Dividend Tax Rate Between India and Germany Under DTAA

Dividend Tax Rate Between India and Germany

The Double Taxation Avoidance Agreement (DTAA) between India and Germany, signed on 19 June 1995 and effective from 26 October 1996, provides significant relief on dividend taxation for cross-border investors. Under Article 10 of the treaty, the maximum withholding tax rate on dividends paid between the two countries is capped at 10% of the gross amount, compared to India's domestic rate of 20% under Section 115A of the Income Tax Act.

This reduced rate applies to both Indian companies paying dividends to German shareholders and German companies distributing dividends to Indian residents. The treaty ensures that investors are not subjected to excessive taxation in the source country, while the residence country provides relief through tax credits under its domestic law.

For German companies operating in India through subsidiaries, and for Indian investors holding shares in German companies, understanding these dividend tax provisions is essential for efficient cross-border tax planning and compliance.

Treaty Rate vs Domestic Rate: Detailed Comparison

The contrast between the DTAA rate and the domestic withholding tax rate on dividends is substantial. Here is how the two regimes compare:

Domestic Rate (Without DTAA)

Under Indian domestic law, dividends paid by an Indian company to a non-resident shareholder are subject to withholding tax at 20% (plus applicable surcharge and health & education cess) under Section 115A of the Income Tax Act, 1961. This rate applies to all foreign shareholders regardless of their country of residence, unless a more favourable treaty rate is available.

DTAA Rate (With Treaty)

Article 10(2) of the India-Germany DTAA limits the withholding tax to 10% of the gross amount of dividends, provided the recipient is the beneficial owner of the dividend income. This represents a 50% reduction from the domestic rate.

Unlike some other Indian DTAAs (such as those with the USA, UK, or Netherlands), the India-Germany treaty does not differentiate between portfolio and substantial shareholding categories. The flat 10% rate applies regardless of the percentage of ownership held by the German shareholder in the Indian company.

Effective Tax Savings

For a German company receiving INR 1 crore in dividends from its Indian subsidiary, the DTAA saves INR 10 lakh in withholding tax (10% instead of 20%). The German company can then claim a foreign tax credit in Germany for the 10% tax paid in India, effectively eliminating double taxation on the same income.

Who Qualifies for the Reduced Rate

Claiming the reduced 10% dividend withholding rate under the India-Germany DTAA requires meeting several conditions established by both the treaty and Indian domestic law.

Beneficial Ownership Requirement

The most critical requirement is that the German recipient must be the beneficial owner of the dividend income. A beneficial owner is someone who has the right to use and enjoy the dividend income without being legally obligated to pass it on to another party. This concept was reinforced in the landmark Giesecke & Devrient case, where the Delhi ITAT held that DDT on dividends paid to a Japanese parent should be capped at the treaty rate, establishing a precedent that has been applied to the India-Germany treaty as well.

A mere nominee, agent, or conduit company that receives dividends on behalf of another person cannot claim treaty benefits. The German recipient must have unrestricted access to the dividend income and be able to use it independently.

Tax Residency Requirement

The recipient must be a tax resident of Germany, as determined under Article 4 of the DTAA. A company is considered a German tax resident if it is incorporated in Germany or has its place of effective management in Germany. For individuals, the test is based on domicile, habitual abode, or similar criteria under German domestic law.

Limitation on Benefits (LOB) and GAAR

With the application of the Multilateral Instrument (MLI) to the India-Germany treaty, a Principal Purpose Test (PPT) now applies. Treaty benefits will be denied if it is reasonable to conclude that obtaining the benefit was one of the principal purposes of any arrangement or transaction. India's domestic General Anti-Avoidance Rules (GAAR), effective from April 2017, can also override treaty benefits if a transaction is found to be an impermissible avoidance arrangement.

No Permanent Establishment Connection

The reduced rate does not apply if the German beneficial owner carries on business in India through a permanent establishment (PE) and the shares generating the dividends are effectively connected with that PE. In such cases, the dividend income is taxed as business profits under Article 7 of the DTAA.

Dividend-Specific Treaty Provisions Under Article 10

Article 10 of the India-Germany DTAA contains several important provisions that govern the taxation of dividend income.

