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Double Taxation Convention – UK and India

Published by Susan Basnet
Posted Date: July 4, 2024 , Modified Date: July 10, 2024

The Double Taxation Convention between the UK and India, initially signed on 25 January 1993 and coming into force on 25 October of that year, aimed to address double taxation issues for individuals and businesses operating in both countries. Subsequently, the Convention was amended by a protocol signed on 30 October 2012.

Covering various tax aspects from residency determination to specific taxation of income streams such as dividends, interest, royalties, and capital gains, the Convention ensures fairness, transparency, and non-discrimination in tax matters. It provides mechanisms for tax relief, dispute resolution, and cooperation in tax collection while promoting clarity and predictability in tax obligations for residents and businesses in both jurisdictions.

Scope and Application

Article 1: Scope of the Convention

The convention is applicable to persons who are residents of either or both of the Contracting States of the Convention. Additionally, the convention extends to the territorial sea and to those areas of the exclusive economic zone or the continental shelf adjacent to the outer limit of each State’s territorial sea, over which the State holds sovereign rights in accordance with international law.

Article 2: Taxes Covered

The taxes subject to the convention include the following:

  • The income tax,
  • The corporation tax,
  • The capital gains tax, and
  • The petroleum revenue tax.

In the United Kingdom, these are referred to as ‘United Kingdom tax.’

In India, the tax subject to the convention is:

  • Income tax, including any surcharge thereon, referred to as ‘Indian tax’.

General Definitions

Article 3 of titled ‘General Definitions’ gives the following definitions relevant for the interpretation:

  • the term ‘United Kingdom’ means Great Britain and Northern Ireland.
  • the term ‘India’ means the Republic of India.
  • the term ‘tax’ means United Kingdom tax or Indian tax, as the context requires but shall not include any amount which is payable in respect of any default or omission in relation to the taxes to which this Convention applies or which represents a penalty imposed relating to those taxes.
  • the term ‘fiscal year’ in relation to Indian tax means ‘previous year’ as defined in the Income-tax Act, 1961 (43 of 1961) and in relation to United Kingdom tax means a year beginning with 6th April in one year and ending with 5th April in the following year.
  • the terms ‘a Contracting State’ and ‘the other Contracting State’ mean India or the United Kingdom, as the context requires.
  • the term ‘person’ includes an individual, a company, a body of persons and any other entity which is treated as a taxable unit under the taxation laws.
  • the term ‘company’ means any corporate body or any entity which is treated as a company or corporate body for tax purposes.
  • the terms ‘enterprise of a Contracting State’ and ‘enterprise of the other Contracting State’ mean respectively an enterprise carried on by a resident of a Contracting State and an enterprise carried on by a resident of the other Contracting State.
  • the term ‘competent authority’ means the Commissioners of Inland Revenue or their authorised representative in the case of the United Kingdom, and, in the case of India, the Central Government in the Ministry of Finance (Department of Revenue) or their authorised representative.
  • the term ‘international traffic’ means only transport by a ship or aircraft operated by an enterprise of a Contracting State except when the ship or aircraft is operated solely between places in the other Contracting State.

Residency Status

Article 4: Fiscal Domicile

For the purposes of the Convention, Any person is resident of a Contracting State for tax purposes if they are liable to tax  there due to their domicile, residence, place of management, place of incorporation or any other criterion of a similar nature. However, the term does not extend to persons who are liable to tax in that State in respect only of income from sources in that State.

Fiscal-Domicile

Where an individual qualifies as a resident of both States under this definition, their residency status will be determined based on additional factors, mainly:

Permanent Home: An individual is considered a resident of the Contracting State where they have a permanent home. If the person has a permanent home in both territories, their residency is determined by the proximity of their personal and economic relations to each Contracting State.

Habitual Abode: If the permanent home test fails, either because there is no permanent home or the proximity of relations cannot be established, a person is considered a resident of the Contracting State where they have a habitual abode, i.e., where they spend a significant amount of time.

Nationality: If the individual has a habitual abode in both States, or in neither of them, he shall be deemed to be a resident only of the State of which he is a national.

