Indian Ministry of Finance issues Circular on MFN clauses in Indian DTAAs

This blog is an update to our previous blogs titled “Reduction of Dividend WHT (to 5%) under India-Netherlands DTAA as India abolishes DDT (from 1 April 2020)” and “Delhi High Court confirms 5% dividend WHT rate under India-Netherlands DTAA”. These blogs affirm that the effective WHT rate on dividends distributed by Indian subsidiaries to their parent companies in the Netherlands could be reduced from 15% (as stipulated in the India-Netherlands DTAA) to 5% (by operation of the MFN-clause in the DTAA) based on a Decree of the Dutch Ministry of Finance and a recent Delhi High Court ruling . On 3 February 2022, the Indian Central Board of Direct Taxes (“CBDT”) issued a Circular stating their interpretation on the MFN clauses in India’s DTAAs with European/OECD member countries, including the Netherlands. The Circular states that the effective WHT rate on dividends under the India-Netherlands DTAA should be 10% (and not 5% as stated in the Dutch Decree and the Delhi High Court ruling). In this blog, we summarize the main contentions of the CBDT with regard to the effective rate of dividend WHT under the India-Netherlands DTAA and also touch upon some considerations for Dutch companies receiving dividends from their Indian subsidiaries.

05 May. '22 Neha Mohan


India’s Double Tax Avoidance Agreements (“DTAAs”) with 12 countries (namely, the Netherlands (1988), Philippines (1990), France (1992), Belgium (1993), Spain (1993), Switzerland (1993), U.K. (1993), Sweden (1997), Hungary (2003), Saudi Arabia (2006), Finland (2010) and Nepal (2011)) contain Most Favoured Nation (“MFN”) clauses. While the MFN clause in the DTAA with Philippines deals with income from air transport and those in the DTAAs with Saudi-Arabia and U.K. deal with deduction of expenses in relation to permanent establishments, the MFN clauses in the other 9 DTAAs deal with WHT on dividends, interest, royalties and fees for technical services. Though the 9 MFN clauses are formulated differently, the underlying purpose of these clauses is that India is obliged to provide “favourable treatment” (as in, lower WHT rate or more restricted scope of application) to the residents of the DTAA-partner country (in relation to the item of income specified – dividends and/or interest and/or royalties) if such treatment is provided to the residents of certain other DTAA-partner countries via DTAAs concluded after the DTAA that contains the MFN clause.

Neha Mohan

Neha Mohan is a Tax Adviser at NovioTax.

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