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CA Final · Direct Tax Laws & International Taxation · Overview of Model Tax Conventions

Kaveri Pharma Ltd, an Indian company, owns 30% of the shares of Lumen Labs BV, a company resident in a treaty country. The treaty follows OECD Model Article 10 and caps dividend withholding at 5% where the beneficial owner is a company holding at least 25% of the capital, and at 15% in all other cases. Lumen Labs declares a dividend of Rs 40,00,000 to Kaveri. What is the maximum tax the source country may levy under the treaty?

The maximum source-country tax is Rs 2,00,000. Kaveri is a company holding 30% of the capital, meeting the 25% threshold for the lower treaty rate of 5%. Applying 5% to the Rs 40,00,000 dividend gives Rs 2,00,000. The 15% rate applies only to other shareholders.

  1. ARs 2,00,000Correct
  2. BRs 6,00,000
  3. CRs 4,00,000
  4. DNil

Explanation

Kaveri is a company holding 30%, which is at least 25% of the capital, so the 5% rate applies. Tax = 5% x Rs 40,00,000 = Rs 2,00,000. Rs 6,00,000 would wrongly apply the 15% general rate.

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