If all three of these tests fail, the question of residency will be settled by mutual Convention between the competent authorities of the two territories. In the absence of such an Convention, the person shall not be considered a resident of either Contracting State and therefore cannot claim any benefits under the Convention, except for the elimination of double taxation, non-discrimination, and the mutual Convention procedure.

Specific Tax Provisions 

Article 5: Permanent Establishment

The Convention defines the term ‘Permanent Establishment’ as a fixed business location where activities are wholly or partially conducted, such as a management office, branch, office, or factory. Activities such as building sites, construction projects, or supervisory work connected to these projects are considered permanent establishments only if they last more than nine months.

If an enterprise from one Contracting State provides services in another State either through individuals present for over 183 days in a year with more than 50% of revenue from those services, or for over 183 days for the same or related projects, it's deemed to have a permanent establishment in that other State.

Certain activities are particularly excluded from this definition, such as facilities solely for storage or merchandise delivery or maintaining a business location solely for purchasing goods or gathering information for the enterprise. However, these exemptions cease to apply if the enterprise or a closely affiliated entity engages in business activities at the same location or elsewhere within the same Contracting State.

An enterprise does not automatically establish a permanent establishment in a Contracting State solely because it conducts business there through an independent broker or agent, or due to control relationships between companies from different territories.

Article 6: Income from Immovable Property

Article 6 of the convention states that income from immovable property may be taxed in the State in which the property is situated. The term ‘immovable property’ is defined in the same way as it is under the law of the Contracting State in which the property is situated. However, the term clearly excludes ships, boats and aircraft.

For the purposes of Convention, the income could origin via the direct use, letting or use in any form of immovable property, whether by individuals or enterprises.

Article 7: Business Profits

Typically, the profits of an enterprise of a Contracting State are only taxable in that State. However, if the enterprise carries on business in the other Contracting State through a permanent establishment there, the profits of the enterprise may be taxed in the other State, but only the profits directly or indirectly attributable to that permanent establishment would be taxed in the other state.

The profits that the permanent establishment would be expected to make if it were a distinct enterprise engaged in the same or similar activities under the same or similar conditions and dealing independently with the enterprise to which it belongs, shall be considered as the profits directly attributable to that permanent establishment.

Similarly, if a permanent establishment actively participates in negotiating, concluding, or fulfilling contracts made by the enterprise, the portion of the enterprise's profits from those contracts that corresponds to the permanent establishment's contribution will be considered as profits indirectly attributable to that permanent establishment.

Article 8: Air Transport

The convention says that the profits from the operation of aircraft in international traffic by an enterprise of a Contracting State should not be taxed in the other Contracting State. This provision would apply in respect of participation in pools of any kind by enterprises engaged in air transport.

Air-transport - UK-India Double Taxation

Where a gain is made by an enterprise from the disposal of aircraft owned and operated by the enterprise, that gain is taxable only in that State where disposal is made.

Article 9: Shipping

Similar to Air transport, the income of an enterprise from the operation of ships in international traffic is taxable only in that State. For the purposes of the convention, income from operation of ships includes income earned from the rental on a bareboat basis of ships if such rental income is incidental to the income.

Article 10: Associated Enterprises

As per Article 10 of the Convention, an appropriate adjustment must be made by the two states in regard to the tax on profits from associated enterprises. The article applies in two scenarios:

  • When an enterprise from a Contracting State is directly or indirectly involved in the management, control, or capital of an enterprise in the other Contracting State, or
  • When the same persons are directly or indirectly involved in the management, control, or capital of enterprises in both Contracting States.

If either of these conditions is met and the terms between the two enterprises differ from those between independent enterprises, resulting in unreported profits, those profits may be added to the taxable profits of the enterprise.

Additionally, if a Contracting State taxes profits of its enterprise that have already been taxed by the other Contracting State —and those profits would have accrued to the first enterprise under independent conditions—the other Contracting State will adjust the tax amount appropriately. This adjustment will consider the other provisions of the Convention, and the competent authorities of both Contracting States will consult each other if needed.

