Dividend Tax Rate Between India and Italy Under DTAA

Dividend Tax Rate Between India and Italy

The India-Italy Double Taxation Avoidance Agreement (DTAA), signed on 23 November 1995 and effective from 25 April 1996, establishes specific withholding tax rates on cross-border dividend payments between the two countries. Under Article 10 of the treaty, dividends paid by an Indian company to an Italian resident (or vice versa) are subject to withholding tax rates that depend on the level of shareholding held by the beneficial owner.

Unlike many of India's other DTAAs that offer rates of 10% or lower, the India-Italy treaty prescribes relatively higher rates: 15% for companies holding at least 10% of the shares, and 25% for all other recipients. While the 15% rate still provides savings compared to the domestic rate of 20% plus surcharge and cess (~20.8%), the 25% general rate actually exceeds the domestic withholding rate, making the domestic rate the more beneficial option for portfolio investors in many cases.

This treaty rate structure makes the India-Italy DTAA one of the less favourable agreements for dividend flows, though the Second Protocol approved by the Union Cabinet proposes to reduce the dividend withholding rate to 10%, pending formal signing and notification by both countries. Understanding the current rates and documentation requirements is essential for Indian companies paying dividends to Italian shareholders and Italian investors receiving Indian dividends.

Treaty Rate vs Domestic Rate: Detailed Comparison

Understanding the gap between the treaty rate and the domestic rate is critical for tax planning. Here is how the rates compare for dividends paid by an Indian company to an Italian resident:

Under Section 196D of the Income Tax Act, 1961, dividends paid to non-residents are subject to TDS at 20%. When surcharge and 4% health & education cess are added, the effective domestic rate reaches approximately 20.8% to 21.84%. For companies with 10%+ shareholding, the DTAA rate of 15% provides a clear tax saving of approximately 5.8%. However, for general investors with below 10% holding, the DTAA rate of 25% is higher than the domestic rate, so Section 90(2) allows the taxpayer to opt for the more beneficial domestic rate.

This dual-rate structure under Article 10 makes it essential for Italian investors and Italian companies operating in India to carefully evaluate whether the DTAA rate or the domestic rate is more advantageous based on their specific shareholding percentage.

Who Qualifies for the Reduced Rate

Not every Italian recipient automatically qualifies for the lower 15% DTAA rate. The treaty imposes specific conditions that must be satisfied:

Beneficial Ownership Requirement

Article 10 requires the recipient to be the beneficial owner of the dividends. The recipient must have the right to use and enjoy the dividend income, not merely act as a conduit, nominee, or agent. Italian holding companies that function purely as intermediaries without genuine commercial substance may be denied treaty benefits. The OECD Commentary on Article 10 provides guidance that a mere conduit or agent cannot be considered a beneficial owner.

10% Shareholding Threshold

The lower 15% rate under Article 10(2)(a) applies only when the beneficial owner is a company (not an individual or trust) that directly or indirectly controls at least 10% of the voting power in the Indian company paying the dividends. This is a lower threshold compared to treaties with countries like Singapore (25%) or the USA (10%), making it relatively easier for Italian corporate investors to access the preferential rate.

Tax Residency Certification

The Italian recipient must hold a valid Tax Residency Certificate (TRC) issued by the Italian tax authorities (Agenzia delle Entrate). Without a TRC, the Indian payer must deduct tax at the domestic rate of 20%.

GAAR and Anti-Avoidance

India's General Anti-Avoidance Rules (GAAR), effective from 1 April 2017 under Chapter X-A of the Income Tax Act, can override treaty benefits if an arrangement is determined to be an impermissible avoidance arrangement lacking commercial substance. Given that the India-Italy treaty has not yet been modified by the MLI, there is no treaty-level Principal Purpose Test (PPT), but domestic GAAR provisions still apply.

Dividend-Specific Treaty Provisions Under Article 10

Article 10 of the India-Italy DTAA contains several provisions that specifically govern dividend taxation:

Article 10(1): Right to Tax

Dividends paid by a company resident in one Contracting State (e.g., India) to a resident of the other Contracting State (e.g., Italy) may be taxed in the recipient's state of residence. Italy, as the residence state, has the primary right to tax the dividends as part of the Italian recipient's worldwide income.

Article 10(2): Source State Limitation

The source state (India, if the dividend-paying company is Indian) may also tax the dividends, but the tax charged shall not exceed: (a) 15% of the gross amount if the beneficial owner is a company controlling at least 10% of the voting power; or (b) 25% of the gross amount in all other cases. However, under Section 90(2), the taxpayer may apply the lower domestic rate where it is more beneficial.

