Background:-India and UK have signed a Protocol on 30th October 2012, amending the Convention between the Government of the Republic of India and the Government of the United Kingdom of Great Britain for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect of Taxes on Income and Capital Gains.
The specific exclusion of UK partnership from definition of “person” has been amended to provide that Article 3 would extend the benefits of Convention to partners of the UK partnerships to the extent of income of the UK partnership is subject to tax in the hands of partners.
The term “Resident of the Contracting State” proposed in Article 4(1), which defines the same in case of a partnership, only so much of income as derived by such partnership, which is subject to tax in a Contracting State as the income of the resident of Such Contracting State either in its hands or in the hands of its partners, would be eligible for claiming benefits under the India-UK Treaty.
In case of a UK partnership earning income from India, only so much of income which is subject to tax in the UK as the income of the UK resident partner would be eligible for India-UK Treaty benefits.
Once the protocol to India-UK Tax Treaty comes into force an Indian entity will have to consider the tax residence of the partners of the UK partnership at the withholding stage, while granting Treaty benefits to the UK partnership. In this context, attention is invited to the recently introduced Sec. 90(4) of the Act, which requires a non-resident claiming Treaty benefits in India to obtain a certificate containing prescribed particulars (i.e. Tax Residency Certificate or TRC) from the Government of the home country. It would be interesting to observe how a TRC would be issued by the UK Government to a UK partnership earning income from India, where one of the partner therein is a non-resident.
The Protocol has proposed to amend the definition of the ‘resident of the Contracting State’ in Article 4(1) to provide that in case of an income derived by a ‘trust’ or an ‘estate’, if such income is subject to tax in the resident country in the hands of its beneficiaries as tax resident of that country, then to that extent it would be eligible for benefits under the Indian-UK Tax Treaty.
Hence, even if the UK trust is not treated as a separate taxable unit under the UK domestic tax laws, if certain portion of the income of the UK trust is taxable in the UK in the hands of beneficiaries who are residents of the UK, then to that extent, income of the UK trust would be eligible for benefits under the India-UK Tax Treaty.
The protocol has proposed to reduce the rate of tax withholding on payment of dividend by replacing the existing Article 11 of the India UK Tax Treaty. The Protocol has provided for revised withholding tax rate as follows:
• 15% of the gross amount of dividends where such dividend is paid out of income derived directly or indirectly from immovable property by an investment vehicle which distributes most of its income annually and whose income from such immovable property is exempted from tax;
• 10% of gross amount of dividends in all other cases.
The protocol shall come into force from the date of notification after completion of procedures required by laws of each country.
In India the protocol shall be effective from fiscal year beginning on or after the date of Notification.
Source: Press release issued by CBDT, dated 1st November 2012
(Author can be reached at email@example.com)