Article 10 - Dividends - International Taxation - Income Tax

Article 10 - Dividends As per OECD Model Tax Convention Provide Right to Residence State to tax Dividend Dividends paid by a company which is a resident of a Contracting State to a resident of the other Contracting State may be taxed in that other State. [ Para 1 of Article 10 ] Same right provided in the UN Model Tax Convention. Confers Right to the Source State However, dividends paid by a company which is a resident of a Contracting State may also be taxed in that State according to the laws of that State, but if the beneficial owner of the dividends is a resident of the other Contracting State, the tax so charged shall not exceed: a) 5 per cent of the gross amount of the dividends if the beneficial owner is a company which holds directly at least 25 per cent of the capital of the company paying the dividends throughout a 365 day period that includes the day of the payment of the dividend Computing that period , no account shall be taken of changes of ownership that would directly result from a corporate reorganisation, such as a merger or divisive reorganisation, of the company that holds the shares or that pays the dividend; b) 15 per cent of the gross amount of the dividends in all other cases. The competent authorities of the Contracting States shall by mutual agreement settle the mode of application of these limitations. This paragraph shall not affect the taxation of the company in respect of the profits out of which the dividends are paid. [ Para 2 of the Article 10 ] In the UN model Tax convention leaves this percentage to be established through bilateral negotiations. Exception of para 1 and 2 of Article 10 The provisions of paragraphs 1 and 2 shall not apply if the beneficial owner of the dividends, being a resident of a Contracting State, carries on business in the other Contracting State of which the company paying the dividends is a resident through a permanent establishment situated therein and the holding in respect of which the dividends are paid is effectively connected with such permanent establishment. In such case the provisions of Article 7 shall apply. [ Para 4 of Article 10 ] Impose restriction on other contracting state for any tax on Dividend Where a company which is a resident of a Contracting State derives profits or income from the other Contracting State, that other State may not impose any tax on the dividends paid by the company, except insofar as such dividends are paid to a resident of that other State or insofar as the holding in respect of which the dividends are paid is effectively connected with a permanent establishment situated in that other State, nor subject the company s undistributed profits to a tax on the company s undistributed profits, even if the dividends paid or the undistributed profits consist wholly or partly of profits or income arising in such other State. [ Para 5 of Article 10 ] Meaning of Dividends The term dividends as used in this Article means income from shares, jouissance shares or jouissance rights, mining shares, founders 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 State of which the company making the distribution is a resident. [ Para 3 of Article 10 ] The definition of Dividends in the both Model viz OECD and UN Model is similar. As per UN Model Tax Conventions Article 10 of the United Nations Model Convention reproduces Article 10 of the OECD Model Convention except of the following paragraphs Exception of Para 1 and 2 of Article 10 The provisions of paragraphs 1 and 2 shall not apply if the beneficial owner of the dividends, being a resident of a Contracting State, carries on business in the other Contracting State of which the company paying the dividends is a resident, through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein , and the holding in respect of which the dividends are paid is effectively connected with such permanent establishment or fixed base. In such case the provisions of Article 7 or Article 14 , as the case may be, shall apply.