Dividend Tax Rate Between India and the Netherlands Under DTAA

Dividend Tax Rate Between India and the Netherlands

Under the India-Netherlands Double Taxation Avoidance Agreement (DTAA), signed on 30 July 1988 and effective from 21 January 1989, dividends paid by an Indian company to a Dutch resident are subject to a maximum withholding tax rate of 10% of the gross amount, compared to the domestic rate of 20% under Section 195 read with Section 115A of the Income Tax Act, 1961. This represents a significant tax saving of 10 percentage points for qualifying Dutch investors.

The treaty rate applies when the recipient in the Netherlands is the beneficial owner of the dividends. The reduced rate is available irrespective of the shareholding percentage held by the Dutch entity in the Indian company, unlike many other Indian DTAAs that distinguish between substantial holdings and portfolio investments.

Treaty Rate vs Domestic Rate: Detailed Comparison

India's domestic withholding tax on dividends paid to non-residents is 20% (plus applicable surcharge and cess) under Section 115A of the Income Tax Act. The India-Netherlands DTAA reduces this to 10%, offering Dutch investors a 50% reduction in the withholding tax burden.

When surcharge and health and education cess are included, the effective domestic rate can rise to approximately 22.48% for non-corporate payees. The DTAA caps this at a flat 10% without any surcharge or cess, making the treaty benefit even more substantial in practice.

Impact on Dutch Holding Structures

Many Dutch entities maintain holding structures in India through which dividends flow. Under the treaty, these entities benefit from the 10% cap. However, it is critical that the Dutch entity demonstrates genuine beneficial ownership and is not merely a conduit. India's General Anti-Avoidance Rules (GAAR) and the Principal Purpose Test (PPT) under the MLI can deny treaty benefits if the arrangement lacks commercial substance.

Who Qualifies for the Reduced Rate

To claim the 10% treaty rate on dividends under the India-Netherlands DTAA, the recipient must satisfy the following conditions:

• Tax Residency: The recipient must be a tax resident of the Netherlands, substantiated by a valid Tax Residency Certificate (TRC) issued by the Dutch tax authorities (Belastingdienst).
• Beneficial Ownership: The recipient must be the beneficial owner of the dividends, not merely an agent, nominee, or conduit entity. The concept of beneficial ownership is interpreted in accordance with international fiscal law, requiring the recipient to have the full right to use and enjoy the dividend income without being obligated to pass it on to another person.
• No PE Nexus: The dividends must not be effectively connected with a permanent establishment (PE) that the Dutch resident has in India. If the shares generating the dividends form part of the business assets of a PE in India, the income would be taxed as business profits under Article 7 rather than under the dividend article.
• Anti-Avoidance Compliance: The arrangement must not be designed primarily to obtain treaty benefits. Under the MLI's PPT provision, treaty benefits can be denied if one of the principal purposes of the arrangement was to secure a benefit under the DTAA.

Dividend-Specific Treaty Provisions

Article 10 of the India-Netherlands DTAA governs the taxation of dividends. Key provisions include:

Article 10(1): Source Country Taxation

Dividends paid by a company that is a resident of India to a resident of the Netherlands may be taxed in the Netherlands. This establishes the right of the residence country (Netherlands) to tax the dividends.

Article 10(2): Withholding Tax Cap

However, such dividends may also be taxed in India (the source country), but the tax so charged shall not exceed 10% of the gross amount of the dividends if the beneficial owner is a resident of the Netherlands. This is the critical rate-limiting provision.

The MFN Clause Controversy

The Protocol to the India-Netherlands DTAA contains a Most Favoured Nation (MFN) clause. This clause stipulated that if India subsequently entered into a DTAA with an OECD member country providing lower rates on dividends, the lower rate would automatically apply to the India-Netherlands treaty as well.

Based on this MFN clause, Dutch taxpayers argued for a reduced dividend withholding rate of 5% (based on India's treaties with Slovenia, Lithuania, and Colombia, which became OECD members after signing their respective DTAAs with India). The Delhi High Court had upheld this position in several rulings.

However, in its landmark judgment of 19 October 2023, the Supreme Court of India overruled these decisions, holding that:

• A separate notification under Section 90(1) of the Income Tax Act is mandatory to give effect to the MFN clause.
• The MFN clause applies only when the third country was an OECD member at the time of signing its DTAA with India, not when it subsequently became a member.

As a result, the dividend withholding rate under the India-Netherlands DTAA remains at 10%, not 5%, unless and until the Indian government issues a specific notification under Section 90(1).

Documentation Required

To avail the reduced 10% treaty rate on dividends, the following documentation is mandatory:

1. Tax Residency Certificate (TRC): Issued by the Belastingdienst (Dutch Tax Authority), confirming the recipient is a tax resident of the Netherlands for the relevant period. The TRC must contain prescribed particulars including name, status, nationality, taxpayer identification number, period of residency, and address.
2. Form 10F: A self-declaration form filed electronically on the Indian income tax portal by the non-resident. It captures additional details not present in the TRC, such as whether the taxpayer is liable to tax by reason of domicile, residence, place of management, or incorporation.
3. Self-Declaration of Beneficial Ownership: A declaration confirming that the recipient is the beneficial owner of the dividend income and not a mere nominee or agent.
4. No PE Declaration: Confirmation that the income is not attributable to a permanent establishment in India.
5. PAN or TIN: While having an Indian PAN is not strictly mandatory for claiming treaty benefits, it is practically useful. Without a PAN, higher rates of TDS may apply under Section 206AA, although this should not override treaty rates per CBDT circulars.

