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TAX TREATMENT OF DIVIDEND RECEIVED FROM A FOREIGN COMPANY

SAHU & ASSOCIATES:
Dividend received from an Indian company which has suffered dividend distribution tax is exempt from tax under section 10(34). However, as per section 115BBDA, in the case of a "specified assessee" dividend shall be chargeable to tax at the rate of 10% if aggregate amount of dividend received from a domestic company during the year exceeds Rs. 10,00,000. Exemption under section 10(34) is granted to dividend received from an Indian company and not to a dividend received from a foreign company. Thus, dividend from a foreign company received by an Indian resident is taxable. In this part you can gain knowledge about tax treatment of dividend received from a foreign company.

"specified assessee" means a person other than,

(i) a domestic company; or

(ii) a fund or institution or trust or any university or other educational institution or any hospital or other medical institution referred to in sub-clause (iv) or sub-clause (v) or sub-clause (vi) or sub-clause (via) of clause (23C) of section 10; or

(iii) a trust or institution registered under section 12A or section 12AA.

In common parlance "dividend" means the profits distributed by a company to its shareholders. Apart from that, i.e., dividend paid by a company to its shareholders, section 2(22)(e) gives the definition of deemed dividend.

Head of taxability and Applicable tax rate:

Dividends are charged to tax under the head "Income from other sources" and hence dividend received from a foreign company is charged to tax under the head "Income from other sources".

Dividend received from foreign company will be included in the total income of the taxpayer and will be charged to tax at the normal rates applicable to the taxpayer to his income. Normal tax rate applicable to an Indian company is 30% (plus surcharge and cess as applicable), hence, dividend received from a foreign company is charged to tax at 30% in the hands of an Indian company.

However, section 115BBD provides a concessional rate of tax in respect of dividend received by an Indian company from a foreign company in which the Indian company holds 26% or more in nominal value of the equity share capital.

By virtue of section 115BBD, dividends [as defined in section 2(22) except dividend as defined in section 2(22)(e)] received by an Indian company from a foreign company in which the Indian company holds 26% or more in nominal value of the equity share capital is charged to tax at a flat rate of 15% (plus surcharge and cess as applicable).

It should however be noted that, in the above case no deduction on account of any expenditure or allowance will be allowed from the amount of the dividend covered under section 115BBD. In other words, the gross amount of dividend (without deducting any expenditure/allowance) will be taxed at the rate of 15% (plus surcharge and cess as applicable).

Relief from double taxation:

Dividend received from a foreign company is charged totax in India as well as in the country to which the foreign company belongs. If the foreign dividend has suffered double taxation, then the taxpayer can claim double taxation relief either as per the provisions of Double Taxation Avoidance Agreement (if any) entered into with that country (if any) by the Government of India or can claim relief as per section 91 (if no such agreement exists).

To understand the tax treatment of the dividend received from a foreign company, the taxpayer should keep in mind the provisions of Income-tax Law as well as the provisions of Double Taxation Avoidance Agreement (DTAA) (if any) entered into with that country (if any).

Extract from avoidance of double taxation of income between India and USA:

1. 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.

2. However, such dividends may also be taxed in the Contracting State of which the company paying the dividends is a resident, and 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. 15 per cent of the gross amount of the dividends if the beneficial owner is a company which owns at least 10 per cent of the voting stock of the company paying the dividends.
b. 25 per cent of the gross amount of the dividends in all other cases.
Sub-paragraph (b) and not sub-paragraph (a) shall apply in the case of dividends paid by a United States person which is a Regulated Investment Company. Sub-paragraph (a) shall not apply to dividends paid by a United States person which is a Real Estate Investment Trust, and sub-paragraph (b) shall only apply if the dividend is beneficially owned by an individual holding a less than 10 per cent interest in the Real Estate Investment Trust. This paragraph shall not affect the taxation of the company in respect of the profits out of which the dividends are paid.

3. The term "dividends" as used in this Article means income from shares or other rights, not being debt-claims, participating in profits, income from other corporate rights which are subjected to the same taxation treatment as income from shares by the taxation laws of the State of which the company making the distribution is a resident ; and income from arrangements, including debt obligations, carrying the right to participate in profits, to the extent so characterised under the laws of the Contracting State in which the income arises.

4. 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 dividends are attributable to such permanent establishment or fixed base. In such case the provisions of Article 7 (Business Profits) or Article 15 (Independent Personal Services), as the case may be, shall apply.

5. 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 or a fixed base 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.

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The information contained in this article is for general information purposes only. While the article endeavours to keep the information up to date and correct, there is no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability or availability with respect to the content of the article.



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TAX TREATMENT OF DIVIDEND RECEIVED FROM A FOREIGN COMPANY