Dividend, Interest and Capital Gains – Basic but if the beneficial owner of the interest is a resident

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  • 1/23/2010

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    DIVIDEND, INTEREST & CAPITAL

    GAINS – BASIC CONCEPTS

    Workshop on

    Basics of International Taxation

    Institute of Chartered Accountants of India

    CA Kusuma Yathish B.Com, LLB, FCA

    PARTNER

    M/S. SHEKAR & YATHISH

    PASSIVE INCOMES

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    OBJECTIVE

    Jurisdictional Taxing Rights

     Investment Incomes

    – Dividend

    – Interest

     Capital Gains

    UN Model Convention

    PRINCIPLES OF INTERNATIONAL

    TAXATION

     Jurisdiction Exclusivity

     Resident Country Taxation

     Source Country Taxation

     Domestic law

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    DIVIDEND

    DIVIDENDS

     Meaning of Dividend under International

    Tax;

     Taxation thereof;

     Participatory and Portfolio Dividends;

     Dividend and PE;

     Beneficial Ownership;

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    DEFINITION OF DIVIDEND - DTAA

    The term Dividends as used in this article means

     income from share.

     “Jouissance” shares or :Jouissance” rights

     Mining shares,

     Founders Shares, or

     Other rights, not being debt-claim, participating in profits,

     Income from other corporate rights which is subjected to

    the same taxation treatment as income from shares by the

    law of [ Country S].

    DIVIDENDS – MEANING

     Distribution of profits or shareholders

    funds

     Cash or kind

     Deemed Dividends / Constructive

    Dividends

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    TAXATION

     Domestic Tax Laws

    – Gross Dividend / Net Dividend

    – Withholding tax

     DTAA

    – Resident State

    – Source State

    DIVIDENDS – ARTICLE 10(1) & 10(2)

    Right is to the Resident State

     Source State may also Tax

    This implies that if Domestic Law of Country R taxes

    foreign dividends derived by its resident share

    holders, the DTA between Country R and Country S

    is not going to stop Country R from doing so.

     OECD Vs. UN model DTAA‟s

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     Participation Dividends

     Portfolio Dividends

    a. 5% of the gross amount of dividends if the beneficial

    owner is a company (other than a partnership) which

    holds directly at least 25% of the capital of the

    company paying dividends.

    b. 15% of the gross amount of Dividends in all other

    cases.

    DIVIDENDS AND PERMANENT

    ESTABLISHMENTS

    - Art.10(4) of the OECD model DTA provides for special

    treatment of Dividend received by a permanent establishment

    of a non resident in the source state.

    - It provides that the provisions of paragraph 1 and 2 shall not

    apply if the „beneficial owner‟ of the Dividends, being a

    resident of [Country R], carries on business in [Country S]

    through a permanent establishment situated [in Country S]

    and the holding in respect of which the dividends are paid is

    „effectively connected‟ with such permanent establishment. In

    such case the provisions of Article 7 shall apply.

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    DIVIDENDS AND PE – CONTD.,

    o The UN Model DTA extends this provision beyond only

    permanent establishment to the fixed bases in Country S of

    taxpayers who provides independent personal services. In which

    case the Dividends that arise from shareholding that are effectively

    connected with such fixed bases are taxed in accordance with

    Art.14 (Independent Personal Services) of the UN model DTA.

    o Dividends are taxed as business profits of the permanent

    establishment (Income of the independent personal service

    provider) on a net income basis (i.e. after allowance for deductible

    expenditure incurred in producing that income) under Art.7 (or

    Art.14 of the UN model DTA whichever is applicable)

    Dividend derived by a PE can give rise to 4 scenarios based on the location of the PE, viz.:

    SCENARIO - 1 SCENARIO 2 SCENARIO 3 SCENARIO 4

    PE receiving dividend from

    Company S in Country S is in

    Country R which is the residence

    of its Parent Co. too

    PE of Company R,

    PE receiving

    dividend from

    Company S in

    Country S is located

    in Country

    PE of Company R, PE

    receiving dividend

    from Company S in

    Country S is located in

    Country T

    PE of Company

    R, PE receiving

    dividend from

    Company T in

    Country T is

    located in

    Country S

    TAX IMPLICATION UNDER DTAA

    Art.10(1)&(2) would apply. 10(4)

    would not apply as PE is not in

    Country S

    Art.10(4)would

    apply as PE is in

    Country S

    Art. 10(4) would not

    apply as the PE is in

    Country T. Art.

