Tax Treaties and Investments Made Outside India

Nations around the world engage in many kinds of agreements related to financial matters. Such treaties and agreements prove to be beneficial for the residents (individuals as well as business entities) of those countries who are active parties in the agreement. They can provide a tax credit, tax exemptions, and an overall cut in the tax rates.

Here we will focus on the Treaties made by Singapore with India and UAE.

The Double Taxation Avoidance Agreement (DTA) between Singapore and India is a unique tax treaty for avoiding double taxation of income. In the absence of DTA, such income invites double taxation on individuals, Companies formed in India and Singapore incorporated companies, where both the countries impose their tax rates on the same income. This penalizes the following of income unfairly between the countries and also discourages commerce and trade going on.

Types of taxes in consideration

1. In India
   • Income tax including any surcharge,
   • Capital gains tax
2. In Singapore
   • Income tax
   • Capital gains tax

The rate of tax is determined by the country wherever the specific income is taxable according to the provisions of DTA. As an example, for royalty income, the tax rate mentioned in the DTA is ten percent. It means that if a taxpayer is from India and gets a receipt of royalty from Singapore, the tax rate on such income will be ten percent. Understanding this is crucial because the tax rates in the DTA agreed by the countries and the corresponding prevailing tax rates of the country can be different.

Important aspects of India-Singapore DTA

♦ Taxation of the income from immovable property

Income which is acquired from the straight usage of or permitting or any other form of the usage of immovable property will be subject to tax in that country where the property is actually located. Now, this will include real-estate earning of the enterprise as well as the income earned from immovable properties used for accomplishing professional services.

♦ Taxation of business profits

Business profits or incomes of any enterprise will be taxable in that specific country where the enterprise would be a resident. However, if the organization is carrying out business in the other contracting country with the help of a permanent establishment that is situated in that contracting country, then all the income or profits obtained from that permanent establishment singularly will be subject to tax in the other contracting country.

♦ Taxation of transport income

Profits derived from ship or aircraft operations in the international traffic by any resident of one of the contracting countries will be liable to tax in that very country only.

Air-transport and shipping income includes the following:

• Profits earned from participation in a joint business, a pool, or an international operating agency that is engaged in the operations of aircraft or ships.
• All the interest on those funds which are connected with the operation of aircraft or ships in the international traffic.
• Profits which are obtained from transport movement by air or sea of mail, passengers, goods, or livestock kept upon by the lessees or owners or charterers of the aircraft or ships including all the profits from:
  • Selling tickets for such transport movement on behalf of other enterprises.
  • The subsidiary lease of aircraft or ships which are used in such transportation.
  • The maintenance, use, or rent of those containers (including equipment related to the transportation of containers and trailers) which are connected with such transport movement.
  • Any other activity that is directly in connection with such transportation.

♦ Taxation of dividend income

From the April month of 2020, India has eradicated the DDT. Now, the dividends would be taxable only in the hands of the recipient. Instead, India has now initiated a dividend retaining tax. The rate of this tax will be 10% for the dividends which are paid to shareholders who are resident in India and 20% if the payment is made to foreign investors.

In Singapore, the distribution of dividends by any company is tax-free. Also, the recipient shareholder is free from the tax on dividend income.

The DTA of India and Singapore clearly states that the dividend income is taxable only in the recipient’s state of accommodation which is as follows:

1. 10% if the recipient company is holding a minimum of 25% of the shares of the company which is paying dividend and
2. 15% in all the remaining cases.

The new dividend tax regime introduced by India is creating an outstanding opportunity for considerable tax savings by creating a Singapore company the shareholder of any Indian company. This can benefit both Indian and Foreign shareholders

♦ Taxation of interest income

Without the DTA, the held back tax rate in the country of Singapore for any interest payment to non-residents is 15% whereas in India the same rate ranges from 5 – 20%, depending upon the kind of interest besides surcharge and cess. Under the treaty, the tax on interest can be studied as follows:

1. 10% of the gross amount, if the interest is paid on loan granted by any financial institution or any bank carrying on banking business.
2. 15% of the gross amount in all other cases.

♦ Taxation of royalty

Without DTA, the held back tax rate in Singapore for any royalties paid to the non-residents is only 10% whereas in India the same tax rate paid to the non-residents is 10% plus cess and surcharge. Under the treaty, the rate of tax for royalties is 10-15% depending upon the kind of royalty is being paid to the non-residents.

