INDIA- GERMANY DOUBLE TAXATION AVOIDANCE AGREEMENT

The India-Germany Double Taxation Avoidance Agreement (“DTAA”) is a bilateral agreement signed between the governments of India and Germany, aimed at preventing double taxation of income and facilitating economic relations between the two countries. The agreement was first signed in 1995 and has since been amended in 2006.  

Applicability 

The DTAA applies to the following taxes in the contracting states:

a. In India-

• the income tax, including any surcharge thereon; and
• the wealth tax.

b. In Germany-

• the Einkommensteuer (income-tax);
• the Korperschaftsteuer (corporation-tax);
• the Vermogensteuer (capital tax); and
• the Gewerbesteuer (trade tax).

Key takeaways  

1. Long-term capital gains arising to the Deutsche Investitionsund Entwicklungsgesellschalt due to alienation of shares in Indian companies, shall be exempt from taxation in India.
2. Income as interests shall be subject to a withholding tax rate of 10%, provided that the beneficial ownership test has been satisfied.
3. Fees for technical services payable to a resident of Germany, shall be subject to a withholding tax rate of 10%, provided that the beneficial ownership test has been satisfied.
4. In addition to a fixed place as permanent establishment (“PE”), the DTAA covers other forms of PEs such as construction PE, service PE and agency PE. These provisions are comparable to the United Nations Model Treaty.
5. Other incomes arising in India, shall be chargeable to tax in India.
6. Articles of the DTAA are aligned to the provisions of Multilateral Instrument to Implement Tax Treaty related measures to prevent base erosion and profit shifting.
7. The agreement provides for the taxation of capital gains from the sale of shares in companies, real estate, and other assets in the country of residence of the taxpayer, subject to the specified conditions.

Inference

Overall, the India-Germany DTAA is aimed at promoting trade and investment between the two countries by providing a framework for the avoidance of double taxation of income and the facilitation of economic activity. This agreement has also played an important role in promoting bilateral economic relations between India and Germany. Aside from tax relief and lower withholding tax rates, the DTAA additionally offers a lower dividend distribution tax which is an additional tax levied on businesses. The DTAA also consists of a limitation of benefit clause. The treaty provides for tax credit in respect of taxes paid in a country so as to reduce the tax burden on the taxpayers. Further, an exchange of interest clause has been inculcated in the DTAA on the premise that it will help both the states to comply with the international standards specifically to increase transparency and reduce instances of tax evasion.