Overview of US & India Double Tax Treaty: IRS Taxation

US & India Tax Treaty

US & India Income Tax Treaty: The United States and India have entered into several different International Tax Treaties. These treaties impact how the IRS enforces US Tax law — and vice versa. The two main treaties are the Double Tax Treaty and the Foreign Account Reporting Act. The focus of this article will be the US and India Income Tax Treaty. The treaty impacts many different issues, including passive income, foreign pension (EPF), Double Taxation, and more. One important issue to keep in mind is that while the treaty is a good baseline for assessing tax issues between the respective countries, there are hidden issues (and roadblocks) to be aware of — the most common being the application of the Saving Clause. We represent many clients throughout India and the United States, who have India assets and income — including dual-citizens and residents with IRS, and India Offshore and Foreign Reporting issues and have prepared this guide to assist with common questions.

Indian Income & U.S. Tax

Even though the U.S. follows a worldwide income model, there are still tax treaty, resident-related rules that can impact the taxation of certain items, such as Dividends, Income, Pension, and Social Security.

We will focus this summary on some of the more common issues our clients confront when working to get into IRS offshore tax and reporting compliance. We have separate stand-alone articles to assist further with:

• • FATCA Compliance

  • U.S. Tax on PPF

  • Offshore Reporting of Indian Investments

*If you are interested in reading a full copy of the treaty, you can find that here.

India US Tax Treaty Article 4 (Residence)

From a Treaty Perspective, Residence is not as simple as where a person lay his head at night; it is more detailed than that.

When it involves the U.S. & India Tax Treaty, “Resident of a Contracting State” means:

• • • For the purposes of this Convention, the “resident of a Contracting State” means any person who, under the laws of that State, is liable to tax therein by reason of his domicile, residence, citizenship, place of management, place of incorporation, or any other criterion of a similar nature, provided, however, that:

• • • (a) this term does not include any person who is liable to tax in that State in respect only of income from sources in that State; and
    • (b) in the case of income derived or paid by a partnership, estate, or trust, this term applies only to the extent that the income derived by such partnership, estate, or trust is subject to tax in that State as the income of a resident, either in its hands or in the hands of its partners or beneficiaries.

Non-Technical Summary & Example on “Residence”

If a person is a resident of one of the contracting states (example India), and under India Law, the person is liable for taxes based on residence or domicile in India — then he is considered a resident of India.

IRS Technical Summary

Subsection (a): The technical explanation actually sums this up nicely: “Thus, for example, an Indian consular official in the United States, who may be subject to U.S. tax on U.S. source investment income, but is not taxable in the United States on non-U.S. income, would not be considered a resident of the United States for purposes of the Convention.”

India US Tax Treaty Article 6 Income from Real Property

This Article is relatively straightforward:

• • • Income derived by a resident of a Contracting State from immovable property (real property), including income from agriculture or forestry, situated in the other Contracting State may be taxed in that other State.

Non-Technical Summary & Example (Real Property Income)

 If a person is considered a resident of the U.S. for example, and is receiving income from certain real property located in India — it may be taxed in India.

*This does not mean a U.S. Person escapes tax on the rental income. He doesn’t, since the U.S. follows a worldwide income model — and the treaty does not say the other contracting state has “exclusive” tax rights.

India US Tax Treaty Article 10 (Dividends)

Unlike Article 6 above, Article 10 Dividends is much more complicated.

Here are the two major paragraphs:

• • • • “Dividends paid by a company which is a resident of a Contracting State to a resident of the other Contracting State may be taxed in that other State”

• • • • “However, such dividends may also be taxed in the Contracting State of which the company paying the dividends is a resident, and according to the laws of the State, but if the beneficial owner of the dividends is a resident of the other Contracting State, the tax so charged shall not exceed:
      • 15 percent of the gross amount of the dividends if the beneficial owner is a company which owns at least 10 percent of the voting stock of the company paying the dividends

• • • • 25 percent of the gross amount of the dividends in all other cases. Subparagraph (b) and not subparagraph (a) shall apply in the case of dividends paid by a United States person which is a Regulated Investment Company. “

Non-Technical Summary & Example (Dividend Income)

Dividends paid by a company that is a resident in India to a resident of the U.S., may be taxed in the U.S.

Non-Technical Summary (Dividend Non-Exclusive Taxation)

Even if the beneficial owner (you) reside in the U.S. and are receiving dividends from an Indian Company, India can still tax, but is limited to either 15% or 25%

*Exceptions and Exclusions apply

India US Tax Treaty Article 11 (Interest Income)

• • • • Interest arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State.

• • • • However, such interest may also be taxed in the Contracting State in which it arises, and according to the laws of that State, but if the beneficial owner of the interest is a resident of the other Contracting State, the tax so charged shall not exceed:
      • 10 percent of the gross amount of the interest if such interest is paid on a loan granted by a bank carrying on a bona fide banking business or by a similar financial institution (including an insurance company); and
      • 15 percent of the gross amount of the interest in all other cases.

Non-Technical Summary & Example (Interest Income)

Interest arising from India, but paid to a resident of the U.S., may be taxed in the U.S.

Non-Technical Summary (Interest Income Non-Exclusive Taxation)

Continuing from the example above, even though the U.S. can tax the income, India is not prevented from levying tax on the same income, although the tax is limited to either 10% or 15%

*Exceptions and Exclusions apply

India US Tax Treaty Article 13 (Gains)

• • • • • Except as provided in Article 8 (Shipping and Air Transport) of this Convention, each Contracting State may tax capital gain in accordance with the provisions of its domestic law.

