India-UK DTAA

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 came into force on the 26 October 1993. 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 UK 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:

• Residence-based Taxation

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.

• Business Profits

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 and 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.

• Capital Gains

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.

• Exchange of Information

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 the India-UK 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
• Premises used as a sales outlet or for receiving or soliciting orders.
• A warehouse in relation to a person providing store facilities for others.
• A mine, an oil or gas well, quarry on other place of extraction of natural resources.
• An installation or structure used for the exploration or exploitation of natural resources.
• A building site or construction, installation or assembly project or supervisory activities in connection therewith, where such site, project or supervisory activity continues for a period of more than 6 months, 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.
• The furnishing of services, other than included services as defined in Article 13 (Royalties and Fees for Included Services), within India by an enterprise through employees or other personnel, but only if (& vice versa):
  a)    activities of that nature continue within that State for a period or periods aggregating more than 90 days within any twelve-month period, or
  b)    the services are performed within India for a related enterprise [within the meaning of Associated Enterprises as per paragraph 1 of Article 9 of India-UK DTAA] and continue for a period or periods aggregating more than 30 days within any twelve-month period.
• Person acting in India on behalf of an enterprise of UK shall be deemed to be a permanent establishment of that enterprise in India if (& vice versa):
  a)    The person has, and habitually exercises in India, an authority to negotiate and enter into contracts for or on behalf of the enterprise, unless his activities are limited to the purchase of goods or merchandise for the enterprise, or
  b)    the person habitually maintains in the India a stock of goods or merchandise from which they regularly deliver goods or merchandise for or on behalf of the enterprise, or
  c)    The person habitually secures orders in India, wholly or almost wholly for the enterprise itself or for the enterprise and the enterprises controlling, controlled by, or subject to the same common control, as that enterprise.

Note: The mere presence of a company's goods or merchandise in the other country does not, by itself, constitute a Permanent Establishment (PE).

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 advertising, for the supply of information or for scientific research, being activities solely of a preparatory or auxiliary character in the trade of business of the enterprise. However, this provision shall not be applicable where the enterprise maintains any other fixed place of business in India for any purpose or purposes other than the purposes specified in this paragraph.

F.    The maintenance of a fixed place of businesses solely for any combination of activities mentioned in sub-paragraphs (A) to (E) of the paragraph, provided that the overall activity of the fixed place of business resulting from this combination is of a preparatory or auxiliary character.

In case an enterprise has a Permanent Establishment in both India and UK, 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-UK DTAA plays a crucial role in determining the tax liability of foreign enterprises doing business in India or UK.

A summary of structure of entities covered in Permanent establishment is as follows:

Particulars	Indian Definition	UK Definition	India-UK 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 UK - 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 > 12 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-UK DTAA *
Dividend	20%	15%/10%
Interest	20%	10%/15%
Royalty	20%	15%/10%
Fee for Technical Services	20%	15%/10%

*The rates as per Income Tax Act shall be increased by applicable surcharge (2%/5% - for companies and 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 DTAA

Dividend Income

‘Dividends’ as used in Article 11 means — income from shares, or other rights, not being debt-claims, participating in profits, as well as any other item 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 UK are taxable in India at:

(a)    A rate of 15% if those dividends are paid out of income (including gains) derived directly or indirectly from immovable property (within the meaning of Article 6) by an investment vehicle which distributes most of this income annually and whose income from such immovable property is exempted from tax.

(b)    A rate of 10% of the gross amount of the dividends in all other case.

Interest

As per Article 12, the term ‘Interest’ in this article 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 but, subject to the provisions of paragraph (9) of this Article, shall not include any item which is treated as a distribution under the provisions of Article 11 (Dividends) of this Convention. Such interests earned in India by a resident of UK are taxable in India at:

a)    A rate of 10% of the gross amount of the interest if such interest is paid on a loan granted by a bank carrying on a bona fide banking business or by a similar financial institution (including an insurance company), and

b)    A rate of 15% of the gross amount of the interest in all other cases.

The interest income shall not be taxable if interest arises in India/UK and is derived and beneficially owned by the Government of the other country, a political sub-division or local authority thereof, and the Reserve Bank of India.
The above rates and taxability are not applicable if such incomes are earned through a permanent establishment situated therein. Then the permanent establishment shall be taxed as per rates of Income Tax Act (i.e., 40%).

Royalty

As per Article 13, ‘royalties’ means:   

a)    Payments of any kind received as a consideration for the use of, or the right to use, any copyright of a literary, artistic or scientific work, including cinematograph films or work on films, tape or other means of reproduction for use in connection with radio or television broadcasting, any patent, trademark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience, and

b)    Payments of any kind received as consideration for the use of, or the right to use, any industrial, commercial or scientific equipment, other than income derived by an enterprise of a Contracting State from the operation of ships or aircraft in international traffic.

