The Finance Act, 2020 amended the provisions with respect to taxation of dividends whereby Dividend Distribution Tax (DDT) was abolished and classical system of dividend taxation was adopted. In consequence of such amendment, Dividends now paid by Indian companies are taxed in the hands of shareholders and accordingly subjected to withholding tax. Taxation and corresponding withholding tax rate under Double Taxation Avoidance Agreements (DTAAs) have always been a matter of closer scrutiny due to the complexities involved (interpretation issues, overriding provisions of DTAA as compared to domestic rates, Most Favoured Nation clause, etc). One of such debated issues is the interplay of Most Favoured Nation (MFN) clause under certain DTAAs and beneficial provisions under DTAAs with Organization for Economic Co-operation and Development (OECD) member countries. 

 

Recently, the Hon’ble High Court of Delhi in the case of Concentrix Services Netherlands B.V. and Optum Global Solutions International B.V (W.P. (C) 9051/2020 and W.P. (C) 882/2021) dealt with the issue of applicability of MFN clause i.e. Clause IV of the Protocol appended to the DTAA between India and Netherlands. Hon’ble High Court held that no separate notification is required to be issued by the Government for application of the MFN clause and it is automatically applicable on date of beneficial DTAA country becoming member of OECD.

 

This is a welcome judgment and would provide relevant clarity to taxpayers particularly with respect to remittance of dividend to non-resident shareholders and applicability of withholding tax thereon.

 

However, it is notable that MFN Clause in case of certain DTAA’s such as those entered by India with United Kingdom, Philippines, Saudi Arabia, etc. do not provide for the beneficial provisions entered with third State to be made applicable by default but rather require the countries to either request, review or consult each other on the necessity of modifying the provisions of the relevant DTAA to incorporate the beneficial provisions. Thus, considering the distinctive factors, such cases may not directly apply the ratio of the Delhi High Court Ruling.

 

It may be noted that provisions of Multilateral Instrument (MLI) have also become effective in around 40 DTAAs. Therefore, while taking recourse of DTAAs, aspects like Minimum holding period/ Shareholding threshold requirement, Principal Purpose Test, etc. may also be considered.