Article 10(3): Definition of Dividends

The term "dividends" includes income from shares, jouissance shares, mining shares, founders' shares, or other rights participating in profits that are not debt-claims. It also covers income from other corporate distributions treated as income from shares under the domestic law of the source state, including deemed dividends under Section 2(22) of the Income Tax Act.

Article 10(4): PE Exception

If the beneficial owner carries on business through a permanent establishment (PE) in the source state, and the shareholding giving rise to dividends is effectively connected with that PE, the dividends are taxed as business profits under Article 7 rather than under the preferential Article 10 rates.

Second Protocol — Proposed Changes

The Union Cabinet has approved the signing of a Second Protocol to the India-Italy DTAC that would reduce the dividend withholding rate to 10% across the board. The Protocol also proposes to reduce interest and FTS rates and broaden the scope of PE definitions. However, these reduced rates will become effective only after the Protocol is formally signed and notified by both countries under their respective domestic laws.

Documentation Required for Claiming the Reduced Rate

Indian companies paying dividends to Italian residents must ensure complete documentation before applying the treaty rate. The following documents are mandatory:

Tax Residency Certificate (TRC)

The Italian shareholder must obtain a TRC from the Agenzia delle Entrate (Italian Revenue Agency) confirming tax residency in Italy for the relevant financial year. The TRC must contain the shareholder's name, tax identification number (codice fiscale), status (individual/company), period of residency, and address in Italy.

Form 10F

Under Section 90(5) of the Income Tax Act read with Rule 21AB, the non-resident must furnish Form 10F to the Indian payer. Form 10F is a self-declaration providing information not already available in the TRC, including the assessee's status, PAN in India (if available), period of residential status, and purpose of obtaining the certificate.

Self-Declaration / No-PE Certificate

A self-declaration confirming that the recipient does not have a PE in India through which the dividends are effectively connected, and that the recipient is the beneficial owner of the income. This declaration supports the application of Article 10 rates rather than Article 7 (business profits).

PAN (Optional but Recommended)

While a PAN is not strictly mandatory for claiming DTAA benefits following the Supreme Court ruling and CBDT Circular 10/2002, having a PAN simplifies withholding compliance and facilitates any future TDS refund claims.

Withholding Procedure for Indian Payers

When an Indian company pays dividends to an Italian resident, the following compliance steps apply under Section 195 of the Income Tax Act:

Step 1: Collect and Verify Documentation

Before applying the treaty rate, the Indian payer must collect and verify the TRC, Form 10F, and beneficial ownership self-declaration from the Italian recipient. The payer should also determine the recipient's shareholding percentage to identify whether the 15% or 25% rate applies.

Step 2: Determine Applicable Rate

Compare the DTAA rate with the domestic rate. For 10%+ holdings, apply 15% (DTAA is lower). For below 10% holdings, apply the domestic rate of approximately 20.8% (domestic is lower than the 25% DTAA rate). Under Section 90(2), the beneficial rate prevails.

Step 3: Deduct TDS

Deduct TDS at the applicable rate on the gross amount of dividends. When applying DTAA rates, no surcharge or cess is levied. When applying domestic rates, surcharge and cess are added.

Step 4: File Form 15CA/15CB

For remittances above INR 5 lakh, the Indian payer must file Form 15CA online and obtain a Chartered Accountant's certificate in Form 15CB certifying the nature of the payment, applicable DTAA article, and the rate of TDS applied. Form 15CB must be uploaded before filing Form 15CA.

Step 5: Deposit TDS and File Return

Deposit the deducted TDS within prescribed due dates. File the quarterly TDS return in Form 27Q, reporting payment details, DTAA article applied, and TDS deducted. For comprehensive guidance on cross-border payment compliance, see our tax advisory services.

Common Disputes and Judicial Precedents

Several legal and interpretive issues arise in the context of dividend taxation under the India-Italy DTAA:

Beneficial Ownership Challenges

Indian tax authorities have scrutinised Italian holding structures to determine whether the Italian entity is the true beneficial owner or merely a conduit. The Authority for Advance Rulings (AAR) and Income Tax Appellate Tribunal (ITAT) examine factors such as commercial substance, decision-making authority, economic risk exposure, and the entity's ability to dispose of the dividend income independently. Italian special purpose vehicles (SPVs) with minimal operations may face denial of treaty benefits.

