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

Rohan, a resident of Country M, owns a flat in Country N, rented out and managed through a lawyer, with no fixed base. The OECD Model applies between M and N. Rohan's share of the rent is Rs 6,00,000, and he also earns Rs 4,00,000 as interest from a Country N bank, subject to a 10% treaty cap at source. Which statement is correct?

Country N may tax the rent without any treaty cap under Article 6, and may tax the interest only up to 10%, which is Rs 40,000. Country M, as residence state, gives relief for the tax paid.

  1. ACountry N cannot tax either item since Rohan is not resident there
  2. BRent is taxable only in Country M and interest only in Country N
  3. CRent from immovable property may be taxed in Country N without limit, and interest taxed by N is capped at 10%, i.e. Rs 40,000, with Country M giving reliefCorrect
  4. DRent is taxed by N only up to 10%, and interest is taxable only in Country N

Explanation

Article 6 gives the situs state unrestricted right to tax income from immovable property. Article 11 lets the source state tax interest, limited to the treaty rate of 10%, which is Rs 40,000 of Rs 4,00,000. The residence state, M, must give relief under Article 23. Saying rent is capped or interest exclusive to the source misreads the Articles.

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