlike dividends, interest, or royalties where the treaty prescribes maximum withholding tax rates, capital gains under the India-Sweden DTAA follow a jurisdictional allocation model — determining which country gets to tax specific types of gains rather than capping the rate.

This article provides a comprehensive guide to capital gains taxation between India and Sweden, covering all five paragraphs of Article 13, domestic rate comparisons, documentation requirements, and practical examples for cross-border investors and businesses.

Treaty Rate vs Domestic Rate: Detailed Comparison

Article 13 of the India-Sweden DTAA does not prescribe a fixed withholding rate on capital gains. Instead, it allocates taxing rights between the two countries based on the type of asset being alienated. Here is how the treaty provisions compare with Indian domestic capital gains tax rates:

The critical distinction is that for shares of Indian companies that are not property-rich, Article 13(5) generally reserves taxing rights exclusively to Sweden (the alienator’s state of residence), provided the Swedish resident is subject to tax on those gains in Sweden. This is a significant benefit compared to India’s domestic law, which taxes non-residents on capital gains from Indian securities.

Who Qualifies for the Reduced Rate

Since Article 13 allocates taxing rights rather than prescribing reduced rates, the key question is whether a Swedish resident can claim exclusive taxation in Sweden on capital gains from Indian assets. To qualify:

Tax Residency in Sweden

The alienator must be a tax resident of Sweden under Article 4 of the treaty. A valid Tax Residency Certificate (TRC) issued by the Swedish Tax Agency (Skatteverket) is mandatory.

Beneficial Ownership and Substance

The Swedish resident must demonstrate genuine economic substance and cannot be a mere conduit entity. With the Multilateral Instrument (MLI) provisions in effect from April 1, 2020, the Principal Purpose Test (PPT) applies. If one of the principal purposes of an arrangement was to obtain treaty benefits, those benefits may be denied.

No PE Connection

If the capital gain arises from movable property forming part of the business property of a permanent establishment (PE) that the Swedish enterprise has in India, the gain is taxable in India under Article 13(2), not under the residual clause.

Limitation on Benefits (LOB) / GAAR

India’s General Anti-Avoidance Rules (GAAR), effective from April 1, 2017, can override treaty benefits if an arrangement is deemed an “impermissible avoidance arrangement.” Swedish investors must ensure their investment structures have genuine commercial substance beyond mere tax savings.

Capital Gains-Specific Treaty Provisions

Article 13 of the India-Sweden DTAA contains five paragraphs addressing different categories of capital gains:

Article 13(1): Immovable Property

Gains derived by a Swedish resident from the alienation of immovable property (as defined in Article 6) situated in India may be taxed in India. This means India retains full taxing rights on gains from sale of land, buildings, and other real property located in India. The domestic Indian capital gains tax rates apply — 12.5% for long-term gains (held over 24 months) and slab rates for short-term gains.

Article 13(2): Movable Property of PE

Gains from alienation of movable property forming part of the business property of a PE that a Swedish enterprise has in India may be taxed in India. This includes gains from the alienation of the PE itself (alone or with the whole enterprise). This provision ensures that India can tax capital gains on all business assets connected with a Swedish company’s PE in India.

Article 13(3): Ships and Aircraft

Gains from alienation of ships or aircraft operated in international traffic, or movable property pertaining to their operation, are taxable only in Sweden (the state where the enterprise is resident). India has no taxing rights on such gains.

Article 13(4): Property-Rich Companies

Gains from alienation of shares of a company whose property consists directly or indirectly principally of immovable property situated in India may be taxed in India. The word “principally” is generally interpreted as more than 50% of the company’s assets being immovable property. This anti-avoidance provision prevents Swedish residents from avoiding Indian tax on immovable property gains by interposing a holding company.

Article 13(5): Residual Clause

Gains from alienation of any other property (not covered in paragraphs 1–4) are taxable only in Sweden, provided the Swedish resident is subject to tax on those gains in Sweden. If Sweden does not tax the gains, India may exercise its taxing rights. This conditional residual clause is significant — it means that gains from sale of shares of Indian companies (that are not property-rich) by Swedish residents are generally taxable only in Sweden, offering substantial tax savings.

