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

Under the OECD Model Convention, Article 10 limits source-state tax on dividends. Indra Pvt Ltd, resident of State A, owns 30% of the capital of Soma Ltd, a resident of State B, and receives a dividend of Rs 10,00,000. Assume the treaty follows the OECD Model rates, where the beneficial owner is a company holding directly at least 25% of the capital. What is the maximum tax State B can levy?

State B can tax at most Rs 50,000. Indra holds 30% directly, meeting the 25% threshold, so the OECD Model cap of 5% of the gross dividend applies. Five per cent of Rs 10,00,000 is Rs 50,000; the 15% rate applies only to smaller holdings.

  1. ARs 50,000Correct
  2. BRs 1,50,000
  3. CRs 1,00,000
  4. DNil

Explanation

The OECD Model caps source tax at 5% of gross dividends if the beneficial owner is a company holding directly at least 25% of the capital, and at 15% in all other cases. Here 30% qualifies, so 5% of Rs 10,00,000 is Rs 50,000. Rs 1,50,000 wrongly uses the 15% rate.

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