Interpretation of term contracting states mentioned under DTAA between two countries.

What do you mean by the term contracting states mentioned under DTAA?

Sometimes It can be confusing when reading the definition of a contracting state under a DTAA for the first time, as it may be unclear which countries are being referred to as contracting states or which are being referred as other states.

So this article is for clearing the understanding of term contracting states mentioned under DTAA between two countries with an small interesting example.

A contracting state under a Double Taxation Avoidance Agreement (DTAA) is a country that has entered into an agreement with another country to prevent the same income from being taxed twice. The purpose of a DTAA is to provide relief from double taxation on income earned in one of the contracting states by a resident of the other contracting state.

A DTAA applies to residents of the contracting states, which means individuals or entities that are taxable in a contracting state under its domestic tax laws. The DTAA specifies which country has the right to tax certain types of income and at what rate. It may also contain provisions for the exchange of information between the contracting states for tax purposes.

For example, if a resident of Country A earns income in Country B, and both countries have a DTAA in place, the DTAA will determine which country has the right to tax the income and at what rate. If the DTAA specifies that Country A has the right to tax the income, the individual will not be subject to tax on the same income in Country B.

Conclusion

A contracting state under a DTAA refers to a country that has entered into an agreement with another country to prevent the same income from being taxed twice. In this context, both countries are considered contracting states.

For example, if Country A and Country B have entered into a DTAA, they are both considered contracting states. If a resident of Country A earns income in Country B, the DTAA will determine which country has the right to tax the income and at what rate. The DTAA will apply to residents of both countries.  If the DTAA specifies that Country A has the right to tax the income, the individual will not be subject to tax on the same income in Country B.

It may also be helpful to consider the specific terms of a DTAA, such as which types of income are covered, how income is defined, and how the agreement applies to residents of each contracting state.

I hope this helps to clarify the concept of a contracting state under a DTAA and addresses any confusion you may have had.

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Hi there! Meet CA Abhishek Jain, the founder of Tax2Save. With over 10 years of experience in the field of tax planning and compliance, CA Abhishek is a seasoned professional and an expert in the field. He has worked with some of the biggest MNCs, where he gained invaluable experience in helping emp View Full Profile

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One Comment

  1. Muzzammil K says:

    Dear Sir, please guide if the services are rendered in foreign country and foreign entity is not registered in india and neither have permanent establishment in india.
    We are acting like coordinator for our client and foreign entity.
    Whether we are liable to deduct TDS for payment to foreign entity. The services are getting IP registered in EU nations.

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