♦ Taxation of director’s fees

Directors’ fees along with all other similar kinds of payments accepted by the resident of one of the contracting countries in his own capacity as a director of the company, who is a resident in any other contracting country will have to pay taxes in that other contracting country. Simply stating, the fees of directors are liable to taxation in that country in which the company paying the fees is resident.

Taxation of Capital Gains

• Gains that are derived by the resident of one of the contracting countries from the detachment of immovable property that is situated in any other contracting country may be taxed in that other country.
• Gains that are derived by the enterprise or resident of one of the contracting countries from the detachment of movable property of its permanent establishment or a fixed base that is situated in another contracting country may be taxable in that other contracting country.
• Gains from the detachment of aircraft or ships being operated in the international traffic or movable property of the operation of such aircraft or ships are taxable in the recipient’s country of residence.
• Any other gains will be taxable in the recipient’s country of residence.

Singapore-UAE DTA Agreement

Now, UAE and Singapore signed the double taxation agreement in 1990 and it was specifically framed to avoid double taxation of air transportation income. The terms of this treaty were renewed in 1997 which lead to the addition of many other incomes. The latest additions were seen at the end of October 2014.

This agreement was also for preventing the practices of double-taxation on incomes related to individuals and companies formed in the UAE and Singapore. Specifically, the agreement covers both income and corporates taxes in the UAE, but in Singapore, it covers only the income tax. For availing the benefits, the person (individual or company) will have to get registered with the authorities, otherwise, the privilege will be denied.

The double-tax treaty of Singapore and UAE clearly states that the income generated from renting or selling an immovable property will be applicable to tax in one of the two countries. However, aircraft and ships are not deemed as immovable properties in this agreement.

When it comes to business profits, the taxes will be levied by the country where the business operations are being carried out. All the provisions regarding the interest, royalty, and dividend incomes are similar to the India-Singapore treaty.

A new provision was added in the UAE-Singapore treaty in 2018 and it referred to the permanent establishments. In the old tax treaty, these establishments were considered as business activities carried out in one of the countries for at least six months. However, the new provisions specify any business activity to be considered as a permanent establishment after being undertaken for 300 or more days continuously. The new policy also lowered the dividend withholding tax to 0%.

Indian businesses are no less in the competition. With time, Indians are increasingly multiplying their Overseas Direct Investment in almost all parts of the world. The investment can be made by buying existing shares of any foreign entity either by private placement or market purchase or through a stock exchange, or via subscription to the Memorandum of any foreign entity signifying a subsequent long-term interest.

Investment in any foreign company by an Indian individual is governed by the Foreign Exchange and Management Act, 1999, and various regulations that are issued thereunder. Because of the regulatory and complex regime, investors are necessitated to take proper guidance related to all the matters on their investment.

Types of Direct Overseas Investments

FEMA, 1999 prescribes the regulation for investments by an Indian individual in a foreign company. The typical segregation prescribed by the Act is as follows.

♦ Direct Investment

This generally indicates a long-term investment in foreign business. It generally happens in the form of subscription to the memorandum of any overseas business or capital contribution or through share purchase of new entities via private placement, stock exchange, or markets. The intention behind this will be of controlling the management of the investee company.

♦ Portfolio Investment

Foreign investment by Indians is sometimes made for speculation or financial gains. Here there is no controlling interest or long-term investment aim through the management of the foreign company. Therefore, unlike Direct investment, you can easily withdraw Portfolio investment without many thoughts.

Conclusion

All three countries are active participants in the global financial marketplace and aim to reduce the burden of investors with different capacities and requirements. Double-tax treaties play a major role in their decisions of tax benefits for the residents. Compliance and regulation are an integral part of these agreements failing which can take away your privileges. You can start investing in foreign companies easily through various online platforms at low costs to understand the practical aspects yourself.

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Author bio: Ms. Priyanka Bhandari is part of the management team at IMC Group. She spearheaded our Digital Marketing initiatives and her core expertise lies in communications management. With a Masters in Communication she is at the forefront of our  Client relationship Management, Media and Marketing Division & Business Development opportunities amongst other responsibilities.