Potential impact on Finnish companies with Indian subsidiaries
Delhi High Court renders a decision on the application of the most favored nation (MFN) clause in Indian tax treaties
26 April 2021
The Delhi High Court rendered its decision on 22 April 2021 that the withholding tax on dividend by an Indian subsidiary to its Netherlands parent company would be applicable at 5% as per India-Netherlands tax treaty’s MFN clause. According to the India-Netherlands tax treaty dividends are generally taxed at 10%. However, the MFN clause provides for that if India agrees on a lower dividend tax rate with an OECD member country, the same rate should also apply under the said tax treaty. According to the Delhi High Court’s decision, the Dutch parent company was entitled to claim the 5% treaty rate under the India-Slovenia tax treaty even though Slovenia was not a member of the OECD at the moment of entering into the treaty in 2005 but as from 2010.
The Finland-India tax treaty provides a 10% dividend tax rate but contains a similar MFN clause as that in the India-Netherlands tax treaty. The Finnish companies having subsidiaries in India should consider the impact of the ruling on the Indian dividend tax rate retrospectively and going forward.