25% Rate vs Domestic Rate Disputes

Disputes have arisen where Indian companies applied the 25% DTAA rate to portfolio investors instead of the lower domestic rate. The settled position under Section 90(2) is that the taxpayer may choose the more beneficial rate. Indian companies should apply the domestic rate (~20.8%) for below-10% shareholders, as it is more favourable than the 25% treaty rate.

Deemed Dividends

Questions arise on whether deemed dividends under Section 2(22)(e) of the Income Tax Act (loans and advances by closely held companies to shareholders) qualify for treaty rates. The broad definition under Article 10(3) generally covers deemed dividends as income from shares, though this remains a matter of interpretation in specific cases.

Second Protocol Expectations

The proposed reduction of dividend rates to 10% under the Second Protocol has created uncertainty about whether taxpayers should defer dividend payments pending notification. Until the Protocol is formally signed and notified, the existing rates of 15%/25% continue to apply.

Practical Examples and Calculations

Example 1: Italian Parent Company (10%+ Holding)

An Italian company holds 40% equity in an Indian subsidiary. The Indian subsidiary declares a dividend of INR 1,00,00,000.

• Without DTAA: TDS at 20% + surcharge (2%) + cess (4%) = effective ~20.8% = INR 20,80,000 withheld
• With DTAA (Article 10(2)(a)): TDS at 15% (no surcharge/cess) = INR 15,00,000 withheld
• Tax saving: INR 5,80,000 per INR 1 crore dividend

Example 2: Italian Portfolio Investor (Below 10% Holding)

An Italian individual holds 3% shares in an Indian listed company. Dividend received: INR 50,00,000.

• DTAA rate: 25% = INR 12,50,000
• Domestic rate: ~20.8% = INR 10,40,000
• Rate applied (Section 90(2)): Domestic rate of ~20.8% (more beneficial) = INR 10,40,000

Example 3: Dividend from Italy to India

An Indian company receives dividends from its Italian subsidiary. Italy imposes a withholding tax of 26% on dividends paid to non-residents under domestic law (or a reduced rate under the DTAA). The Indian company includes the dividend in its taxable income in India and claims a foreign tax credit under Section 90 or 91 for the Italian tax paid, subject to the credit limitations under Rule 128.

Frequently Asked Questions

What is the DTAA tax rate on dividends from India to Italy?

Under Article 10 of the India-Italy DTAA, the withholding tax rate is 15% if the Italian beneficial owner is a company holding at least 10% of the shares, and 25% in all other cases. For portfolio investors with below 10% holding, the domestic rate of approximately 20.8% is more beneficial and should be applied under Section 90(2).

Will the dividend rate reduce to 10% under the Second Protocol?

The Union Cabinet has approved signing a Second Protocol that proposes to reduce the dividend withholding rate to 10%. However, the Protocol has not yet been formally signed and notified by both countries. Until notification, the existing rates of 15% and 25% continue to apply.

What documents does an Italian company need to claim the 15% DTAA rate?

The Italian company must provide: (1) a valid Tax Residency Certificate from the Agenzia delle Entrate, (2) Form 10F self-declaration, (3) a beneficial ownership and no-PE declaration, and (4) proof of 10%+ shareholding in the Indian company. The Indian payer must verify these before applying the reduced rate.

Does Italy tax dividends received from India?

Yes. Italy taxes dividends received from India as part of the Italian recipient's worldwide income. Italy provides a foreign tax credit for the Indian withholding tax paid under its domestic law and the DTAA, ensuring relief from double taxation. The Italian corporate tax rate (IRES) is 24%, and an additional regional tax (IRAP) of 3.9% may also apply.

Can an Italian individual claim the 15% rate on Indian dividends?

No. The 15% rate under Article 10(2)(a) is available only to companies controlling at least 10% of the voting power. Individual shareholders fall under the general rate of 25%, though they can opt for the more beneficial domestic rate of approximately 20.8% under Section 90(2).

Is the DTAA rate applied automatically on dividend payments to Italy?

No. The Indian payer must collect the TRC, Form 10F, and self-declaration from the Italian recipient before applying the treaty rate. If these documents are not provided, the payer must deduct TDS at the domestic rate. The Italian recipient can then claim a refund by filing an Indian income tax return.

How does GAAR affect dividend taxation under the India-Italy DTAA?

Since the India-Italy treaty has not yet been modified by the MLI, there is no treaty-level Principal Purpose Test. However, India's domestic GAAR provisions under Chapter X-A of the Income Tax Act can override treaty benefits if the arrangement is found to be an impermissible avoidance arrangement lacking genuine commercial substance.