Dividend Tax Rate Between India and Israel Under DTAA

Dividend Tax Rate Between India and Israel

The Double Taxation Avoidance Agreement (DTAA) between India and Israel, originally signed on 29 January 1996 and later amended by a Protocol signed on 14 October 2015, provides significant relief on dividend taxation for cross-border investors. Under Article 10 of the treaty, dividends paid by a company resident in one Contracting State to a beneficial owner resident in the other State are subject to a maximum withholding tax rate of 10% of the gross amount. This is a substantial reduction from India's domestic withholding rate of 20% (plus applicable surcharge and cess) under Section 195 of the Income Tax Act, 1961.

The India-Israel DTAA applies a single uniform rate of 10% on dividends, without distinguishing between portfolio investors and substantial shareholders. This simplicity sets it apart from many other Indian DTAAs (such as the India-USA or India-UK treaties) that employ tiered rates based on the level of equity participation.

Treaty Rate vs Domestic Rate: Detailed Comparison

Understanding the difference between the treaty rate and domestic rate is essential for tax planning and ensuring compliance:

Under domestic law, dividends paid by an Indian company to a non-resident are subject to tax at 20% under Section 115A of the Income Tax Act. When surcharge (depending on the quantum of income) and health and education cess of 4% are added, the effective domestic rate can reach approximately 22.88% for companies and up to 23.92% for certain categories. The DTAA rate of 10% therefore offers a saving of roughly 12-14 percentage points.

Since the abolition of the Dividend Distribution Tax (DDT) from April 2020, dividends are taxable in the hands of the recipient. This has made the DTAA rate even more significant for Israeli investors receiving dividends from Indian companies, as the tax burden has shifted from the distributing company to the shareholder.

Who Qualifies for the Reduced Rate

To avail the reduced 10% rate under the India-Israel DTAA, the recipient must satisfy several conditions:

Beneficial Ownership Requirement

The most critical condition under Article 10(2) is that the recipient of the dividends must be the beneficial owner. This means the recipient must have the right to use and enjoy the dividends unconstrained by any contractual or legal obligation to pass the income to another person. Mere nominees, agents, or conduit entities will not qualify for the reduced rate.

Tax Residency in Israel

The recipient must be a tax resident of Israel as defined under Article 4 of the treaty. A valid Tax Residency Certificate (TRC) issued by the Israeli Tax Authority is mandatory documentation. Dual residents are resolved through the tie-breaker rules in Article 4(2), which consider factors such as permanent home, centre of vital interests, habitual abode, and nationality.

Limitation on Benefits and Anti-Avoidance

Following India's ratification of the Multilateral Instrument (MLI), the Principal Purpose Test (PPT) now applies to the India-Israel treaty. Under the PPT, treaty benefits can be denied if one of the principal purposes of an arrangement was to obtain the reduced rate. India's General Anti-Avoidance Rules (GAAR) under Chapter X-A of the Income Tax Act may also be invoked in cases of impermissible avoidance arrangements.

Permanent Establishment Exception

The reduced rate under Article 10 does not apply if the beneficial owner carries on business in India through a Permanent Establishment (PE) and the shares generating the dividends are effectively connected with such PE. In that case, the dividends are taxed as business profits under Article 7.

Dividend-Specific Treaty Provisions

Article 10 of the India-Israel DTAA defines "dividends" broadly to include:

• Income from shares, including "jouissance" shares or rights
• Income from mining shares and founders' shares
• Income from other rights participating in profits (not being debt-claims)
• Income treated as a distribution under the taxation law of the State of residence of the distributing company

The 2015 Protocol introduced important amendments to the treaty, including the removal of the deemed tax credit (also known as "tax sparing") provisions. Under the original 1996 treaty, Israel was entitled to grant a deemed credit of 15% on dividend income from India, even if the actual Indian tax was lower. This provision was eliminated effective from the date the Protocol entered into force (19 December 2016), aligning the treaty with modern OECD standards.

