In view of the most favored nation (MFN) clause in the India-Netherlands tax treaty, can a Netherlands company directly and beneficially owning at least 10% capital of an Indian company apply the lower dividend withholding tax stipulated in the India-Slovenia tax treaty even if it does not satisfy the 365-day ownership requirement of Art. 8(1) of the MLI?
1. Introduction
The protocol to the India-Netherlands tax treaty contains ‘most favoured nation’ (MFN) clause. The MFN clause seeks to ensure that the dividend tax treatment under that tax treaty is no less favourable than the tax treatment under India’s subsequent tax treaty with an OECD member state.
Before Art. 8(1) of the OECD’s Multilateral Instrument (MLI) became operative in respect of the India-Slovenia tax treaty, Art. 10(2)(a) of that tax treaty stipulated dividend tax rate of 5 per cent. That tax rate applied, in the context relevant for us, if the recipient (i) was a Slovenian company, (ii) beneficially owned the dividend income, and (iii) directly held at least 10 per cent of the capital of the dividend paying Indian company.
On 1 April 2020, Art. 8(1) of the MLI became operative in respect of the India-Slovenia tax treaty. The period before that date is hereafter referred to as the “pre-MLI period”. The period since that date is hereafter referred to as the “post-MLI period”.
During the pre-MLI period – as result of the MFN clause in the India-Netherlands tax treaty – if a Netherlands company directly and beneficially owned at least 10 per cent of an Indian company’s capital, the former’s dividends from the latter were taxable in India at 5 percent.
It is important to note that even during the post-MLI period, Art. 8(1) of the MLI does not apply in respect of the India-Netherlands tax treaty. Hence, we are faced with an interesting question:
Can the above-mentioned 5 per cent dividend tax rate continue to apply in the post-MLI period for the purpose of Art. 10(2) of the India-Netherlands tax treaty?
That is analyzed hereafter.
