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India-Germany Double Taxation Avoidance Agreement (DTAA)

The India-Germany Double Taxation Avoidance Agreement (DTAA) is a pivotal bilateral agreement between the governments of India and Germany. This agreement, initially signed in 1995 and subsequently amended in 2006, is designed to prevent double taxation of income and foster economic relations between the two countries.

Applicability

The DTAA is applicable to specific taxes in the contracting states:

In India:

  • Income tax, including any surcharge.
  • Wealth tax.

In Germany:

  • Einkommensteuer (income tax).
  • Körperschaftsteuer (corporation tax).
  • Vermögensteuer (capital tax).
  • Gewerbesteuer (trade tax).

Key Takeaways

Here are some essential aspects of the India-Germany DTAA:

  1. Capital Gains Exemption: Long-term capital gains from the sale of shares in Indian companies, resulting in profit to Deutsche Investitions-und Entwicklungsgesellschaft, are exempt from taxation in India.
  2. Withholding Tax: Interest income is subject to a withholding tax rate of 10%, provided the beneficial ownership test has been satisfied. Fees for technical services paid to a resident of Germany are also subject to a 10% withholding tax rate, contingent on meeting the beneficial ownership test.
  3. Permanent Establishments: The DTAA includes various forms of permanent establishments (PEs), such as construction PE, service PE, and agency PE, apart from the conventional fixed place PE. These provisions align with the United Nations Model Treaty.
  4. Taxation of Various Incomes: Other income earned in India is subject to taxation in India.
  5. Multilateral Instrument Alignment: Articles of the DTAA are in harmony with the provisions of the Multilateral Instrument to Implement Tax Treaty-related measures designed to counteract base erosion and profit shifting (BEPS).
  6. Capital Gains Taxation: The DTAA provides for the taxation of capital gains arising from the sale of shares, real estate, and other assets in the taxpayer’s country of residence, subject to specific conditions.

Inference

The India-Germany DTAA plays a pivotal role in promoting trade and investment between the two countries by offering a framework for the avoidance of double taxation and the facilitation of economic activities. This agreement has been instrumental in bolstering bilateral economic relations between India and Germany.

In addition to mitigating tax burdens and reducing withholding tax rates, the DTAA also offers a reduced dividend distribution tax. This tax is an additional levy on businesses. The treaty further includes a limitation of benefits clause, which ensures that the benefits under the agreement are accessible to eligible residents only.

Moreover, the DTAA enables tax credits for taxes paid in one country to reduce the tax liability in the other country, contributing to tax relief and fostering economic cooperation.

The inclusion of an exchange of interest clause is essential in enhancing transparency and reducing instances of tax evasion, aligning both countries with international standards.

For comprehensive legal advice or additional information about the India-Germany Double Taxation Avoidance Agreement or other legal matters, please do not hesitate to contact Chandrawat & Partners. Our legal experts specialize in international tax agreements and are dedicated to providing tailored legal assistance to meet your specific needs.

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To know more about DTAA relations between India and Germany, please download our Guide.

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