The MLI modifications, effective from 1 October 2019 for India and 1 January 2019 for Israel, further strengthened anti-abuse provisions by introducing the PPT alongside the existing treaty provisions.

Documentation Required

To claim the reduced 10% withholding rate on dividends, the Israeli beneficial owner must provide the following documents to the Indian payer:

Tax Residency Certificate (TRC)

A valid TRC issued by the Israeli Tax Authority (Rashut HaMisim) for the relevant financial year. This is the primary document establishing treaty eligibility under Section 90(4) of the Indian Income Tax Act.

Form 10F

A self-declaration in Form 10F providing additional details such as the taxpayer's status, nationality, tax identification number in Israel, and period of residential status. Since 2022, Form 10F must be filed electronically on the Indian income tax portal.

No Permanent Establishment Declaration

A self-declaration confirming that the recipient does not have a PE in India, or that the dividend income is not effectively connected with any PE in India.

Beneficial Ownership Declaration

A declaration confirming that the recipient is the beneficial owner of the dividends and is not acting as an agent, nominee, or conduit.

Withholding Procedure for Indian Payers

Indian companies paying dividends to Israeli residents must follow a specific compliance procedure under the Income Tax Act:

Section 195 Compliance

Under Section 195, any person responsible for paying income to a non-resident must deduct tax at the appropriate rate. When the DTAA rate is lower than the domestic rate, the payer may apply the DTAA rate provided the payee has furnished a valid TRC and Form 10F.

Form 15CA and Form 15CB

For remittances exceeding specified thresholds, the payer must furnish Form 15CA (an online declaration) and obtain a certificate from a Chartered Accountant in Form 15CB. Form 15CB certifies the nature of the remittance, the applicable DTAA provisions, and the rate of tax deducted. These forms must be uploaded to the Income Tax portal before the remittance is made through an authorized dealer bank.

Lower Withholding Certificate

If the payer anticipates that the tax liability will be lower than the statutory rate, they may apply to the Assessing Officer under Section 197 for a lower or nil withholding certificate. This requires providing the DTAA details, TRC, and Form 10F of the Israeli recipient.

Common Disputes and Judicial Precedents

Several issues have arisen in the interpretation and application of dividend taxation under India-Israel DTAA provisions:

Beneficial Ownership Disputes

Indian tax authorities have increasingly scrutinized beneficial ownership claims, particularly in cases involving holding companies in Israel that may lack substance. The CBDT Circular No. 01/2025 on the Principal Purpose Test has further tightened the requirements for claiming treaty benefits.

Deemed Dividend under Section 2(22)(e)

A recurring issue is whether loans or advances by Indian companies to their Israeli shareholders constitute "deemed dividends" under Section 2(22)(e) of the Income Tax Act and whether such deemed dividends qualify for the reduced DTAA rate. Indian tribunals have generally held that deemed dividends under domestic law may not qualify as "dividends" under the treaty definition, though outcomes vary based on specific facts.

Most Favoured Nation (MFN) Clause

The India-Israel DTAA does not contain a Most Favoured Nation clause in its protocol, unlike the India-France or India-Netherlands DTAAs. This means Israeli investors cannot automatically claim lower rates that India may have negotiated with other OECD countries.

Tax Sparing Credit Removal

The removal of deemed tax credit provisions by the 2015 Protocol has been a point of discussion, as it increased the effective tax burden on Israeli investors who previously benefited from the tax sparing arrangement.

Practical Examples and Calculations

Below are worked examples demonstrating the application of the India-Israel DTAA dividend rate:

Example 1: Israeli Individual Receiving Dividends from an Indian Company

An Israeli tax resident individual holds shares in an Indian listed company. The company declares a dividend of INR 10,00,000 (approximately USD 12,000).

