Will international treaty benefits apply to dividend income?

I am a non-resident Indian (NRI)) and have my own business in Dubai. I have invested in shares as well as mutual funds in India. I have received dividend on shares and mutual funds. Can I get any benefit of lower taxation under treaty for dividend income?

—Name withheld on request

Under the India-UAE Double Taxation Avoidance Agreement (DTAA), dividend income is addressed in Article 10. Though Article 10 makes a reference to domestic tax laws, it provides an autonomous definition of ‘dividend’, which does not rely on definition given under the Income Tax Act, 1961 (ITA). 

According to this treaty definition, dividend income from shares is clearly covered, and you are entitled to a lower rate of taxation, at 10%, instead of the customary 20% (plus applicable surcharge and cess) under the ITA.

However, it needs to be further examined whether dividend income from mutual funds is similarly covered under Article 10. 

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Besides including dividend income from shares, the definition of ‘dividend’ under Article 10 also encompasses income from ‘corporate rights,’ which is taxed in the same manner as dividends from shares. 

Although dividends from mutual funds are taxed under the ITA in the same manner as dividends from shares, they neither arise from ‘corporate rights’ nor are mutual funds taxed in India in a manner comparable to companies. 

Additionally, according to the mutual fund regulations of the Securities and Exchange Board of India (Sebi), a mutual fund is established in the form of a trust. 

As a trust, a ‘mutual fund’ does not meet the definition of a ‘company’ under the treaty since it is neither treated as a company nor as a body corporate for tax purposes under the ITA. 

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Therefore, dividends from mutual funds do not qualify as ‘dividends’ under Article 10, and are not eligible for the reduced rate of taxation of 10% under the DTAA.

Since dividends from mutual funds are not covered by Article 10, they fall within the scope of Article 22, which deals with residual income. 

According to Article 22 of the India-UAE DTAA, the taxing rights for any residual income are assigned to the UAE. Thus, dividends from mutual funds are not subject to tax in India under the treaty.

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Having stated the above, there are judicial precedents on both sides, and you should seek professional advice to examine the treaty eligibility for mutual fund dividend income in your specific case.

—Harshal Bhuta is a partner at chartered accountancy firm P.R. Bhuta & Co.

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