Non-Technical Summary & Example (Capital Gains)

• • • Capital Gains is not subject to the treaty (beyond article 8) and both countries may tax Capital Gains as they see fit.

India US Tax Treaty Article 17 (Directors’ Fees)

• • • Directors’ fees and similar payments derived by a resident of a Contracting State in his capacity as a member of the board of directors of a company which is a resident of the other Contracting State may be taxed in that other State

Non-Technical Summary & Example (Directors’ Fees)

For example, Director’s Fees generated to a resident of the U.S. (Contracting State), as a result of being a Board Member of a company in India (Other Contracting State), may be taxed in India (e.g., the other state.)

India US Tax Treaty Article 19 (  Government Service Pension)

Article 19 is broken down into 2-subsections

• • • Non-Pension Government Income (Article 19)

      • (a) Remuneration, other than a pension, paid by a Contracting State or a political subdivision or a local authority thereof to an individual in respect of services rendered to that State or subdivision or authority shall be taxable only in that State. (b) However, such remuneration shall be taxable only in the other Contracting State if the services are rendered in that other State and the individual is a resident of that State who: (i) is a national of that State; or (ii) did not become a resident of that State solely for the purpose of rendering the services.

Non-Technical Summary & Example (Non-Pension Government Income)

Earnings (but not pension) paid by India, for services provided in India, shall only be taxable in India. But, it may be taxed in the U.S. if the services are rendered in the U.S., and the individual is a resident of the U.S. who:

• Nation of the U.S.
• Did not become a resident solely to render services.

Pension Income from Government Service (Article 19)

• • • • (a) Any pension paid by, or out of funds created by, a Contracting State or a political subdivision or a local authority thereof to an individual in respect of services rendered to that state or subdivision or authority shall be taxable only in that State. (b) However, such pension shall be taxable only in the other Contracting State if the individual is a resident of, and a national of, that State.

Non-Technical Summary (Pension Income from Government Service)

Any Government Pension Paid out by the Indian Government to an individual for work performed for the Indian Government can ONLY be taxed by India — but the pension may only be taxable in the U.S. if the individual is a resident and national of the U.S.

India US Tax Treaty Article 20 Private Pensions, Annuities, Alimony and Child Support

• • • Any pension, other than a pension referred to in Article 19 (Remuneration and Pensions in Respect of Government Service), or any annuity derived by a resident of a Contracting State from sources within the other Contracting State may be taxed only in the first-mentioned Contracting State.
    • Notwithstanding paragraph 1, and subject to the provisions of Article 19 (Remuneration and Pensions in Respect of Government Service), social security benefits and other public pensions paid by a Contracting State to a resident of the other Contracting State or a citizen of the United States shall be taxable only in the first-mentioned State.

Non-Technical Summary & Example (Private Pension, Annuities, Alimony & Child Support)

Aside from any government pension referred to Article 19 above (or other exceptions), any pension derived by a resident of the U.S. (contracting state) from sources within the other contracting state (India) may only be taxed in the first mentioned state (U.S.)

Article 20 Social Security Exception Summary & Example

• • • • When the money received is from social security or public pension paid by a Contracting State (India) to a resident of the other Contracting State (U.S.) or citizen of the U.S. — shall only be taxable in India.

India US Tax Treaty Article 25 Relief from Double Taxation

• • • In accordance with the provisions and subject to the limitations of the law of the United States (as it may be amended from time to time without changing the general principle hereof), the United States shall allow to a resident or citizen of the United States as a credit against the United States tax on income: (a) the income tax paid to India by or on behalf of such citizen or resident

Non-Technical Summary & Example (Relief From Double Taxation)

The U.S. will allow for a Foreign Tax Credit for citizens or residents of the U.S. on taxes due to the U.S., against any tax already paid to India and vice versa

*Exceptions and limitations apply.

India US Tax Treaty Saving Clause

“Notwithstanding any provision of the Convention except paragraph 4, a Contracting State may tax its residents (as determined under Article 4 (Residence)), and by reason of citizenship may tax its citizens, as if the Convention had not come into effect.

What is the Saving Clause?

The Saving Clause basically says the contacting states (India and U.S.) can disregard the treaty, when applicable, and still tax the resident/citizen as if the treaty was not in place.

Saving Clause (Limitation)

• • • The provisions of paragraph 3 shall not affect (a) the benefits conferred by a Contracting State under  paragraph 2 of Article 9 (Associated Enterprises), under paragraphs 2 and 6 of Article 20 (Private Pensions, Annuities, Alimony, and Child Support), and under Articles 25 (Relief from Double Taxation), 26 (Nondiscrimination), and 27 (Mutual Agreement Procedure);

    • and (b) the benefits conferred by a Contracting State under Articles 19 (Remuneration and Pensions in Respect of Government Service), 21 (Payments Received by Students and Apprentices), 22 (Payments Received by Professors, Teachers and Research Scholars) and 29 (Diplomatic Agents and Consul Officers), upon individuals who are neither citizens of, nor have immigrant status in, that State.

What is a “Limitation” on the Savings Clause?

There are certain articles and paragraphs which cannot be overridden by the Savings clause.

Are You Out of IRS Compliance?

If you have unreported income, accounts, assets, or investments from India or multiple countries – we can help.

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, and specifically IRS offshore disclosure. 

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