Article 11: Dividends

Dividends paid by a company in one Contracting State to a resident of the other Contracting State can be taxed in that other Contracting State. However, these dividends can also be taxed in the Contracting State where the company paying the dividends is based, but if the recipient is a resident of the other Contracting State:

  • the tax cannot exceed 15% of the gross amount of the dividends where those dividends are paid out of income derived directly or indirectly from immovable property by an investment vehicle which distributes its income annually.
  • 10 % of the gross amount of dividends, in all other cases.

When a company from one Contracting State earns profits or income from the other Contracting State, that other Contracting State cannot tax the dividends paid by the company, except if the dividends are paid to a resident of that other Contracting State or if the holding related to the dividends is connected to a permanent establishment in that Contracting State. Additionally, the other Contracting State cannot impose a tax on the company's undistributed profits, even if those profits originate from within that Contracting State.

Article 12: Interest

Interest earned in one Contracting State and beneficially owned by a resident of the other Contracting State may be taxed in that other Contracting State. However, the Contracting State where the interest arises can also tax it, but if the beneficial owner is a resident of the other Contracting State, the tax cannot exceed 15% of the gross interest amount. However, in certain circumstances the 15% rule does not apply, specifically:

  • If the beneficial owner is exempt from tax on such income in the Contracting State where he is a resident.
  • The beneficial owner sells or makes a contract to sell the holding from which the interest is derived within three months of the date of acquiring the holding.
  • if the interest is paid to a bank engaged in bona fide banking business, which is a resident and the beneficial owner of the interest, the tax in the State where the interest originates shall not exceed 10% of the gross amount.
  • If the interest is paid to the Government, a political subdivision, local authority, or the Reserve Bank of India of one of the Contracting States, it shall be exempt from tax in the State where it arises.
  • Interest arising in India and paid to a resident of the United Kingdom, if beneficially owned and paid on a loan or debt-claim guaranteed or insured by the UK's Export Credits Guarantee Department, shall be exempt from tax in India.
  • Interest arising in the United Kingdom which is paid to and beneficially owned by a resident of India shall be exempt from tax in the United Kingdom if it is paid in respect of a loan made, guaranteed or insured, or any other debt-claim or credit guaranteed or insured by the Export Credits and Guarantee Corporation of India and/or Export-Import Bank of India.

Moreover, these provisions do not apply if the beneficial owner, a resident of one Contracting State, has a permanent establishment in the other Contracting State where the interest arises and the debt-claim is connected with this establishment; in such cases, the business profits article will apply. Interest is considered to arise in the Contracting State where the payer is a resident, but if the payer has a permanent establishment in a Contracting State where the debt-claim was incurred, the interest is deemed to arise in the Contracting State of the permanent establishment.

Article 13: Royalties And Fees for Technical Services       

Royalties and fees for technical services arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. However, the laws of the State may lead to such royalties being taxed in the Contracting State as well. The catch here is that where the beneficial owner of the royalties is a resident of the other Contracting State, the tax must not exceed:

i)

During the first five years for which the Convention has effect:

  • 15% of the gross amount of such royalties or fees for technical services when the payer of royalties is the Government of the Contracting State.
  • 20% of the gross amount of such royalties in all other cases

ii)

During subsequent years, 15% of the gross amount of such royalties or technical fees.

Typically, Royalties are deemed to arise in the Contracting State where the payer is a resident. However, if the payer has a permanent establishment in a Contracting State and the liability to pay the royalties is connected to that establishment, the royalties are deemed to arise in the Contracting State of the permanent establishment.

Article 14: Capital Gains

Except on the gains arising in the disposal of Air Transport (Article 8) and Shipping (Article 9) of the Convention, each Contracting State may tax capital gains in accordance with the provisions of its domestic law.

Article 15: Independent Personal Services

Income earned by an individual, either independently or as a member of a partnership, who is a resident of one Contracting State from professional services or other similar independent activities may be taxed in that State.

Independent-personal-services

However, such income may also be taxed in the other Contracting State if the services are performed there and one of the following conditions is met:

  • The individual is present in the other State for a total of 90 days or more during the relevant fiscal year, or
  • The individual, or the partnership, has a fixed base regularly available in the other State for performing their activities.

However, in each case, only the portion of the income attributable to those services performed in the other State may be taxed there.

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.

