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

Meera Pvt Ltd, resident of India, owns 30% of the shares of Lotus Inc., a resident of State Y. Lotus Inc. pays a dividend of 1,00,000 to Meera. The India-State Y treaty follows the OECD Model, with a 5% rate where the beneficial owner is a company holding at least 25% of the capital and 15% in other cases. State Y's domestic withholding rate is 20%. What is the maximum tax State Y can levy on this dividend?

State Y can levy at most 5,000. Meera is a corporate beneficial owner holding 30%, which exceeds the 25% threshold, so the lower 5% treaty rate applies to the 1,00,000 dividend. The higher 15% and 20% domestic rates are not applicable.

  1. A20,000
  2. B15,000
  3. C5,000Correct
  4. DNil

Explanation

Meera is a company holding 30%, above the 25% threshold, so the 5% treaty rate applies. The tax is 5% of 1,00,000 = 5,000. The 15% rate is for other cases, and the 20% domestic rate is overridden by the treaty where it is more beneficial.

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