DTAA stands for Double Taxation Avoidance Agreement, which is an agreement between two countries that aims to eliminate the double taxation of income earned by individuals or entities in both countries. The DTAA provides a mechanism for foreign investors to avoid being taxed twice on the same income. It allows foreign investors to claim tax relief in their home country for the tax paid in India. The DTAA also helps to prevent tax evasion and promote transparency in tax matters.
The India-Germany DTAA is an agreement signed between India and Germany to prevent double taxation of income and wealth. The agreement was signed in 1995 and came into force on the 26th day of October 1996. The DTAA ensures that taxpayers who are residents of one country but earn income from another country do not have to pay taxes twice on the same income. The agreement covers taxes on income and wealth and applies to residents of both countries.
Scope of India-Germany DTAA
Foreign investors in India can be categorized into different groups based on their investment objectives, the nature of their investment, and the regulatory requirements they need to comply with. Here are some of the categories of foreign investors in India:
The DTAA provides clarity on the tax treatment of residents and non-residents in both countries. It ensures that individuals and businesses are not taxed twice on the same income.
The agreement provides guidelines for the taxation of business profits earned by companies in either country. It ensures that companies are taxed fairly based on their activities in each country.
- Dividends, Interest and Royalties
The DTAA states the rules for the taxation of dividends, interest, and royalties received by residents of either country. It ensures that these payments are taxed at a reasonable rate and not subject to double taxation.
The agreement provides for the taxation of capital gains arising from the sale of assets, such as shares, real estate, and other investments. It ensures that residents are taxed fairly and not subject to double taxation.
The agreement provides for the exchange of information between the tax authorities of both countries to prevent tax evasion and ensure compliance with tax laws.
Definitions under India-Germany DTAA
The DTAA defines various terms such as 'person', 'resident', 'permanent establishment', 'dividend', 'interest', 'royalties', 'capital gains', etc. These definitions are important as they help in determining the scope and applicability of the agreement.
Permanent Establishment
As per
Article 5 of India Germany DTAA, a Permanent Establishment (PE) refers to a fixed place of business via which an enterprise of one country carries on its business activities in another country.
- It includes a place of management, a branch, an office, a factory, a workshop, a mine, etc. However, the mere presence of a company's goods or merchandise in another country does not, by itself, constitute a permanent establishment.
A summary of the structure of entities covered in Permanent Establishment is as follows:
| Particulars |
Indian Definition |
German Definition |
India-Germany DTAA Definition |
| Brief meaning |
- Any fixed place of business serving the activities of an enterprise
- Any entity engaged in any activity, relating to the production, storage, supply, or distribution
- Wider definition than Tax treaty |
- Any fixed place of business or facility serving the business of an enterprise.
- Wider definition than Tax treaty |
- Any fixed place of business through which the business of an enterprise is wholly or partly carried on
- Narrower definition than respective taxation |
| Examples |
| Place of Management |
Yes |
Yes |
Yes |
| Branch or office |
Yes |
Yes |
Yes |
| Factory or workshop |
Yes |
Yes |
Yes |
| Fixed place solely for the purpose of purchasing goods or merchandise |
Yes |
Yes |
No |
| Fixed place solely for the purpose of maintenance of a stock of goods |
Yes |
Yes |
No |
| Building site or construction for a period exceeding 6 months |
Yes |
Yes |
Yes |
Withholding Tax as per Indian Tax Law
A brief summary of withholding tax rates is as follows:
| Nature of income |
Indian Income-tax Act* |
India-Germany DTAA |
| Dividend |
20% |
10% |
| Interest |
20% |
10% |
| Royalty |
10% |
|
| Fee for Technical Services |
20% |
10% |
*The amount of income tax shall be increased by applicable surcharge and health and education cess.
- Taxability of dividend is on a gross basis and the amount of tax is deducted by the source country.
- Interest is also taxable on a gross basis and the tax is withheld by the source country.
Benefits and Rates of Tax as per DTAA
Fees for Technical Services and Royalty
As per Article 12, the term "royalties" means payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work, including cinematograph films or films or tapes used for radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for the use of, or the right to use, industrial, commercial or scientific equipment, or for information concerning industrial, commercial or scientific experience.
