DTAA stands for Double Taxation Avoidance Agreement, which is an agreement between two countries that aims to eliminate the double taxation of income earned by individuals or entities in both countries. The DTAA provides a mechanism for foreign investors to avoid being taxed twice on the same income. It allows foreign investors to claim tax relief in their home country for the tax paid in India. The DTAA also helps to prevent tax evasion and promote transparency in tax matters.
The DTAA is based on the
OECD Model Tax Convention and was signed in 1993 and came into force on the 12 January 1995. It has been revised several times since then. The DTAA ensures that taxpayers who are residents of one country but earn income from the other country are not taxed twice on the same income. The agreement covers taxes on income and wealth and applies to residents of both countries.
Scope of India Spain DTAA
Foreign investors in India can be categorized into different groups based on their investment objectives, the nature of their investment, and the regulatory requirements they need to comply with. Here are some of the categories of foreign investors in India:
The DTAA provides clarity on the tax treatment of residents and non-residents in both countries. It ensures that individuals and businesses are not taxed twice on the same income.
The agreement provides guidelines for the taxation of business profits earned by companies in either country. It ensures that companies are taxed fairly based on their activities in each country.
- Dividends, Interest & Royalties
The DTAA provides rules for the taxation of dividends, interest, and royalties received by residents of either country. It ensures that these payments are taxed at a reasonable rate and not subject to double taxation.
The agreement provides for the taxation of capital gains arising from the sale of assets, such as shares, real estate, and other investments. It ensures that residents are taxed fairly and not subject to double taxation.
The agreement provides for the exchange of information between the tax authorities of both countries to prevent tax evasion and ensure compliance with tax laws.
Permanent Establishment
As per
Article 5 of India-Spain DTAA, a Permanent Establishment means a fixed place of business through which an enterprise of one country carries on its business activities in the other country. It includes the following:
- A place of management.
- A branch.
- An office.
- A factory.
- A workshop.
- A premise used as a sales outlet.
- An installation or structure used for the exploration or exploitation of natural resources, but only if it is used for a period of more than 3 months.
- A building site or construction, installation or assembly project or supervisory activities in connection therewith, where such site, project or activities (together with other such sites, projects or activities, if any) continue for a period of more than 6 months in any twelve-months period, or where such project or supervisory activity, being incidental to the sale of machinery or equipment, continues for a period not exceeding 6 months and the charges payable for the project or supervisory activity exceed 10 per cent of the sale price of the machinery and equipment.
- If it provides services or facilities in connection with or supplies plant and machinery on hire used or to be used in, the prospecting for, or extraction or production of mineral oils in the State if the activities continue for a period of more than 30 Days in any twelve-month period.
| Note: The mere presence of a company's goods or merchandise in the other country does not, by itself, constitute a Permanent Establishment. |
The DTAA also considers certain activities as not constituting a PE, such as:
A. The use of facilities solely for the purpose of storage or display of goods or merchandise belonging to the enterprise.
B. The maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage or display.
C. The maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of processing by another enterprise.
D. The maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise or for collecting information for the enterprise.
E. The maintenance of a fixed place of business solely for the purpose of carrying on any other activity of a preparatory or auxiliary character.
In case an enterprise has a Permanent Establishment in both India and Spain, the business profits will be taxed in both countries, but the DTAA provides relief from double taxation by allowing the taxpayer to claim a credit for the taxes paid in one country against the taxes payable in the other country.
Overall, the definition of Permanent Establishment under the India-Spain DTAA plays a crucial role in determining the tax liability of foreign enterprises doing business in India or Spain.
A summary of structure of entities covered in Permanent Establishment is as follows:
| Particulars |
Indian Definition |
Spain Definition |
India-Spain DTAA Definition |
| Brief meaning |
- Any fixed place of business serving the activities of an enterprise.
- Any entity engaged in any activity, relating to the production, storage, supply or distribution.
- Wider definition than Tax treaty. |
- Any fixed place of business serving the activities of an enterprise.
- entity perform clearly differentiated activities and the management of these is carried out in Spain.
- Wider definition than Tax treaty. |
- Any fixed place of business through which the business of an enterprise is wholly or partly carried on.
- Narrower definition than respective taxation. |
| Examples |
| Place of Management |
Yes |
Yes |
Yes |
| Branch or office |
Yes |
Yes |
Yes |
| Factory or workshop |
Yes |
Yes |
Yes |
| Fixed place solely for the purpose of purchasing goods or merchandise |
Yes |
Yes |
No |
| Fixed place solely for the purpose of maintenance of a stock of goods |
Yes |
Yes |
No |
| Building site or construction |
Yes (if Duration > 6 Months) |
Yes (if Duration > 6 Months) |
Yes (if Duration > 6 months) |
Withholding Tax as per Indian Tax Laws
A brief summary of withholding tax rates is as follows:
| Nature of income |
Indian Income Tax Act |
India-Spain DTAA* |
| Dividend |
10% |
15% |
| Interest |
10% |
15% |
| Royalty |
10% |
10%/20% |
| Fee for Technical Services |
10% |
20% |
*The rates as per Income Tax Act shall be increased by applicable Surcharge (2%/5% - for Companies & 10%/15%/25%/37% - for individuals) and Cess (4%).
- Taxability of dividend is on gross basis and the amount of tax is deducted by the source country.
- Interest is also taxable on gross basis and the tax is withheld by the source country.
Benefits and Rates of Tax as per India-Spain DTAA
Fees for Technical Services and Royalty
- As per Article 13, ‘royalties’ refers to payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work, including cinematographic films or films or tapes used for radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for the use of, or the right to use, industrial, commercial or scientific equipment, or for information concerning industrial, commercial or scientific experience. Such royalties earned in India by a resident of Spain relating to the payments for the use of, or the right to use, industrial, commercial or scientific equipment are taxable in India at a rate of 10%. Otherwise, they are taxable at a rate of 20%.
