Application and Interpretation of Tax Treaties: formula sheet

Key formulas

Beneficial-provision rule (Section 90(2))

Tax payable = lower of (tax under the Act, tax under the treaty)

Applies only to an assessee to whom a notified agreement applies. Compare income by income. Within one income or article, take the treaty treatment or the Act treatment. Do not mix provisions selectively.

Treaty cannot create a charge

No charge under the Act → no tax, even if the treaty permits India to tax

The treaty allocates or restricts taxing rights. The charge must exist in domestic law first.

Treaty eligibility

Treaty claim needs: TRC (Section 90(4)) and prescribed information (Section 90(5)) — necessary, not sufficient

A non-resident without a TRC and the prescribed information cannot claim treaty benefit. Even with them, the claim also depends on the treaty's own articles (including any limitation-of-benefits clause) and on GAAR. Residence is decided under the treaty's residence article.

GAAR and treaty (Section 90(2A))

GAAR applies notwithstanding Section 90(2)

The treaty benefit can be denied only if the arrangement is an impermissible avoidance arrangement under GAAR.

Scope of Section 90 agreements

Relief + avoidance of double tax + exchange of information + recovery of tax

Four purposes for which the Central Government may enter agreements.

Section 90A

Agreement between specified associations of India and a specified territory outside India → adopted by notification

Used where there is no government-to-government treaty, for example with a specified territory.

OECD vs UN Model

OECD = residence-leaning; UN = source-leaning

UN Model has a wider PE (building site after 6 months, against 12 months in OECD) and more source taxation of royalties and fees.

Vienna Convention, Article 31 (general rule)

Interpret in good faith = ordinary meaning of terms + context + object and purpose

Context includes text, preamble, annexes, related agreements and instruments, and later agreement or practice between parties.

Vienna Convention, Article 32 (supplementary means)

Use preparatory work and circumstances of conclusion only to confirm Article 31 or if meaning is ambiguous, obscure, manifestly absurd or unreasonable

Article 32 does not override a clear Article 31 result.

Article 3(2) of the OECD/UN Model

Undefined term = meaning under the law of the applying State at the time of application, unless the context otherwise requires

Under the Models, tax law meaning prevails over meaning under other laws. Context can displace the domestic meaning. Treaty wording may vary, and some treaties freeze the meaning at signing.

Treaty versus domestic law in India

Section 90(2) of the 1961 Act (section 159 of the Income-tax Act, 2025): assessee may choose the more beneficial of the Act or the treaty

Treaty cannot be used to impose a tax burden that the domestic law does not impose.

Weight of OECD Commentary

OECD Commentary = persuasive aid, not binding law

Strongest where the treaty follows the OECD Model and the commentary existed or is consistent with the text at signing.

Treaty resident (Article 4(1))

Treaty resident = person liable to tax in a state by reason of domicile, residence, place of management or similar criterion

Liability to tax under domestic law is the entry ticket. Income-only source-based liability usually does not make a person a treaty resident.

Individual tie-breaker order

Permanent home → Centre of vital interests → Habitual abode → Nationality → Mutual agreement

Apply in sequence. Move to the next test only if the current one gives both states or neither state.

Permanent home test

Resident of the state where a home is available at all times, continuously and not for a short stay

If a home is available in both states, or in neither, go to the next test.

Centre of vital interests

Closer personal relations + closer economic relations

Look at family, social ties, occupation, business, property and where affairs are administered.

Non-individual tie-breaker (older treaty wording)

Resident of the state where place of effective management is situated

POEM means where key management and commercial decisions for the business as a whole are, in substance, made.

Non-individual tie-breaker (OECD 2017 wording)

Competent authorities decide by mutual agreement, considering POEM, place of incorporation and other factors

If no agreement, treaty benefits are not available except as the authorities agree.

Treaty eligibility documents

TRC from the other country (condition for claiming treaty benefit) + Form 10F only for prescribed particulars not in the TRC

Furnished by the non-resident claiming relief. The TRC is a condition, not standalone proof of eligibility. Section and rule numbers depend on the Act applicable to the year (1961 Act: s.90(4) and Rule 21AB); check the current Act and Rules.

Article 5 general test (fixed place PE)

PE = fixed place of business + at the enterprise's disposal + business carried on wholly or partly through it

All three elements are needed. A mere presence of a few days, or a place with no business activity, may fail the test.

Construction PE

Building site / construction / assembly / installation project continuing for more than the treaty period (commonly 6 or 9 months, or 183 days in some treaties) = PE

Use the period in the specific treaty. Check whether connected projects are aggregated and how the period is counted.

Service PE

Services furnished through employees or other personnel for more than the treaty period (e.g. 90 or 183 days in a given period) = PE

Present in the UN Model and many Indian treaties, not in the OECD Model. Read the treaty's day count and period.

Agency PE

Dependent agent + habitually concludes contracts (or plays principal role in concluding them) on behalf of enterprise = PE

An independent agent acting in the ordinary course of its business does not create a PE. Wording varies across treaties.