- Such royalties earned in India by a resident of Germany are taxable in India at a rate of 10% as per DTAA.
- The above rates and taxability are not applicable if such income is earned through a permanent establishment situated therein. Then the permanent establishment shall be taxed as per the rates of the Income Tax Act (i.e., 40%).
Dividend Income
Dividends, as used in
Article 10, means:
- Dividends on shares including income from shares, "jouissance" shares or "jouissance" rights, mining shares, founders' shares or other rights, not being debt-claims, participating in profits.
- Other income which is subjected to the same taxation treatment as income from shares by the laws of the State of which the company making the distribution is a resident.
If the recipient is a resident of Germany and the beneficial owner of the dividends, the tax so charged shall not exceed
10% of the gross amount of the dividends and also vice versa.
Dividend income is exempt from German taxation if:
- Recipient is a corporation (not a partnership) that is located in Germany.
- The distributing corporation is located in India.
- Recipient owns at least 10% of shares of distribution corporation.
- Proof of active operations necessary.
Interest
As per
Article-11, the term “Interest” means income from debt claims of every kind, whether or not secured by mortgage and whether or not carrying a right to participate in the debtor's profits, and in particular, income from Government securities and income from bonds or debentures, including premiums and prizes attaching to such securities, bonds or debentures. Penalty charges for the late payment shall not be regarded as interest.
- Such interests earned in India by a resident of Germany are taxable in India at a rate of 10% as per DTAA.
- The above rates and taxability are not applicable if such incomes are earned through a permanent establishment situated therein. Then the permanent establishment shall be taxed as per the rates of the Income Tax Act (i.e., 40%).
Independent Personal Services
As per
Article – 14, the term "professional services" includes independent scientific, literary, artistic, educational, or teaching activities, as well as the independent activities of physicians, surgeons, lawyers, engineers, architects, dentists, and accountants.
Income derived by an individual who is a resident of Germany and earned from the performance of professional services or other independent activities shall be taxable in India only if any of the following conditions are satisfied:
- If they have a fixed base regularly available to them in India for the purpose of performing their activities and, in that case, only so much of the income as is attributable to that fixed base may be taxed in India.
- If their stay in India is for a period or periods amounting to or exceeding in the aggregate 120 days in the relevant fiscal year; in that case, only so much of the income as is derived from their activities performed in that other State may be taxed in India.
Dependent Personal Services
As per
Article – 15, salaries, wages, and other similar remuneration derived by a resident of Germany in respect of an employment shall be taxable in India only if the employment is exercised in India at the rates in force.
Such salary can be taxed in Germany only after fulfillment of the following conditions:
- The recipient is present in India for a period or period not exceeding in the aggregate 183 days in the fiscal year concerned, and
- The remuneration is paid by, or on behalf of, an employer who is not a resident of India, and
- The remuneration is not borne by a permanent establishment or a fixed base which the employer has in India.
Tax on Capital Gains
- Immovable Property: Gains derived by a resident of Germany from the alienation of immovable property situated in India may be taxed in India.
- Movable Property: Gains from the alienation of movable property forming part of the business property of a permanent establishment which a German enterprise has in India or of movable property pertaining to a fixed base available to a resident of Germany in India, shall be taxable in India.
- Sale of securities: Gains from the sale of shares in a company that is a resident of Germany are taxed in Germany.
Comparison with Other Tax Treaties
| Treaty Partner |
Dividends |
Interest |
Royalties |
Fee for Technical Services |
Capital Gain on Shares held in India |
| Germany |
10% |
10% |
10% |
10% |
Capital gain arises in India |
| France |
10% |
10% |
10% |
10% |
Capital gain arises in India if more than 10% Shares are held |
| Netherlands |
10% |
10% |
10% |
10% |
Capital gain arises in India if more than 25% of Shares are held |
| United Kingdom |
10% / 15% |
10% / 15% |
10% / 15% |
10% / 15% |
Capital gain arises as per Indian/UK Income Tax Act |
Documents required to take benefit of DTAA
Any foreign company or non-resident is taxable in India under the Income Tax Act 1961 but not under the DTAA or taxable at a higher tax rate under the Income Tax Act 1961 but lower tax rate under the DTAA, in such a scenario, such foreign company or non-resident can take a benefit of the Double Taxation Avoidance Agreement with the producing the following documents:
- Tax Residency Certificate – It is necessary to submit a Tax Residency Certificate at the time of filing Form 10F electronically to the Income Tax Department.