- As per Article 12, the term ‘fees for technical services’ refers to payments of any kind to any person other than payments to an employee of the person making the payments and to any individual for independent personal services mentioned in Article 15 (Independent Personal Services), in consideration for the services of a technical or consultancy nature, including the provision of services of technical or other personnel. Such fees for technical services earned in India by a resident of Spain are taxable in India at a rate of 20%.
Note: The above rates and taxability are not applicable if such incomes are earned through a Permanent Establishment (PE) situated therein. Then the PE shall be taxed as per rates of the Income Tax Act (i.e., 40%).
Dividend Income
‘Dividends’ as used in
Article 11 refers to income from shares or other rights, not being debt-claims, participating in profits, as well as income from other corporate rights which is subjected to the same taxation treatment as income from shares by the laws of the country of which the company making the distribution is a resident.
Such Dividend earned in India by a resident of Spain are taxable in India at a rate of
15% and vice-versa.
Interest
As per
Article-12, the term 'interest' refers to income from debt-claims of every kind, whether or not, secured by mortgage and whether or not carrying a right to participate in the debtor's profits, and in particular, income from Government securities and income from bonds or debentures, including premiums and prizes attaching to such securities, bonds or debentures. Penalty charges for late payment shall not be regarded as interest for the purpose.
Such interests earned in India by a resident of Spain are taxable in India at a rate of
15%.Interest arising in India and paid to a resident of the Spain shall be exempt from tax in India if:
- The payer of the interest is the Government of India or of a political sub-division or local authority thereof.
- The beneficial owner of the interest is the central bank of Spain.
The above exemption is available vice versa to Interest arising in Spain and paid to a resident of India.
Note: The above rates and taxability are not applicable if such incomes are earned through a Permanent Establishment (PE) situated therein. Then the PE shall be taxed as per rates of the Income Tax Act (i.e., 40%).
Independent Personal Services
As per
Article 15, ‘professional services’ include independent scientific, literary, artistic, educational or teaching activities, as well as the independent activities of physicians, surgeons, lawyers, engineers, architects, dentists and accountants.
Income derived by a resident of Spain, earned from the performance of professional services or other independent activities of a similar character shall be taxable in India only if any of the following conditions is satisfied:
- If they have a fixed base regularly available to them in India for the purpose of performing their activities and in that case, only so much of the income as is attributable to that fixed base may be taxed in India; or
- If their stay in India is for a period or periods amounting to or exceeding in the aggregate 183 days in the relevant fiscal year; in that case, only so much of the income as is derived from their activities performed in that other State may be taxed in India.
Dependent Personal Services
As per
Article 16, salaries, wages and other similar remunerations derived by a resident of a Spain in respect of an employment shall be taxable in India only if the employment is exercised in India at the rates in force.
Such salary can be taxed in Spain only if the following conditions are fulfilled:
- The recipient is present in India for a period or periods not exceeding in the aggregate 183 days in the fiscal year concerned.
- The remuneration is paid by, or on behalf of, an employer who is not a resident of India.
- The remuneration is not borne by a PE or a fixed base which the employer has in India.
Tax on Capital Gains
Gains derived by a resident of Spain from the alienation of immovable property situated in India may be taxed in India.
Gains from the alienation of movable property forming part of the business property of a PE which an enterprise of Spain has in India or of movable property pertaining to a fixed base available to a resident of Spain in India, such gains shall be taxable in India.
i. Gains from the alienation of shares of a company the property of which consists, directly or indirectly, principally of immovable property situated in India will be taxed in India and vice versa.
ii. Gains for the alienation of shares of a company forming part of a participation of at least
10 per cent in a company which is a resident of India will be taxed in India and vice versa.
Comparison with the Other Tax Treaties
| Treaty Partner |
Dividends |
Interest |
Royalties |
Fee for Technical Services |
Capital Gain on Shares held in India |
| Canada |
15% / 25% |
15% |
10%/15% |
10%/15% |
Capital gain arises in both India and Spain |
| France |
10% |
10% |
10% |
10% |
Capital gain arises in India if more than 10% Shares are held |
| Spain |
15% |
15% |
10%/20% |
20% |
Capital gain arises in India if more than 10% Shares are held |
| Germany |
10% |
10% |
10% |
10% |
Capital gain arises in India |
| Netherlands |
10% |
10% |
10% |
10% |
Capital gain arises in India if more than 25% Shares are held |
| United Kingdom |
10% / 15% |
10% / 15% |
10% / 15% |
10% / 15% |
Capital gain arises as per Indian/UK Income Tax Act |
Conclusion
While addressing India-Spain DTAA, it is also important to consider two pertinent rulings by the Appellate Tribunal (ITAT).
In the case of
GRI Renewable Industries S.L. vs. CIT (IT), the ITAT ruled in favour of GRI Renewable Industries S.L., a Spanish company engaged in the business of manufacturing wind turbine generators. ITAT held that the payments made by GRI to GRI India were not taxable in India and were not subject to withholding tax. The decision is significant as it clarifies the scope of technical services under the India-Spain DTAA and provides guidance on the taxability of similar transactions in the future.
In the case of
Ford India Private Limited vs. ITO, the ITAT concluded that the transfer pricing adjustments made by tax authorities were not justified and ordered the deletion of the adjustments. The decision is significant as it underscores the importance of selecting an appropriate transfer pricing methodology that takes into account the unique characteristics of each transaction and provides guidance on the application of transfer pricing rules in India.
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