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1/23/2010
1
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