Article 16: Dependent Personal Services

Except on the income discussed elsewhere, the salaries, wages and other similar remuneration derived by a resident of a Contracting State is taxable only in that State. However, if the employment is performed on the other State, the remuneration derived therefrom may be taxed in that other State. Even in such cases, the remuneration is not taxable in the other State if:

  • The individual is present in that other State for a period or periods not exceeding a total of 183 days during the relevant fiscal year,
  • The remuneration is paid by, or on behalf of, an employer who is not a resident of that other State, and
  • The remuneration is not deductible in computing the profits of an enterprise subject to tax in that other State.

Article 17: Directors’ Fees

Directors’ fees and similar payments derived by a resident of a Contracting State in his capacity as a member of the board of directors of a company which is a resident of the other Contracting State may be taxed in that other State.

Article 18: Artistes and Athletes

Income derived by a resident of one Contracting State as an entertainer (such as a theatre, motion picture, radio or television artist, or musician) or as a sportsperson from personal activities performed in the other Contracting State may be taxed in that other Contracting State.

Additionally, if the income from personal activities performed by an entertainer or sportsperson is paid to another person rather than to the entertainer or sportsperson directly, that income may still be taxed in the Contracting State where the activities are performed.

Article 19: Governmental Remuneration and Pensions

Remuneration, other than a pension, paid by the Government of a Contracting State to an individual who is a national of that State for services rendered in the discharge of governmental functions in the other Contracting State shall be exempt from tax in the other Contracting State.

Any pension paid by the Government of a Contracting State to an individual for services rendered to that Government shall be taxable only in that Contracting State.

Article 20: Pensions and Annuities

Any pension, except the one on Article 19, or annuity paid to a resident of a Contracting State is only taxable in the State where it arises.

Pensions-and-annuities

The term ‘pension’ means a periodic payment made in consideration of past employment or by way of compensation for injuries received in the course of performance of employment or any payments made under the social security legislation of either Contracting State.

Article 21: Students and Trainees

An individual who is a resident of a Contracting State, or was a resident of that State immediately before visiting the other Contracting State, and who is temporarily present in that other State for the primary purpose of:

  • studying at a university or other accredited or recognised educational institution in that other Contracting State; or
  • securing training required to qualify them to practice a profession or a professional specialty; or
  • studying or conducting research as a recipient of a grant, allowance, or award from a governmental, religious, charitable, scientific, literary, or educational organisation.

shall not be subject to tax by that other Contracting State in respect of:

  • gifts from abroad for the purposes of their maintenance, education, study, research, or training,
  • the grant, allowance, or award, and
  • income from personal services rendered in that other Contracting State (other than services rendered by an articled clerk or other person undergoing professional training to the person or partnership to whom they are articled or who is providing the training) not exceeding the sum of 750 pounds sterling or its equivalent in Indian currency during any fiscal year.

However, the exemption is only extended for such period of time as may be reasonably or customarily required for the purpose of the visit, but in no event shall any individual benefit from the exemption for more than 5 years.

An individual who is a resident of a Contracting State, or was a resident of that State immediately before visiting the other Contracting State, and who is temporarily present in that other State for a period not exceeding 12 months, as an employee of, or under contract with, a resident of the first-mentioned Contracting State, for the primary purpose of:

  • acquiring technical, professional, or business experience from a person other than that resident of the first-mentioned Contracting State, or
  • studying at a university or other accredited or recognised institution in that other Contracting State.

shall not be subject to tax by that other Contracting State on their income from personal services performed in the other Contracting State for that period in an amount not exceeding 1,500 pounds sterling or its equivalent in Indian currency.

An individual who is a resident of a Contracting State, or was a resident of that State immediately before visiting the other Contracting State, and who is temporarily present in that other State for a period not exceeding 12 months as a participant in a program sponsored by the Government of the other Contracting State, for the primary purpose of training, research, or study, shall not be subject to tax by that other Contracting State in respect of payments made by the Government of the first-mentioned Contracting State for the purposes of their maintenance, training, research, or study.

Article 22: Teachers

An individual who visits a Contracting State for a period not over two years for the purpose of teaching or engaging in research at a university, college, or other recognised educational institution in that State, and who was immediately before that visit a resident of the other Contracting State, shall be exempt from tax by the first-mentioned Contracting State on any remuneration for such teaching or research for a period not exceeding two years from the date of their first visit for this purpose.