Preparatory or auxiliary exclusion

Storage, display, delivery, purchase of goods, or other preparatory or auxiliary activity only = no PE

Check whether the treaty's exclusion list is subject to the 'preparatory or auxiliary' condition.

Article 7 attribution

Taxable profit in source country = profit attributable to the PE, treating PE as a separate and independent enterprise dealing at arm's length

Deduct expenses incurred for the PE's business, including a reasonable share of executive and general administrative expenses, as the treaty permits.

No PE rule

No PE → business profits taxable only in the residence country

Different rules apply to royalties and fees for technical services, which have their own treaty articles.

Treaty vs domestic rule

Tax in source state = lower of (domestic rate, treaty rate)

Apply to each income separately. Treaty relief is available only where the recipient is a resident of the treaty partner and is eligible.

Source-state tax on dividend, interest, royalty or FTS

Tax = Gross income × applicable rate (plus surcharge and cess if the rate is the domestic one)

Treaty rates are usually applied on gross income and are generally not increased by surcharge and cess. Follow the instruction given in the question.

Beneficial ownership test

Treaty cap applies only if recipient = beneficial owner

A conduit, nominee or agent with no right to use and enjoy the income does not qualify.

Dividend rate tiering

Lower rate if holding ≥ stated % of payer's capital; otherwise higher rate

The percentage and the rates are treaty-specific. Take them from the question.

Capital gains allocation (Article 13)

Immovable property: source state. PE movable property: source state. Shares: as per treaty. Other assets: residence state

Immovable property is taxable where it is situated. Share gains depend on the exact treaty text.

Credit in the residence state

Credit = lower of (foreign tax paid, tax payable on that income in residence state)

Links to the foreign tax credit rules under the Act. The method of relief (credit or exemption) depends on the relief article of the treaty concerned.

Article 15 short-stay exemption (all three conditions)

Source state cannot tax salary if: (a) stay ≤ 183 days in the specified period AND (b) employer is not a resident of the source state AND (c) cost is not borne by a PE/fixed base in the source state

All three must be satisfied together. On the model wording, a stay of exactly 183 days still qualifies. Check whether the treaty counts days in the fiscal year, the tax year or any 12-month period, and follow the treaty given in the question.

Article 14 independent services (UN-style)

Source state may tax only if fixed base regularly available OR stay amounts to or exceeds 183 days (UN Model wording); tax only on income attributable to that base or the services there

Treaty wording varies. Some treaties say 'exceeding 183 days', some use a different day limit, and some use a 'furnishing of services' test. Do not treat the boundary as universal. Follow the treaty given in the question.

Artistes and sportspersons (Article 17)

Taxable in the state where the performance takes place

Applies overriding the business profits and personal services articles. Some treaties exempt cultural exchange or state-funded visits.

Students (Article 20)

Payments from sources outside the host state for maintenance, education or training are not taxed in the host state

Applies to a person who was a resident of the other state just before the visit and is present only for education or training.

Other income (Article 21)

Residence state taxes; source state may also tax under UN-style treaties

Use only if no other article covers the income. Income effectively connected with a PE goes to the business profits article.

Exemption method

Foreign income is excluded from residence-state tax; full exemption excludes it entirely, exemption with progression uses it only to decide the rate

Rare in India's treaties. Read the treaty to see which version applies.

Ordinary credit method (limit)

Credit = lower of (a) foreign tax paid and (b) residence-state tax on that foreign income

Compute (b) at the average rate of tax on total income applied to the doubly taxed income. Credit is computed income by income and country by country, and is limited to the Indian tax on that income. Under Indian domestic rules, excess foreign tax is generally not refunded or carried forward. Follow the treaty or rule given in the question.

Unilateral relief (no Section 90 agreement)

Credit = lower of Indian tax rate and foreign tax rate × doubly taxed income

Conditions: resident of India, foreign tax paid on income that accrued or arose outside India and is also taxed in India, and no agreement under Section 90 applies to that country.

Net tax after credit

Net residence-state tax = Tax on total income − Credit allowed

Credit cannot exceed the Indian tax on that foreign income, and the foreign tax must actually be paid on income that is also taxable in India.

Principal Purpose Test

Benefit denied if: obtaining the benefit was one of the principal purposes of the arrangement, judged on all facts and circumstances, unless granting it accords with the object and purpose of the treaty

Purpose-based and fact-driven. The taxpayer can still show the benefit fits the treaty's object.

Limitation of Benefits

Benefit allowed only if the person meets the objective tests in the clause

Rule-based. Read the exact test in the treaty, such as expenditure level, listing or genuine business operations.

MLI application

MLI modifies a treaty only if: both countries are parties + the treaty is notified by both as a Covered Tax Agreement. Optional provisions apply only where both countries' choices match or are compatible, as each article requires. The minimum-standard anti-abuse provision applies regardless of matching.

