NEW DELHI: Indian Central Board of Direct Taxes (CBDT) said in a statement dividends declared by a foreign company outside India on shares that derived substantial value from assets in India cannot be brought to tax within the country.
Such dividends “would not be deemed to be income accruing or arising in India”, clarifies the circular.
The clarification will go a long way in allaying apprehensions of foreign investors that Indian tax authorities may extend the application of ‘indirect transfer’ provisions introduced in Budget 2012 to cover dividend income declared by a foreign company outside India.
In its latest circular, CBDT has made it clear that declaration of a dividend by a foreign company — whose shares derive value substantially from assets situated in India — does not have the effect of transfer of any underlying assets located in India.
Therefore, such dividends “will not be deemed to be income accruing or arising in India” by virtue of Explanation 5 to Section 9(1)(i) of Income Tax Act (Indirect transfer of shares), it says.
Aseem Chawla, Partner, MPC Legal, said CBDT’s clarification recognizes that taxation of dividend income declared by a foreign company under Section 9 (of the Income Tax law) will result in unintended consequences and contrary to the settled rule of taxation.
According to the circular, the intended purpose of Budget 2012 amendment to Section 9 (indirect transfer) was to deal with situations where the effect was transfer — director or indirectly —of the underlying assets located in India.
Therefore, distributions made by foreign companies in the nature of dividend, achieve clarity to the extent of not falling under Section 9, Chawla said.
Milind Kothari, Managing Partner and Head-Direct Tax, BDO India LLP, said CBDT’s clarification is a “good move” as it clears the air on taxability (under indirect transfer) of dividends declared by foreign companies outside India.
Meanwhile, PwC India said the latest circular may be useful where dividends are paid by offshore funds to their investors/ limited partners.