Documentation Required

Swedish residents claiming treaty protection on capital gains from Indian assets must provide the following documentation:

Tax Residency Certificate (TRC)

A valid TRC from the Swedish Tax Agency (Skatteverket) is the primary document required under Section 90(4) of the Indian Income Tax Act. The TRC must confirm the taxpayer’s tax residency in Sweden for the relevant financial year.

Form 10F

In addition to the TRC, the non-resident must submit Form 10F containing prescribed details including tax identification number (Swedish personnummer or organisationsnummer), residential status, period of residency, and the article of the treaty under which treaty benefit is being claimed.

Self-Declaration

A self-declaration confirming that the income is not attributable to a PE in India, that the taxpayer is the beneficial owner of the capital gains, and that the arrangement does not have obtaining treaty benefits as one of its principal purposes (PPT compliance under MLI).

Capital Gains Computation

Detailed computation of capital gains including cost of acquisition, date of acquisition, sale consideration, and applicable holding period classification (short-term vs long-term under Indian domestic law).

Withholding Procedure for Indian Payers

When Indian companies or entities make payments involving capital gains to Swedish residents, specific compliance procedures apply:

Section 195 Compliance

Under Section 195 of the Income Tax Act, any person responsible for paying to a non-resident any sum chargeable to tax in India must deduct TDS at the applicable rate. For capital gains not exempt under the treaty, TDS applies at domestic rates unless a lower withholding certificate is obtained.

Form 15CA and Form 15CB

Before remitting sale proceeds or consideration for transfer of Indian assets to Sweden, the payer must:

• Obtain a Form 15CB certificate from a Chartered Accountant certifying the nature of the payment, applicable tax rate, and treaty applicability
• File Form 15CA online with the Income Tax Department as a declaration of the remittance

For capital gains exempt under Article 13(5), the Form 15CB should certify that the payment is not chargeable to tax in India under the DTAA, citing the specific article and treaty provisions.

Lower Withholding Certificate (Section 197)

Swedish residents expecting capital gains from Indian assets can apply to the Assessing Officer for a lower or nil withholding certificate under Section 197, citing Article 13(5) of the India-Sweden DTAA. This prevents excess tax deduction and avoids the need to file refund claims later.

Common Disputes and Judicial Precedents

Several issues commonly arise in the interpretation and application of capital gains provisions under the India-Sweden DTAA:

Property-Rich Company Test

Indian tax authorities sometimes apply an expansive interpretation of “property consisting principally of immovable property” under Article 13(4). Disputes arise over whether the test should be applied at book value or market value, and whether indirect holding through subsidiaries should be considered. The ITAT has generally held that the test must be applied based on the overall asset composition of the company whose shares are being transferred.

Conditional Residual Clause Interpretation

Article 13(5) contains a unique proviso: gains are taxable only in Sweden “provided that such resident is subject to tax thereon in that State.” Indian tax authorities have argued that if Sweden provides a participation exemption or other relief on capital gains, India retains taxing rights. This interpretation has been litigated, with tribunals generally holding that “subject to tax” means the income falls within the scope of Swedish taxation, not that actual tax is paid.

GAAR vs Treaty Provisions

Since GAAR became effective on April 1, 2017, the Indian tax department has the power to deny treaty benefits if the arrangement is an “impermissible avoidance arrangement.” The interaction between GAAR and DTAA provisions remains an evolving area, with the CBDT clarifying that GAAR will apply to situations of treaty abuse but not to cases where a specific anti-avoidance rule (SAAR) already addresses the situation.

MLI Principal Purpose Test

The MLI provisions in effect from FY 2020-21 for the India-Sweden DTAA added the PPT, which can deny treaty benefits even in genuine structures if one of the principal purposes was obtaining treaty benefits. This creates an additional layer of scrutiny beyond GAAR.

Practical Examples and Calculations

Here are practical scenarios illustrating capital gains taxation between India and Sweden:

Example 1: Swedish Investor Sells Listed Indian Shares

A Swedish tax resident individual sells listed shares of an Indian company (not property-rich) after holding for 18 months, realizing a capital gain of INR 50,00,000.

