Country Note: Abolition Of Ddt In India: A Treat For Foreign Investors?

Abstract

The Indian government eliminated the much maligned dividend distribution tax (DDT) through Finance Act 2020. The abolishing of the DDT marks a return to the shareholder regime of dividend taxation (hereinafter ‘shareholder regime’). Foreign enterprises (generally multinational corporations) aiming to do business in India through subsidiaries or enterprises that already have subsidiaries in India can benefit from this change. This article analyses the tax impact of this change when an Indian subsidiary distributes its profits to its parent or holding company. Thus, the paper presents a tabular representation of taxation in the DDT regime and the shareholder regime and compares them. To present the complete scenario, the paper also analyses different profit distributing mechanisms other than dividends that are used by companies – specifically, the buyback of shares and share capital reduction. Finally, limited liability partnership (LLP) firms offer another vehicle for companies to conduct business in India. Thus, the paper also analyses the taxation aspects of an LLP distributing profits to its partner company. The return to the shareholder regime will allow non-residents to avail beneficial tax rates provided for dividend taxation in double taxation avoidance agreements (DTAAs) signed by India with other countries. Thus, the final section of this article discusses the mechanisms that are in force to prevent treaty shopping. The principal purpose test (PPT) brought in by the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (BEPS) (Multilateral Instrument or MLI), the threshold of beneficial owners found in most DTAAs, and India’s domestic general anti-avoidance rule (GAAR) are analysed to determine the essential requirements of these mechanisms. CFC, Individuals, BEPS, Action 3, Brazil.