    10(1)&(2) would apply

    going by the concept of

    beneficial ownership.

    Provided it is known to

    Co. S that Co. is the

    beneficial owner of the

    PE

    DTA between

    Countries R & S

    not applicable as

    dividend is not

    paid to the PE

    by a Co. Which

    is resident of

    Country S. The

    applicable DTA

    would be the

    one between

    Country R &

    Country T

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    Head

    Office

    PE

    Company S

    Country R

    Country S

    Company R

    Dividend

    SCENARIO - 1

    Dividend derived by a PE can give rise to 4 scenarios based on the location of the PE, viz.:

    SCENARIO 1 SCENARIO - 2

    SCENARIO 3 SCENARIO 4

    PE receiving

    dividend from

    Company S in

    Country S is in

    Country R

    which is the

    residence of its

    Parent Co. too

    PE of Company R, PE receiving

    dividend from Company S in

    Country S is located in Country.

    PE of Company R, PE

    receiving dividend

    from Company S in

    Country S is located in

    Country T

    PE of Company

    R, PE receiving

    dividend from

    Company T in

    Country T is

    located in

    Country S

    TAX IMPLICATION UNDER DTAA Art.10(1)&(2)

    would apply.

    10(4) would not

    apply as PE is

    not in Country

    S

    Art.10(4)would apply as PE is in

    Country S

    Art. 10(4) would not

    apply as the PE is in

    Country T. Art.

    10(1)&(2) would

    apply going by the

    concept of beneficial

    ownership. Provided

    it is known to Co. S

    that Co. is the

    beneficial owner of

    the PE

    DTA between

    Countries R & S

    not applicable as

    dividend is not paid

    to the PE by a Co.

    Which is resident

    of Country S. The

    applicable DTA

    would be the one

    between Country R

    & Country T

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    Head

    Office

    PE

    Company S

    Country R

    Country S

    Company R

    Dividend

    SCENARIO - 2

    Dividend derived by a PE can give rise to 4 scenarios based on the location of the PE, viz.:

    SCENARI

    O 1

    SCENARIO 2 SCENARIO - 3

    SCENARIO 4

    PE

    receiving

    dividend

    from

    Company S

    in Country

    S is in

    Country R

    which is the

    residence

    of its Parent

    Co. too

    PE of Company

    R, PE receiving

    dividend from

    Company S in

    Country S is

    located in

    Country

    PE of Company R, PE

    receiving dividend from

    Company S in Country S is

    located in Country T.

    PE of Company R, PE

    receiving dividend from

    Company T in Country

    T is located in Country S

    TAX IMPLICATION UNDER DTAA Art.10(1)&(

    2) would

    apply. 10(4)

    would not

    apply as PE

    is not in

    Country S

    Art.10(4)would

    apply as PE is in

    Country S

    Art. 10(4) would not apply as the PE

    is in Country T. Art. 10(1)&(2) would

    apply going by the concept of

    beneficial ownership. Provided it is

    known to Co. S that Co. is the

    beneficial owner of the PE

    DTA between

    Countries R & S not

    applicable as dividend

    is not paid to the PE by

    a Co. Which is

    resident of Country S.

    The applicable DTA

    would be the one

    between Country R &

    Country T

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    Head

    Office

    PE

    Company S

    Country R

    Country S

    Company R

    Dividend

    Country T

    SCENARIO - 3

    Dividend derived by a PE can give rise to 4 scenarios based on the location of the PE, viz.: SCENARIO 1 SCENARIO 2 SCENARIO 3

    SCENARIO - 4 PE receiving

    dividend from

    Company S in

    Country S is in

    Country R which

    is the residence

    of its Parent Co.

    too

    PE of Company R, PE

    receiving d