Dividend Tax Rate Between India and Sweden Under DTAA

Dividend Tax Rate Between India and Sweden

The Double Taxation Avoidance Agreement (DTAA) between India and Sweden provides significant relief on dividend taxation for cross-border investors and businesses. Signed on June 24, 1997, and effective from December 25, 1997, this treaty caps the withholding tax on dividends at a reduced rate of 10%, compared to the standard domestic rate of 20% under Indian tax law.

This article provides a comprehensive analysis of the dividend tax provisions under the India-Sweden DTAA, including treaty rates, eligibility requirements, documentation needed, and practical calculation examples for businesses and individuals receiving dividends across borders.

Treaty Rate vs Domestic Rate: Detailed Comparison

Under Article 10(2) of the India-Sweden DTAA, dividends paid by a company that is a resident of one Contracting State to a resident of the other Contracting State may be taxed in both states. However, the tax charged in the source country shall not exceed 10% of the gross amount of the dividends, provided the beneficial owner is a resident of the other state.

Here is how the treaty rate compares with the domestic rate:

Under Indian domestic law, dividends paid to non-residents are subject to Section 195 TDS at 20% (plus applicable surcharge and health & education cess). The DTAA rate of 10% provides a meaningful tax saving, and importantly, when the treaty rate applies, surcharge and cess are not additionally levied on top of the 10%.

For Swedish investors receiving dividends from Indian companies, this translates to a direct 50% reduction in withholding tax on their dividend income. Swedish companies with substantial investment portfolios in India stand to benefit significantly from this provision.

Who Qualifies for the Reduced Rate

To claim the reduced 10% rate on dividends under the India-Sweden DTAA, the recipient must satisfy several key conditions:

Beneficial Ownership Requirement

The most critical requirement is that the dividend recipient must be the beneficial owner of the dividends. This means the recipient must have the right to use and enjoy the dividend income without being legally or contractually obligated to pass it on to another person. Conduit arrangements or back-to-back structures designed purely for treaty shopping will not qualify.

Tax Residency in Sweden

The recipient must be a tax resident of Sweden under Article 4 of the treaty. This is established through a Tax Residency Certificate (TRC) issued by the Swedish Tax Agency (Skatteverket).

No PE Connection

The dividend income must not be effectively connected with a permanent establishment (PE) or fixed base that the Swedish resident has in India. If the shareholding giving rise to dividends is effectively connected with a PE in India, the dividend income will be taxed as business profits under Article 7 instead.

MLI Impact on Beneficial Ownership

With the Multilateral Instrument (MLI) in effect for the India-Sweden treaty from April 1, 2020, the Principal Purpose Test (PPT) has been incorporated. This means that treaty benefits can be denied if one of the principal purposes of an arrangement was to obtain the reduced rate. Both India and Sweden have adopted the PPT provision under the MLI.

Dividend-Specific Treaty Provisions

Article 10 of the India-Sweden DTAA contains several important provisions that dividend recipients should understand:

Definition of Dividends

The term "dividends" under Article 10(3) includes income from shares or other rights participating in profits (not being debt-claims), as well as income from other corporate rights that is subjected to the same taxation treatment as income from shares under the laws of the source state.

Taxation Rights

Dividends may be taxed in both Contracting States. The source state (where the paying company is resident) has the right to tax, but at a maximum of 10%. The residence state (Sweden, for a Swedish recipient) also has the right to tax the dividends, but must provide relief for the tax paid in the source state through a tax credit mechanism under Article 23 of the treaty.

2013 Protocol Amendments

The Protocol amending the India-Sweden convention, signed on February 7, 2013, and effective from August 16, 2013, updated the Exchange of Information article to meet international standards, including allowing the exchange of banking information. While the dividend provisions themselves were not altered by the 2013 Protocol, the enhanced information exchange mechanisms support better treaty compliance.

Documentation Required

Indian payers making dividend payments to Swedish residents must ensure proper documentation to apply the reduced 10% treaty rate:

Tax Residency Certificate (TRC)

The Swedish recipient must provide a valid TRC issued by the Swedish Tax Agency (Skatteverket) confirming their tax residency in Sweden. This is the primary document required under Section 90(4) of the Indian Income Tax Act.

Form 10F

In addition to the TRC, the non-resident must submit Form 10F containing prescribed information such as their tax identification number, residential status, and the period of residency. If the TRC does not contain all the information required under Form 10F, the form must be separately filed.

Self-Declaration / No PE Declaration

A self-declaration confirming that the income is not attributable to a PE in India and that the recipient is the beneficial owner of the dividends.

PAN Requirement

While obtaining an Indian PAN (Permanent Account Number) is advisable, its absence does not prevent treaty rate application, provided TRC and Form 10F are submitted. However, without a PAN, the higher rate under Section 206AA could potentially apply, though CBDT Circular No. 3/2025 has clarified treaty override in such cases.

Withholding Procedure for Indian Payers

Indian companies paying dividends to Swedish shareholders must follow a structured withholding process:

Section 195 Compliance

All payments to non-residents (including dividends) are subject to TDS under Section 195 of the Income Tax Act. The payer must deduct tax at the applicable rate (treaty rate of 10% if conditions are met) at the time of credit or payment, whichever is earlier.

Form 15CA and Form 15CB

Before remitting dividend payments abroad, the Indian 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

These forms ensure compliance with FEMA and Income Tax regulations for cross-border payments. Banks will require the Form 15CA acknowledgment before processing the outward remittance.