Definition of Dividends

The treaty defines "dividends" broadly to include income from shares, jouissance shares or jouissance rights, mining shares, founders' shares, or other rights participating in profits (not being debt-claims), as well as income from other corporate rights subjected to the same tax treatment as income from shares under the domestic law of the country where the distributing company is resident.

Article 10(2): The Rate Cap

The core provision states that dividends may be taxed in the Contracting State of which the company paying the dividends is a resident, but if the beneficial owner is a resident of the other Contracting State, the tax charged shall not exceed 10% of the gross amount of the dividends. This is a maximum rate; nothing prevents a country from applying a lower rate.

Article 10(4): PE Exception

Where the beneficial owner of dividends, being a resident of one Contracting State, carries on business in the other State through a PE, and the holding generating the dividends is effectively connected with that PE, Article 10 does not apply. Instead, the provisions of Article 7 (Business Profits) govern.

Article 10(5): Extra-territorial Taxation

Germany cannot impose withholding tax on dividends paid by an Indian company merely because the company derives profits or income from Germany, unless the dividends are paid to a German resident or the holding is effectively connected with a PE in Germany.

Documentation Required to Claim the Reduced Rate

Indian payers must follow a defined compliance process to apply the reduced 10% rate instead of the 20% domestic rate when paying dividends to German shareholders.

Tax Residency Certificate (TRC)

The German shareholder must obtain a Tax Residency Certificate from the German tax authorities (Finanzamt) confirming that they are a tax resident of Germany for the relevant financial year. This is the primary document required under Section 90(4) of the Income Tax Act.

Form 10F

If the TRC does not contain all the prescribed information (name, status, nationality, tax identification number, period of residential status, and address), the German shareholder must also file Form 10F electronically with the Indian tax authorities. Since July 2022, Form 10F must be filed electronically, even if the non-resident does not have a PAN in India.

Self-Declaration / No PE Declaration

The German shareholder should provide a self-declaration confirming that they do not have a PE in India to which the dividend income is attributable, and that they are the beneficial owner of the income.

PAN or TIN

While not mandatory for treaty benefit claims, having an Indian PAN simplifies the process. Alternatively, the German tax identification number (Steuerliche Identifikationsnummer) can be used for Form 10F filing.

Withholding Procedure for Indian Payers

Indian companies distributing dividends to German shareholders must follow specific procedures under Indian tax law.

Section 195: TDS Obligation

Under Section 195 of the Income Tax Act, any person making a payment to a non-resident that is chargeable to tax in India must deduct tax at source. For dividends, the Indian company must deduct TDS at the applicable rate (10% under DTAA if documentation is in order, or 20% under domestic law if not) at the time of payment or credit, whichever is earlier.

Form 15CA and 15CB

Before remitting the dividend payment to Germany, the Indian company must file Form 15CA online as a declaration of the payment. If the remittance exceeds INR 5 lakh in a financial year, a Chartered Accountant must issue Form 15CB certifying the taxability of the payment, the applicable DTAA rate, and that TDS has been correctly deducted.

Lower Withholding Certificate (Section 197)

If the German shareholder expects the actual tax liability on the dividend income to be lower than the amount that would be deducted at source, they can apply to the Assessing Officer for a lower withholding certificate under Section 197. This is particularly relevant when treaty benefits reduce the effective rate below the standard domestic rate.

Common Disputes and Judicial Precedents

The taxation of dividends under the India-Germany DTAA has been the subject of several important judicial decisions.

Giesecke & Devrient Case (Delhi ITAT)

In the landmark case of Giesecke & Devrient [India] Pvt Ltd v. Addl. Commissioner of Income Tax, the Delhi ITAT held that the Dividend Distribution Tax (DDT) under Section 115-O is effectively a tax on shareholders and must be capped at the treaty rate of 10% under Article 10 of the India-Germany DTAA. The tribunal relied on the Delhi High Court's ruling in New Skies Satellite BV, which established that DTAA rates prevail over domestic tax rates. This was a groundbreaking decision that allowed Indian subsidiaries of German companies to claim refunds of excess DDT paid.