For optional provisions, where choices do not match or are not compatible, the MLI provision does not apply. For the anti-abuse minimum standard, if the countries choose different ways of meeting it, they are expected to reach a mutually satisfactory arrangement. Where one chose the PPT alone and the other a different option, the PPT applies after considering any bilateral agreement. It is not a blanket rule that the PPT always prevails.

India's MLI anti-abuse choice

Minimum standard met through PPT alone

India opted for the PPT alone for Article 7 under the MLI. A simplified LOB under Art 7(6) is an optional addition that applies only if both countries choose it.

Exchange of Information

Information foreseeably relevant to apply the treaty or domestic tax laws; kept confidential

Bank secrecy or lack of domestic interest generally cannot be used to refuse, as under the OECD model wording.

MAP (Article 25)

Case presented to the competent authority of residence within the treaty time limit; authorities endeavour to resolve by mutual agreement

Time limit differs by treaty. The OECD model uses three years from first notification of the action.

Quick revision

• Under section 90(2) of the 1961 Act, the assessee is governed by the Act or the treaty, whichever is more beneficial. It is not a free pick of either. The 2025 Act carries a corresponding provision; check its section number in the current text of the Income-tax Act, 2025.
• GAAR applies even if it is less beneficial to the assessee (section 90(2A) of the 1961 Act). Treaty benefit also needs a tax residency certificate (section 90(4) of the 1961 Act) and the prescribed information. Check the corresponding 2025 Act provisions in the current text.
• Treaty benefits are for a resident of a contracting state; check residence first.
• Tie-breaker for individuals follows this order: permanent home, centre of vital interests, habitual abode, nationality, then mutual agreement. This order applies only to individuals. For companies and other persons, older Indian treaties use place of effective management. Treaties modified by the MLI or following the 2017 OECD Model use mutual agreement between the competent authorities instead. Read the treaty text to see which applies.
• Business profits of a foreign enterprise are taxable in the source state only if it has a PE there, and generally only the profits attributable to that PE. Some treaties widen this to similar business activities, so read the business profits article.
• A PE needs a fixed place of business, or a dependent agent who habitually concludes contracts, or a service or construction PE as the treaty provides.
• Preparatory or auxiliary activity does not create a PE under the usual treaty list. The MLI (anti-fragmentation rule) and the specific treaty can modify this exclusion, so check the treaty text.
• Dividend, interest and royalty usually allow both states to tax, with the source state's rate capped by the treaty.
• Beneficial ownership is often required to claim the reduced rate on dividend, interest and royalty.
• Check the treaty definition of royalty and fees for technical services; they may differ from domestic law.
• Relief for double tax is given by the exemption method or the credit method, as the treaty provides.
• Anti-avoidance rules such as GAAR and the MLI principal purpose test can deny treaty benefit.
• MAP is the route to resolve treaty disputes between the competent authorities of both states.

Common mistakes

• Saying the treaty always overrides the Act. Fix: Write that under Section 90(2) the Act applies to the extent it is more beneficial, so the assessee gets the better provision. Add that GAAR applies notwithstanding Section 90(2).
• Claiming that a treaty can make an income taxable that the Act does not tax. Fix: State that the charge must exist in domestic law. The treaty only allocates and limits taxing rights.
• Saying the OECD Commentary is binding on Indian authorities. Fix: Write that it is a persuasive aid to interpretation, with weight depending on the treaty text and the timing of the commentary.
• Applying the domestic meaning under Article 3(2) without checking the context. Fix: Always add 'unless the context otherwise requires' and test whether the treaty text or purpose points to a different meaning.
• Skipping the permanent home test and jumping to nationality. Fix: Nationality is the fourth test. Apply the tests in order and stop at the first one that gives a clear result.
• Treating the tie-breaker as changing domestic residential status. Fix: Domestic status stays the same. The tie-breaker only decides treaty residence and who gives relief.
• Taxing all the foreign company's profits in India once a PE exists. Fix: Always write 'profits attributable to the PE' and attribute separately, rather than taxing the whole enterprise's profit.
• Using a day limit from memory instead of the one in the treaty. Fix: Use the limit given in the question. If none is given, state the assumption clearly.
• Applying the treaty rate even when the domestic rate is lower. Fix: The treaty rate is a ceiling. Compare both rates and pick the lower one.
• Giving treaty benefit to a recipient that only routes the income to someone else. Fix: Test beneficial ownership separately. Look for facts such as an obligation to pass the income on and no real control over it.

Exam tips

• Write the purpose of DTAAs as a short list. Examiners reward structured points.
• For OECD vs UN, give three concrete differences and name the bias (residence vs source) first.
• In case scenarios, check TRC, residence and the charge under the Act before using the treaty. These are the usual hidden conditions.
• Always show both tax figures (Act and treaty) and name Section 90(2) when you choose the lower one.
• Mention GAAR (Section 90(2A)) and the treaty's own article for the specific income in one line to show depth.
• Write Article 31 and Article 32 separately and in order. Examiners reward the sequence.
• Always attach the phrase 'unless the context otherwise requires' when you write Article 3(2).
• For case-law answers, give the court, the year, the holding and one line of application to the facts.