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

Zenith Ltd (resident of Country P) owns 30% of the voting power of Indira Pvt Ltd (resident of Country Q) and receives a dividend of Rs 10,00,000. The treaty follows the OECD Model with Article 10(2) limits of 5% where the beneficial owner is a company holding at least 25% of the capital, and 15% in other cases. Zenith is the beneficial owner and holds 30% of the capital. Maximum tax that Country Q may levy under the treaty is:

Country Q may tax at most 5%, which is Rs 50,000, because Zenith is a company beneficially owning 30% of the capital, above the 25% threshold. The 15% rate applies only to smaller holdings.

  1. ARs 1,50,000
  2. BRs 50,000Correct
  3. CRs 3,00,000
  4. DNil, since dividends are taxable only in the residence state

Explanation

Article 10(2) allows the source state to tax dividends, capped at 5% when a company beneficially owns at least 25% of capital. Zenith holds 30%, so the cap is 5% of Rs 10,00,000 = Rs 50,000. Rs 1,50,000 applies the 15% rate, which is for smaller holdings.

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