Withholding Procedure for Indian Payers

Indian companies paying dividends to Dutch shareholders must follow a specific compliance procedure under Section 195 of the Income Tax Act:

Step 1: Obtain Documentation

Before making the dividend payment, the Indian company must collect the TRC, Form 10F, beneficial ownership declaration, and no-PE declaration from the Dutch shareholder.

Step 2: Deduct TDS at Treaty Rate

The Indian company deducts TDS at 10% (the treaty rate) on the gross dividend amount, provided all documentation is in order. If documentation is not available, the domestic rate of 20% (plus surcharge and cess) applies.

Step 3: File Form 15CA/15CB

For remittance of dividends to the Netherlands, the Indian company must file Form 15CA (an online declaration to the income tax department regarding the remittance) and, if required, obtain Form 15CB (a certificate from a Chartered Accountant certifying the nature of remittance, applicable tax rate, and treaty provisions). Form 15CB is mandatory when the remittance exceeds INR 5 lakh in a financial year.

Step 4: Deposit TDS and File Return

TDS must be deposited to the credit of the Central Government by the 7th of the following month (30 April for March payments). Quarterly TDS returns must be filed in Form 27Q.

Common Disputes and Judicial Precedents

Dividend taxation under the India-Netherlands DTAA has been the subject of significant litigation. Key precedents include:

MFN Clause Litigation

The Supreme Court's 2023 ruling in Assessing Officer vs Nestle SA (Civil Appeal No. 1420/2023) settled the longstanding debate on the MFN clause, ruling in favor of the Revenue. This overruled earlier Delhi High Court decisions in Steria (India) Ltd and Concentrix Services Netherlands BV that had allowed the 5% rate.

Beneficial Ownership Challenges

Indian tax authorities have increasingly challenged claims of beneficial ownership, particularly in cases involving back-to-back arrangements or conduit entities. In several cases, the ITAT has examined whether the Dutch recipient had the right to use and enjoy the dividend income or was contractually obligated to pass it to another entity.

GAAR Applicability

India's GAAR provisions (Sections 95 to 102 of the Income Tax Act), effective from 1 April 2017, can override treaty benefits if an arrangement is found to be an Impermissible Avoidance Arrangement. Investments routed through the Netherlands purely for treaty shopping purposes are vulnerable to GAAR challenges.

Practical Examples and Calculations

Example 1: Standard Dividend Payment

An Indian listed company pays a dividend of INR 1,00,00,000 (INR 1 crore) to a Dutch corporate shareholder holding 25% equity.

Example 2: Portfolio Investor

A Dutch pension fund receives dividends of INR 50,00,000 from its portfolio of Indian equity investments. Since the India-Netherlands DTAA does not distinguish based on shareholding percentage, the same 10% rate applies, yielding a tax saving of INR 6,24,000 compared to the domestic rate.

Example 3: Dividend on Preference Shares

A Dutch company holds redeemable preference shares in an Indian subsidiary and receives a preference dividend of INR 25,00,000. The 10% treaty rate applies equally to dividends on preference shares, saving INR 3,12,000 compared to domestic rates.

Frequently Asked Questions

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

The dividend withholding tax rate is capped at 10% of the gross amount under Article 10(2) of the India-Netherlands DTAA, compared to the domestic rate of 20% under Section 115A. This rate applies when the recipient in the Netherlands is the beneficial owner of the dividends.

Can Dutch investors still claim a 5% dividend rate under the MFN clause?

No. The Supreme Court of India, in its October 2023 ruling, held that a separate notification under Section 90(1) is mandatory to give effect to the MFN clause. Since no such notification has been issued, the applicable rate remains 10%, not the 5% rate that Dutch taxpayers had previously claimed based on Delhi High Court rulings.

What documents are needed to claim the 10% treaty rate on dividends?

Dutch shareholders must provide a valid Tax Residency Certificate (TRC) from the Belastingdienst, a completed Form 10F filed on the Indian income tax portal, a self-declaration of beneficial ownership, and a no-PE declaration. Without these documents, the Indian payer must deduct TDS at the higher domestic rate of 20%.

Does the India-Netherlands DTAA distinguish between majority and minority shareholders for dividend taxation?

No. Unlike some other Indian DTAAs (such as the India-USA or India-Germany treaties), the India-Netherlands DTAA applies a uniform 10% rate on dividends regardless of the shareholding percentage held by the Dutch investor.

Can GAAR override the treaty dividend rate?

Yes. India's General Anti-Avoidance Rules (GAAR), effective from 1 April 2017, can deny treaty benefits if the arrangement is classified as an Impermissible Avoidance Arrangement. Investments structured through the Netherlands primarily for obtaining lower withholding tax on dividends, without genuine commercial substance, are at risk of GAAR challenge.

How does the MLI affect dividend taxation under this treaty?

The Multilateral Instrument (MLI) introduces the Principal Purpose Test (PPT), which allows India to deny treaty benefits if one of the principal purposes of an arrangement was to obtain a benefit under the DTAA. Both India and the Netherlands have ratified the MLI, and its provisions apply to the India-Netherlands treaty from FY 2020-21.

Is surcharge and cess applicable on the 10% DTAA rate?

No. When a DTAA rate is applied, surcharge and health and education cess are generally not added on top of the treaty rate. The 10% rate is the final maximum rate. This is based on CBDT circular and judicial interpretation, though some ambiguity has existed in practice.