TDS Return Filing

The deductor must file quarterly TDS returns in Form 27Q reflecting the tax deducted on payments to non-residents, including Swedish dividend recipients.

Common Disputes and Judicial Precedents

Several common issues arise in the context of dividend taxation under India-Sweden DTAA:

Beneficial Ownership Challenges

Indian tax authorities have increasingly scrutinized beneficial ownership claims, particularly in cases involving intermediate holding companies. The ITAT Mumbai has held that there can be no presumption of beneficial ownership unless the assessee demonstrates that the beneficial owner is indeed the entity claiming treaty benefits, not merely a conduit entity.

Dividend Stripping

Under Section 94(7) of the Indian Income Tax Act, if shares are purchased within three months before the record date and sold within three months after, any loss from the sale is disregarded to the extent of the dividend received. This anti-avoidance provision applies regardless of DTAA benefits.

GAAR Implications

India's General Anti-Avoidance Rules (GAAR), effective from April 1, 2017, can override treaty benefits if an arrangement is found to be an "impermissible avoidance arrangement." Swedish investors should ensure their investment structures have genuine commercial substance beyond tax savings.

MLI Principal Purpose Test

Since the MLI provisions took effect for the India-Sweden DTAA from FY 2020-21, the Principal Purpose Test (PPT) provides an additional anti-abuse mechanism. If one of the principal purposes of an arrangement is to obtain treaty benefits, those benefits may be denied.

Practical Examples and Calculations

Let us walk through practical scenarios to illustrate how the India-Sweden DTAA dividend provisions work:

Example 1: Swedish Individual Investor

A Swedish tax resident individual holds shares in an Indian listed company and receives a dividend of INR 10,00,000 (approximately SEK 1,10,000).

• Without DTAA: TDS at 20% + surcharge (if applicable) + 4% cess = approximately 20.8% to 22.88% effective rate. Tax deducted: INR 2,08,000 to 2,28,800
• With DTAA: TDS at 10% flat (no surcharge/cess). Tax deducted: INR 1,00,000
• Savings: INR 1,08,000 to 1,28,800 per INR 10 lakh of dividends

Example 2: Swedish Corporate Investor

A Swedish corporation holds a 25% stake in an Indian subsidiary. The Indian subsidiary declares a dividend of INR 5,00,00,000 (INR 5 crore).

• Without DTAA: TDS at 20% + applicable surcharge + 4% cess. At 2% surcharge rate: effective rate ~21.63%. Tax: INR 1,08,16,000
• With DTAA: TDS at 10% flat. Tax: INR 50,00,000
• Savings: INR 58,16,000 on a single dividend payment

The Swedish company can then claim a foreign tax credit in Sweden for the 10% tax paid in India, effectively avoiding double taxation on the same income.

Example 3: Mutual Fund Distributions

A Swedish pension fund receives dividend distributions from Indian mutual fund units. The 10% DTAA rate applies, provided the pension fund qualifies as a "person" and tax resident under the treaty, and is the beneficial owner of the distributions.

Frequently Asked Questions

What is the dividend tax rate between India and Sweden under the DTAA?

The India-Sweden DTAA caps the withholding tax on dividends at 10% of the gross dividend amount under Article 10(2). This is significantly lower than the domestic rate of 20% (plus surcharge and cess) that would otherwise apply to dividends paid to non-residents under Indian tax law.

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

Yes. A valid Tax Residency Certificate (TRC) issued by the Swedish Tax Agency (Skatteverket) is mandatory to claim the reduced 10% rate. Additionally, you must submit Form 10F with prescribed details. Without these documents, the Indian payer must withhold at the higher domestic rate.

Can a Swedish company claim treaty benefits on dividends from an Indian subsidiary?

Yes, provided the Swedish company is the beneficial owner of the dividends and is a tax resident of Sweden. The company must not be a conduit entity, and the shareholding in the Indian company must not be connected with a permanent establishment in India. The reduced 10% rate applies regardless of the percentage of shareholding.

How does Sweden provide relief for tax paid on Indian dividends?

Sweden uses the credit method under Article 23 of the DTAA. Swedish residents can claim a foreign tax credit for the Indian tax (10% under the DTAA) against their Swedish tax liability on the same dividend income. This prevents the same dividend from being taxed twice at full rates in both countries.

Does the MLI affect dividend taxation under the India-Sweden DTAA?

The MLI provisions took effect for the India-Sweden DTAA from FY 2020-21 onwards. While the MLI does not change the 10% dividend rate itself, it introduces the Principal Purpose Test (PPT), which can deny treaty benefits if one of the principal purposes of an arrangement was to obtain the reduced rate. Genuine investors with commercial substance are not affected.

What happens if the Indian payer does not deduct tax at the treaty rate?

If the Indian payer deducts tax at the higher domestic rate (20% plus surcharge and cess) instead of the treaty rate (10%), the Swedish recipient can file an income tax return in India claiming a refund of the excess tax deducted. Alternatively, the Swedish investor can apply for a lower withholding certificate under Section 197 before the dividend payment.

Are dividends from Indian mutual funds covered under the DTAA?

Yes, distributions from Indian mutual fund units to Swedish residents are covered under Article 10 of the DTAA, provided the distributions are characterized as dividends under Indian law. The 10% reduced rate applies, subject to the beneficial ownership and documentation requirements being met.