• Without DTAA: LTCG taxed in India under Section 112A at 12.5% on gains exceeding INR 1.25 lakh. Tax: approximately INR 6,09,375
• With DTAA (Article 13(5)): Since the shares are not property-rich and the Swedish resident is subject to tax in Sweden, the gains are taxable only in Sweden. Indian tax: NIL
• Savings: INR 6,09,375 (100% savings on Indian tax)

The Swedish investor will pay Swedish capital gains tax (typically 30% on investment income), but avoids double taxation entirely through the treaty’s exclusive allocation to Sweden.

Example 2: Sale of Indian Real Estate

A Swedish company sells commercial property in India for INR 10 crore, with a cost basis of INR 4 crore (held for 5 years).

• Treaty treatment (Article 13(1)): India retains full taxing rights on gains from immovable property
• Indian tax: LTCG at 12.5% without indexation = INR 75,00,000
• Swedish relief: Sweden provides a foreign tax credit under Article 23 for the Indian tax paid, eliminating double taxation

Example 3: Sale of Shares of Property-Rich Indian Company

A Swedish holding company sells shares of an Indian subsidiary that owns substantial real estate (immovable property constituting 60% of total assets).

• Treaty treatment (Article 13(4)): Since the Indian company’s property consists principally of immovable property, India may tax the capital gains
• Indian tax: LTCG at 12.5% or STCG at applicable rates depending on holding period
• Swedish relief: Foreign tax credit available in Sweden

For more information on structuring your India-Sweden cross-border investments, consult our tax advisory services or explore the complete India-Sweden DTAA guide. You can also review the withholding tax rates and dividend tax provisions under this treaty. Companies entering India from Sweden should also review how to register a company in India from Sweden and understand permanent establishment rules, transfer pricing requirements, and FEMA/RBI compliance obligations.

Frequently Asked Questions

Are capital gains on Indian shares taxable in India for Swedish residents?

Under Article 13(5) of the India-Sweden DTAA, capital gains from the sale of shares of Indian companies (that are not property-rich) by Swedish residents are taxable only in Sweden, provided the Swedish resident is subject to tax on those gains in Sweden. This effectively exempts such gains from Indian taxation.

What is the capital gains tax rate on immovable property in India for Swedish residents?

Under Article 13(1), India retains full taxing rights on gains from immovable property. Swedish residents pay Indian capital gains tax at domestic rates: 12.5% for long-term capital gains (held over 24 months) and applicable slab rates for short-term gains. Sweden provides a foreign tax credit for taxes paid in India.

Does the property-rich company test apply to indirect holdings?

Article 13(4) covers shares of a company whose property consists directly or indirectly principally of immovable property in India. The word “indirectly” means that even if the immovable property is held through subsidiaries, the provision can apply. However, the test examines the overall asset composition, and property must constitute more than 50% of total assets.

How does the MLI affect capital gains taxation under the India-Sweden DTAA?

The MLI provisions in effect from April 1, 2020, primarily introduce the Principal Purpose Test (PPT). The PPT can deny treaty benefits on capital gains if one of the principal purposes of an arrangement was to obtain those benefits. The MLI does not change the substantive capital gains allocation rules in Article 13 itself.

Can Swedish companies claim treaty benefits if they hold shares through a third country?

Treaty benefits under the India-Sweden DTAA are available only to residents of India or Sweden. If a Swedish company holds Indian shares through a third-country entity (e.g., Singapore or Netherlands), the treaty benefits depend on the DTAA between India and that third country. Additionally, both GAAR and the MLI’s PPT can deny benefits in conduit arrangements.

What documentation is needed to claim capital gains exemption under Article 13(5)?

Swedish residents must provide a valid Tax Residency Certificate from Skatteverket, Form 10F with prescribed details, a self-declaration confirming no PE in India and beneficial ownership, and a detailed capital gains computation. These documents should be provided to the Indian payer or filed with the lower withholding certificate application.

What happens if Sweden does not tax the capital gains?

Article 13(5) has a unique condition: gains are taxable only in Sweden “provided that such resident is subject to tax thereon in that State.” If Sweden does not subject the gains to tax (e.g., under a participation exemption), India may exercise its right to tax the capital gains under domestic law. This prevents double non-taxation.