• Without DTAA: Tax at domestic rate = 20% + 4% cess = 20.80% = INR 2,08,000
• With DTAA: Tax at treaty rate = 10% = INR 1,00,000
• Net saving: INR 1,08,000 (approximately USD 1,300)

The Israeli investor can then claim a foreign tax credit of INR 1,00,000 against their Israeli tax liability on the same dividend income, eliminating double taxation.

Example 2: Israeli Company Receiving Dividends from an Indian Subsidiary

An Israeli technology company holds 100% shares in its Indian subsidiary. The Indian subsidiary distributes dividends of INR 5,00,00,000 (approximately USD 600,000).

• Without DTAA: Tax at domestic rate = 20% + applicable surcharge + 4% cess = approximately 22.88% = INR 1,14,40,000
• With DTAA: Tax at treaty rate = 10% = INR 50,00,000
• Net saving: INR 64,40,000 (approximately USD 77,000)

Note: The India-Israel DTAA does not provide a lower rate for substantial shareholdings (unlike India-USA DTAA which offers 15%/25% tiered rates), so the 10% rate applies uniformly regardless of the ownership percentage.

Example 3: Dividends from Indian Mutual Funds

An Israeli resident receives dividend distributions of INR 2,00,000 from an Indian mutual fund scheme.

• Without DTAA: Tax at domestic rate = 20% + 4% cess = INR 41,600
• With DTAA: Tax at treaty rate = 10% = INR 20,000
• Net saving: INR 21,600

Mutual fund distributions in India are treated as dividend income for non-residents and are eligible for the reduced treaty rate, provided the beneficial ownership and documentation requirements are met.

Frequently Asked Questions

What is the dividend withholding tax rate under the India-Israel DTAA?

Under Article 10(2) of the India-Israel DTAA, the maximum withholding tax rate on dividends is 10% of the gross amount, provided the recipient is the beneficial owner and a tax resident of Israel. This compares favourably with the domestic Indian rate of 20% plus surcharge and cess.

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

Yes, a valid Tax Residency Certificate (TRC) issued by the Israeli Tax Authority is mandatory under Section 90(4) of the Indian Income Tax Act. Without a TRC, the Indian payer must deduct tax at the full domestic rate of 20% plus applicable surcharge and cess.

Does the India-Israel DTAA have different dividend rates for portfolio and substantial investors?

No. Unlike several other Indian DTAAs (such as India-USA or India-UK), the India-Israel DTAA applies a single uniform rate of 10% on dividends regardless of the percentage of shareholding. There is no distinction between portfolio investors and substantial shareholders.

What happened to the tax sparing credit under the India-Israel DTAA?

The 2015 Protocol (effective 19 December 2016) eliminated the deemed tax credit (tax sparing) provisions from the original 1996 treaty. Previously, Israel could grant a deemed credit of 15% on dividend income from India. This removal aligned the treaty with current OECD standards and increased the effective tax cost for Israeli investors.

Can an Israeli holding company claim the reduced dividend rate?

An Israeli holding company can claim the reduced 10% rate only if it qualifies as the beneficial owner of the dividends. Following the MLI's Principal Purpose Test and India's GAAR provisions, holding companies must demonstrate genuine economic substance in Israel and establish that the arrangement's principal purpose is not to obtain treaty benefits.

What forms must be filed when remitting dividends from India to Israel?

The Indian payer must deduct tax under Section 195 and furnish Form 15CA (online declaration) and obtain Form 15CB (CA certificate) before making the remittance. The Israeli recipient must provide a valid TRC, Form 10F, a beneficial ownership declaration, and a no-PE declaration to the Indian payer.

How does the MLI affect dividend taxation under the India-Israel DTAA?

The MLI introduced the Principal Purpose Test (PPT) to the India-Israel treaty. Under the PPT, treaty benefits on dividends can be denied if the tax authorities determine that obtaining the reduced rate was one of the principal purposes of an arrangement. Both India and Israel have ratified the MLI, and its provisions are in effect for their bilateral treaty.