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India-United States Double Taxation Avoidance Agreement (DTAA)

The Double Taxation Avoidance Agreement (DTAA) between the Republic of India and the United States of America (USA) for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income came into force on December 18, 1990, following notifications issued by both contracting states.

Applicability of the DTAA

The treaty covers the following types of taxes:

In the United States:

  • Federal income taxes imposed by the Internal Revenue Code (excluding accumulated earnings tax, personal holding company tax, and social security taxes)
  • Exercise taxes imposed on insurance premiums paid to foreign insurers
  • Exercise taxes imposed with respect to private foundations (to the extent that risks covered by such premiums are not reinsured with a person not entitled to exemption from such taxes under this or any other tax treaty)

In India:

  • Income-tax, including any surcharge thereon (excluding income-tax on undistributed income of companies under the Income-tax Act)
  • Surtax

Key Takeaways

  1. Multilateral Agreement: India has signed a multilateral agreement with the USA, requiring the submission of country-by-country (CbC) reports. CbC reports provide information on financial transactions made by multinational corporations in other countries, promoting transparency and sharing information about tax-avoidance transactions between the two countries.
  2. Residential Status: The general rule for determining residency is where the permanent home is available. The DTAA provides other general rules for determining residential status.
  3. Interest Income: Tax on interest income is levied not only by the state of residence but also by the state where the income is generated. The tax should not exceed 15% of the gross amount of interest unless the taxpayer uses at least 10% of the interest for repaying a loan granted by a bank or financial institution.
  4. Dividends: If dividends are paid by an Indian company to a US resident, the dividends are taxable in the USA. However, the dividends are also taxed in India, subject to prescribed limits.
  5. Capital Gains: Capital gains are taxable as per the domestic laws of the respective states.
  6. Immovable Property Income: Income from immovable property is taxed in the state where the property is situated.
  7. Tax Credits: The USA allows its residents a credit against US tax for income tax paid to India, and vice versa.
  8. Withholding Tax Rates:
    • Dividends: 15% if the recipient holds at least 10% of the voting stock; 25% in other cases.
    • Interest: 10% if a bank or similar institute grants the loan, 15% for other cases.
    • Royalty: 10% or 15%.
    • Fees for Technical Services: 10% or 15%.

Significance of DTAA

The DTAA applies to residents of one or both contracting states and offers taxpayers the benefit of lower withholding tax, allowing for reduced tax deducted at source (TDS) on interest, royalty, or dividend incomes in India. The agreement facilitates transparency and cooperation in tax matters between India and the USA.

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To know more about DTAA relations between India and United States of America, please download our Guide.