This Article shall apply to income from research only if such research is undertaken by the individual in the public interest and not primarily for the benefit of some other private person or persons.

Article 23: Other income

Income beneficially owned by a resident of one Contracting State, other than income from trusts or estates of deceased persons and not covered by other Articles in the Convention, is taxable only in that State.

However, if the income (excluding income from immovable property) is connected with a business or independent personal services conducted in the other Contracting State through a permanent establishment or fixed base, it may be taxed in that other State. Additionally, income not addressed in the Convention and arising in the other Contracting State may also be taxed in that other State.

Special Provisions

Article 24: Elimination of Double Taxation

As per Article 24 of the Convention, the double taxation will be eliminated from the Contracting States as follows:

In the UK:

  • Indian tax paid on profits, income, or gains from Indian sources (excluding certain dividends) shall be credited against UK tax on the same income.
  • For dividends paid by an Indian company to a UK company holding at least 10% voting power, the credit also includes Indian tax on the profits from which the dividend is paid.

In India:

  • UK tax paid on income from UK sources, which is also taxed in India, shall be credited against Indian tax payable on that income.
  • The credit amount in India cannot exceed the proportion of Indian tax attributable to the income taxed in both countries.

If the resident of India is subject to surtax, the tax credit is applied first against income tax payable in India, with any excess applied against surtax.

Additionally, the relief from United Kingdom tax is not given if the income relates to a period starting more than 10 fiscal years after the deduction in computation of taxable income.

Article 25: Partnerships

Article 25 titled ‘Partnerships’ has been removed from the Convention.

Article 26: Non-Discrimination

Article 26 of the Convention outlines several principals related to taxation between Contracting States. It addresses that the nationals of one Contracting State shall not face taxation or requirements in the other Contracting State that are more burdensome than those faced by nationals of the latter State in the same circumstances. The same applies to taxation on permanent establishment of an enterprise, interest, royalties, etc.

However, the article does not require either Contracting State to grant the same tax benefits to non-residents as those granted to residents or nationals.

Article 27: Mutual Convention Procedure

If a person finds that actions of either or both Contracting States result in taxation not aligned with the Convention, they have the right to present their case to the competent authority of the Contracting State of their residency. The case must be presented within three years from the first notification of the action leading to non-compliant taxation.

The competent authority will work to resolve the issue through mutual Convention with the competent authority of the other Contracting State, seeking to prevent taxation that contravenes the Convention. Any Convention reached will be enforced irrespective of domestic law limitations.

Mutual-Convention-Procedure

The competent authorities of the Contracting States will collaborate to address any interpretation or application challenges arising from the Convention and work towards eliminating double taxation not explicitly covered. They have the authority to communicate directly to negotiate an Convention, and if a mutual resolution cannot be achieved, alternative forms of resolution may be explored.

Article 28 — Exchange of Information

Article 28 of the Convention is focused on exchanging of relevant information between the competent authorities of the Contracting State. As per the Convention, the relevant information will be exchanged for enforcing the provisions of the Convention. The article also stresses that the information received by a Contracting State must be treated as secret, similar to domestic tax information.

If a Contracting State requests information, the other Contracting State cannot refuse to supply it, and must use its measures to obtain it, even if it doesn't need it for its own tax purposes.

However, the territories are not obligated to do the following:

  • Carry out administrative measures that violate the laws or administrative practices of either Contracting State.
  • Supply information that is not obtainable under the laws or normal administrative practices of either Contracting State.
  • Provide information that would reveal trade secrets or contravene public policy.

However, the limitations to supply of information should not be solely due to the fact that the information is held by a bank, other financial institutions, nominee acting in an agency, etc.

Article 28A — Tax Examination Abroad

Where a request is made by a competent authority of a Contracting State to enter into the Other State for interview and records examination purposes, the competent authority of the other State may allow the representatives of the competent authority to do so. However, the competent authority must notify the other State of the time and place of the meeting with the concerned individuals.

Likewise, the requested State may allow its representatives to be present at the appropriate part of a tax examination in the Contracting State at the request from the requesting State.