In the case of royalties referred to in sub-paragraph (a) above earned in India by a resident of UK are taxable at a rate of 15% of the gross amount of the royalties and in the case of royalties referred to in sub-paragraph (b) above earned in India by a resident of are taxable at a rate of 10% of the gross amount of the royalties
However, if such services are provided through a permanent establishment (PE), then the PE shall be taxed as per rates of income tax act (i.e., 40%).

Fees for Technical Services

The term ‘fees for technical services’ means payments of any kind to any person in consideration for the rendering of any technical or consultancy services (including the provisions of services of technical or other personnel) which:

a)    are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph (a) of definition of royalty in Article-13 is received, or

b)    are ancillary and subsidiary to the enjoyment of the property for which a payment described in paragraph (b) of definition of royalty in Article-13 is received, or

c)    make available technical knowledge, experience, skill, know-how or processes, or consist of the development and transfer of a technical plan or technical design.

Note: ‘Fees for technical services’ does not cover amounts paid:

a)    for services that are ancillary and subsidiary, as well as inextricably and essentially linked, to the sale of property other than a sale described in (a) of definition of royalty,

b)    for services that are ancillary and subsidiary to the rental of ships, aircraft, containers, or other equipment used in connection with the operation of ships or aircraft in international traffic,

c)    for teaching in or by educational institutions,

d)    for services for the personal use of the individual or individuals making the payments, or

e)    to an employee of the person making the payments or to any individual or firm of individuals (other than a company) for professional services as defined in Article 15 (Independent Personal Services).

In the case of fees for technical services referred to in sub-paragraph (a) & (c) above earned in India by a resident of UK are taxable at a rate of 15% of the gross amount of the royalties and in the case of royalties referred to in sub-paragraph (b) above earned in India by a resident of UK are taxable at a rate of 10% of the gross amount of the royalties.

If such services are provided through a permanent establishment (PE), then the PE shall be taxed as per rates of Income Tax Act (i.e., 40%).

Tax on Capital Gains

Except as provided in Article 8 (Shipping and Air Transport) of India-UK DTAA, each country may tax capital gains in accordance with the provisions of its domestic law.

Independent Personal Services

As per Article 15, the term ‘professional services’ includes 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 (individual or firm) of UK and who earns income from the performance of professional services or other independent activities of a similar character shall be taxable activities shall be taxable in India only if any of the following conditions is satisfied:

a)    if they have a fixed base regularly available to them in India for the purpose of performing their activities, or

b)    If they stay (or stay of one or more members of firm) in India is for a period or periods amounting to or exceeding in the aggregate 90 days in the relevant fiscal year.

Dependent Personal Services

As per Article 16, salaries, wages and other similar remuneration derived by a resident of UK in respect of an employment shall be taxable in India only if the employment is exercised in India and such income shall be taxable at the rates in force. Such salary can be taxed in UK only after fulfilment of the following conditions:

a)    The recipient is present in India for a period or periods not exceeding in the aggregate 183 days in the fiscal year concerned, and

b)    The remuneration is paid by, or on behalf of, an employer who is not a resident of India; and

c)    The remuneration is not deductible in computing the profits of an enterprise chargeable to tax in India.

However, remuneration in respect of an employment exercised aboard a ship or aircraft operated in international traffic by a resident of UK may be taxed in UK (and vice-versa) and the article does not apply to remuneration covered under other articles of the India–UK DTAA such as Articles 17 (Directors' Fees), 18 (Income Earned by Entertainers and Athletes), 19 (Remuneration and Pensions in respect of Government Service), 20 (Private Pensions, Annuities, Alimony and Child Support), 21 (Payments received by Students and Apprentices), and 22 (Payments received by Professors, Teachers and Research Scholars).

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 Canada
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
Australia	15%	15%	10%/15%	Not Covered under DTAA	Capital gain arises in India
USA	15% / 25%	10%/15%	10%/15%	Not Covered under DTAA	Capital gain arises as per India/UK Income Tax Act
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 India/UK Income tax Act

Conclusion

Some issues specific to India-UK DTAA are:

• Linklaters LLP vs. ITO: In this case, the Income Tax Appellate Tribunal (ITAT) Mumbai confirmed that Professional Firms can have a ‘service PE’. The words ‘indirectly attributable to the PE’ encompass the ‘force of attraction’ principle and even services rendered offshore for Indian projects are assessable in India.
• Deputy Director of Income Tax vs. Balaji Shipping (UK) Ltd.: In view of Article 9(1) of the India-UK DTAA, freight income earned by non-resident assessee on account of transportation of cargo in international traffic by ships operated by other enterprises under slot chartering, arrangement would be taxable only in State of residence and, consequently, such income would be exempt from taxation under the Indian Income Tax law.