DTAA Between India and UK: An Overview of the Double Taxation Avoidance Agreement
Double Taxation Avoidance Agreements (DTAAs) are crucial treaties signed between two or more countries to avoid the burden of paying taxes twice on the same income. One such significant agreement exists between India and the United Kingdom (UK), known as the India-UK DTAA. This agreement ensures that individuals and businesses operating between these two nations do not face the hardship of double taxation and promotes cross-border trade, investment, and economic cooperation.
Double taxation occurs when the same income is taxed in two different countries. This typically happens in cases where:
A person resides in one country but earns income in another.
A company operates in multiple jurisdictions.
Cross-border services or dividends, interest, and royalties are involved.
For example, an Indian resident earning dividends from a UK company may be taxed both in India and the UK. Without a DTAA between india and uk, this could lead to excessive tax liability and discourage international economic activity.
The India-UK DTAA was signed in 1993 and has undergone various amendments to address changes in international taxation rules and the economic relationship between the two countries. It outlines how specific types of income will be taxed in each country and who has the primary right to tax that income.
The key objectives of the India-UK DTAA are:
To prevent double taxation of income.
To promote transparency and cooperation between tax authorities.
To provide certainty and legal backing to taxpayers regarding taxation rules.
To prevent tax evasion and avoidance.
Here are the notable provisions and articles in the India-UK DTAA:
The DTAA applies to persons who are residents of one or both countries. It covers various types of taxes including:
In India: Income Tax and any surcharge.
In the UK: Income Tax, Corporation Tax, and Capital Gains Tax.
Taxation is based on the residential status of the taxpayer. A person or company is considered a resident of a country if they meet the criteria specified in that country’s tax laws.
In cases of dual residency (where a taxpayer is a resident of both countries), tie-breaker rules in the DTAA help determine residency for tax purposes.
Income derived from immovable property (like rent or sale of real estate) is taxable in the country where the property is situated. Hence, if a UK resident earns rent from a property in India, it will be taxed in India.
Business profits are taxable only in the resident country unless the enterprise has a Permanent Establishment (PE) in the other country. If a UK company operates in India through a branch office (PE), the profits attributable to that office will be taxed in India.
Dividends paid by a company resident in one country to a resident of the other may be taxed in both countries. However, the withholding tax rate is capped at 10% in the source country under the DTAA.
Interest arising in one country and paid to a resident of the other is taxable in both countries, but the withholding tax in the source country is limited to 15%.
Royalties and fees for technical services are also subject to withholding tax in the source country, but the rate is capped at 15% under the agreement.
Capital gains are generally taxed in the country where the property or investment is located. For example, if a UK resident sells shares of an Indian company, the gains may be taxable in India, subject to domestic tax laws and treaty provisions.
Both India and the UK offer foreign tax credits or exemptions to eliminate double taxation. This means the tax paid in the source country can be claimed as a credit in the resident country, reducing the overall tax burden.
The treaty includes provisions for the exchange of tax-related information between India and the UK. This ensures transparency, helps prevent tax evasion, and supports enforcement of tax laws.
The DTAA between India and the UK plays a vital role in facilitating smooth economic relations between the two countries. By avoiding the issue of double taxation and offering clarity on tax liabilities, it encourages international mobility, investments, and trade.
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