If such a request is accepted, the competent authority of the requested State must notify the other State of the acceptance. It's important to note that all decisions regarding how the tax examination is conducted will be made solely by the requested State that is conducting the examination.

Article 28B — Assistance in the Collection of Taxes.

The Contracting States agree to assist each other in the collection of revenue claims in respect of taxes governed by the Convention. When a revenue claim of one Contracting State is enforceable under its laws and is owed by a person who cannot prevent its collection under those laws, the competent authority of that State may request the competent authority of the other Contracting State to collect the claim. The other State will collect the revenue claim in accordance with its own laws as if it were a revenue claim of that State.

Importantly, a revenue claim accepted by a Contracting State for the purpose of collection or conservancy shall not be subject to time limits or priority rules that apply to domestic revenue claims in that State.

However, the provisions of this Article should not be interpreted in a way that imposes on a Contracting State the following:

  • Perform actions against its laws or administrative practices.
  • Undertake actions contrary to public policy.
  • Assist if the requesting Contracting State has not used all reasonable collection measures.
  • Assist if the administrative burden outweighs the benefit.
  • Assist if the taxes in question are considered contrary to generally accepted taxation principles.

Article 28C — Limitation of Benefits

The benefits provided by this Convention will not be accessible to a resident of a Contracting State, nor will they apply to any transaction undertaken by such a resident, if the primary purpose or one of the main purposes behind the establishment of such a resident or the transaction conducted by them was to gain advantages under this Convention.

However, this restriction does not apply if it is demonstrated that granting that benefit in such circumstances aligns with the intent and purpose of the relevant provisions of this Convention.

Article 29: Diplomatic and Consular Officials

The provisions in this Convention are not to affect the privileges of diplomatic or consular officials under the international law’s general rules.

An individual who is a member of the diplomatic, consular, or permanent mission of a Contracting State situated in the other Contracting State, and who is liable to tax in that other State only if they earn income from sources within that State, shall not be considered a resident of that other State for the purposes of this Convention.

Final Provisions

Article 30: Entry into Force

It is agreed that each of the Contracting States would notify the other of the completion of the procedures required by law to bring the Convention into force. Upon confirmation, the Convention took effect as follows:

In the United Kingdom:

  • For income tax and capital gains tax, changes apply to any year of assessment beginning on or after 6th April in the calendar year following the later of the notifications.
  • For corporation tax, changes apply to any financial year beginning on or after 1st April in the calendar year following the later of the notifications.
  • For petroleum revenue tax, changes apply to any chargeable period beginning on or after 1st January in the calendar year following the later of the notifications.

In India:

  • For income arising in any fiscal year beginning on or after 1st April of the calendar year following the later of the notifications.

Article 31: Termination

The Convention, as agreed, will remain in force until one of the Contracting States terminates it. Both of the Contracting States are free to do so by giving a notice of termination at least six months before the end of a calendar year commencing after the expiration of ten years from the date of entry into force of the Convention.

Termination-UK-India Double Taxation

At termination, the Convention would cease to have effect in the United Kingdom as follows:

  • For income tax and capital gains tax, changes take effect for any year of assessment starting from 6th April in the calendar year following the year in which the notice is issued.
  • For corporation tax, changes apply from any financial year starting from 1st April in the calendar year following the year in which the notice is issued.
  • For petroleum revenue tax, changes apply from any chargeable period starting from 1st January in the calendar year following the year in which the notice is issued.

Likewise, the convention will cease to have effect in respect of income arising in any fiscal year beginning on or after the first day of April next following the calendar year in which the notice is given, in India.

Conclusion

In conclusion, the Double Taxation Agreement (DTA) between the United Kingdom and India serves as a comprehensive framework, governing tax matters ranging from fiscal residency determination to specific taxation of income streams like dividends, interest, royalties, and capital gains.

The Agreement ensures that individuals and enterprises operating in both territories are not subject to double taxation, providing mechanisms for tax relief and dispute resolution through Mutual Agreement Procedures and arbitration. Additionally, it promotes non-discrimination, fairness, and transparency in tax matters, while facilitating the exchange of information and cooperation in tax collection between the competent authorities of both territories.

Susan Basnet
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