- Form 10F – It is necessary to submit Form 10F electronically to the Income Tax Department after 30/09/2023.
- Declaration of No Permanent Establishment in India – Declaration to be furnished by the company that they do not hold any permanent establishment in India such as a place of management, a branch, an office, a factory, or a workshop.
RECENT CHANGES TO FORM 10F
Form 10F is a self-declaration tax form used by non-resident (NR) taxpayers for claiming the benefits under DTAA (Double Taxation Avoidance Agreement)
For a foreign company rendering technical services in India without a permanent establishment, recent changes in the Form 10F procedures have implications that demand attention. Historically, non-residents were required to submit a Tax Residency Certificate (TRC) and a self-certified Form 10F in a written format.
However, the CBDT, in July 2022, mandated the electronic filing of Form 10F. This change posed challenges for non-residents, including the necessity for income tax portal registration, a mandatory Permanent Account Number (PAN), and a Digital Signature Certificate (DSC).
Key developments and considerations by CBDT
- PAN relaxations: To accommodate non-residents without a PAN, the CBDT introduced relaxations in March 2023, allowing manual submission of self-certified Form 10F until September 30, 2023.
- New registration category: Post the relaxation period, a new registration category was introduced for ‘non-residents not having a PAN and not required to have a PAN.’ This allows non-residents to register without a PAN and file Form 10F electronically.
- Considerations during registration:
- The income tax portal accepts foreign mobile numbers but doesn’t deliver OTP passwords to them. Non-residents may need to provide an Indian mobile number for this security verification via OTPs.
- Required documents during registration include the Certificate of Registration for date of incorporation, Tax Identification Number, Tax Residency Certificate, Address Proof, and details of key persons.
- Digital Signature Certificate: Non-residents must digitally sign Form 10F using a DSC obtained in India.
- Verification process: Non-residents must ensure they are not required to obtain a PAN under the Income-tax Act, 1961. Post-registration, key persons must provide contact numbers and email IDs for OTP verification.
Conclusion
Some key issues specific to the India-Germany DTAA are:
- Business Activities incurred on a principal-to-principal basis cannot be construed as an establishment of PE in India (Audi AG vs. ADIT [ITAT Mumbai]).
- For considering the rate of loan at arm’s length price rate prevalent in the country where the loan is to be consumed or received (India/Germany) shall be determinative of the arm’s length rate of interest. (iGate Global Solutions Ltd. Vs DCIT [ITAT Pune]).
- Only business support services provided by an Indian subsidiary to the foreign entity shall not constitute its PE in India. The scope of services of the Indian subsidiary shall not include the authority to execute contacts on behalf of the assessee. (General Reinsurance AG vs DCIT International taxation [ITAT Mumbai]).
- The supervisory services provided by the German Company themselves do not constitute a PE of the German company since these services were not provided in connection with building, construction, or assembly activities of the German Company. The Tribunal held that though the technicians deputed to India stayed more than 180 days, it cannot be said that their place of stay can be a “fixed place of business” for the German Company (GFA Anlagenbau GmbH v. ACIT [ITAT Hyderabad] (2014))
- The burden of Dividend Distribution Tax (DDT) falls on the shareholders rather than on the company, as the amount of distributed profits available for shareholders stands reduced to the extent of DDT levied. Indo-Germany DTAA which provides for a lower tax rate of 10% on dividends predates the introduction of DDT in 1997. ITAT relies on New Skies Satellites (Delhi HC) to hold that the statutory amendment cannot override the treaty provisions. (Giesecke & Devrient [India] Pvt Ltd. vs. ACIT [ITAT Delhi - 2020])
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