Beneficial Ownership Challenges

The Indian tax authorities have increasingly scrutinised claims of beneficial ownership, particularly in cases involving multi-layered holding structures. In several cases, treaty benefits were denied where the German entity was found to be a conduit with no substantive business operations, and the ultimate economic beneficiary was resident in a third country with no DTAA or a less favourable DTAA with India.

MLI Impact on Treaty Shopping

The application of the MLI's Principal Purpose Test (PPT) to the India-Germany treaty has strengthened the ability of tax authorities to deny treaty benefits in cases of treaty shopping. Arrangements designed primarily to access the 10% dividend rate rather than for genuine commercial purposes are now more vulnerable to challenge.

Practical Examples and Calculations

Understanding the practical impact of the India-Germany DTAA on dividend taxation requires working through real-world scenarios.

Example 1: German Parent Receiving Dividends from Indian Subsidiary

ABC GmbH, a German company, holds 100% of XYZ Pvt Ltd, an Indian subsidiary. XYZ declares dividends of INR 2 crore to ABC GmbH.

• Without DTAA: TDS at 20% = INR 40 lakh. ABC GmbH receives INR 1.60 crore.
• With DTAA: TDS at 10% = INR 20 lakh. ABC GmbH receives INR 1.80 crore.
• Tax saving: INR 20 lakh per distribution.

ABC GmbH then claims a foreign tax credit of INR 20 lakh against its German corporate tax liability, ensuring the dividend income is not taxed twice.

Example 2: Indian Individual Investing in German Stocks

Mr. Sharma, an Indian resident, receives EUR 5,000 in dividends from his shareholding in a German listed company.

• German withholding: Under the DTAA, Germany withholds 10% = EUR 500.
• Indian taxation: The full EUR 5,000 is included in Mr. Sharma's total income in India and taxed at his applicable slab rate.
• Relief: Mr. Sharma claims a foreign tax credit under Section 90 for the EUR 500 tax paid in Germany, reducing his Indian tax liability by that amount.

Example 3: PE Attribution Scenario

A German company has both a PE in India (a branch office) and a separate portfolio investment in an Indian listed company. If the shares are held through and attributable to the PE, the dividends are taxed as business profits under Article 7 (at applicable corporate rates, potentially higher than 10%). If the shares are held independently of the PE, the 10% DTAA rate applies.

Frequently Asked Questions

What is the dividend tax rate under the India-Germany DTAA?

The maximum withholding tax rate on dividends under Article 10 of the India-Germany DTAA is 10% of the gross amount of the dividends, provided the recipient is the beneficial owner. This compares to the domestic rate of 20% under Indian law.

Do I need a Tax Residency Certificate to claim the reduced rate?

Yes. A Tax Residency Certificate (TRC) issued by the German tax authorities (Finanzamt) is mandatory for claiming DTAA benefits. Additionally, Form 10F must be filed electronically with the Indian Income Tax Department if the TRC does not contain all prescribed details.

Does the 10% rate apply to all types of shareholders?

The 10% rate applies to all German tax residents who are the beneficial owners of the dividends, regardless of whether they hold a small portfolio stake or a controlling interest. Unlike some other Indian DTAAs, the India-Germany treaty does not differentiate by shareholding percentage.

What happens if the German company has a PE in India?

If the shares generating the dividends are effectively connected with a permanent establishment of the German company in India, the 10% rate does not apply. Instead, the dividends are taxed as business profits under Article 7 of the DTAA at the applicable corporate tax rate.

Can the Indian tax department deny DTAA benefits on dividends?

Yes. Under the Principal Purpose Test (PPT) introduced by the MLI and India's domestic GAAR provisions, treaty benefits can be denied if the arrangement was primarily designed to obtain the reduced rate rather than for genuine commercial reasons.

How does Germany provide relief for dividends taxed in India?

Germany uses the credit method for eliminating double taxation. German tax residents include the gross dividend in their taxable income and receive a credit for the Indian tax (up to 10% under the DTAA) against their German tax liability on the same income.

Is surcharge and cess applicable over and above the 10% DTAA rate?

This is a contested issue. While Indian authorities have argued that surcharge and health & education cess are levied in addition to the DTAA rate, several tribunal rulings have held that the total tax cannot exceed the treaty rate. Taxpayers should review the latest judicial position and may need to litigate if excess amounts are withheld.