Non-discrimination clause in tax treaties – Select issues and recent developments – Part 6

In part 5 of the series, I have discussed Article 24(4) which deals with deduction non-discrimination in detail. In this part, I will discuss Article 24(5) which deals with ownership based non-discrimination and Article 24(6)

This paragraph prohibits a contracting State to give less favourable treatment to an enterprise, the capital of which is owned or controlled, wholly or partly, directly or indirectly, by one or more residents of the other contracting State.

For ex. – Enterprise in State ‘A’ which is wholly or partly owned or controlled, directly or indirectly by residents of State ‘B’ should not be subjected in State ‘A’ to any taxation or connected requirement which is other or more burdensome than taxation or connected requirement to which another Enterprise in State ‘A’, in the same circumstance, is subjected to.

Hence, the purpose of this clause is to safeguard an equal treatment to an enterprise in State A which is discriminated solely on account of foreign ownership.

Article 24(5) of the OECD and UN model is reproduced below –

Conditions to be satisfied –

  • Presence of Enterprise X in the contracting state A, the capital of which are owned by one or more residents in other contracting state B
  • The enterprise is subject to tax in State A to any taxation or other connected requirement thereto
  • The taxation is more burdensome than taxation etc. to which the other enterprise in State A may be subjected to the taxation or connected requirement to which a similar enterprise may be subject to in that State

Pertinent to note, that the object of comparison in this clause is ‘similar enterprise’. Reference in this regard can be drawn from OCED Discussion Draft (2007) on Application and Interpretation of Article 24 para 88, which reads as under –

‘ 88. The Working Group reached the conclusion that the right comparator for the purposes of paragraph 5 was a domestic enterprise owned by residents but agreed that there was no need to clarify this issue in the Commentary as long as there was no practical reason to do so. ‘

Illustrative list of situations in which Clause 24(5) cannot be invoked –

  • If the domestic tax law of one State allows a resident company to consolidate its income with that of a resident parent company, paragraph 5 cannot have the effect to force the State to allow such consolidation between a resident company and a non-resident parent company
  • Withholding tax obligations that are imposed on a resident company with respect to dividends paid to non-resident shareholders but not with respect to dividends paid to resident shareholders cannot be considered to violate paragraph 5
  • Information requirement imposed by the contracting state on the Company during the time of transfer pricing assessments
  • Deferral of a deduction for interest expense accrued to the foreign related party until such interest is paid

Indian Judicial Pronouncements

  • An Indian resident company having foreign parent company cannot be discriminated from Indian resident company having resident parent company (Daimler Chrysler India Pvt Ltd v DCIT (2009)29 SOT 202 (Pune))

Ruling in brief – In this case, by invoking article 24(4) of India-Germany tax treaty, Tribunal held that Indian subsidiary of the German company, shares of which are listed on German stock exchange is to be treated as ‘company in which public is substantially interested’ under section 2(18) of the India Income tax Act. The reason for this was that an Indian company having foreign parent company should not be discrimianted with an Indian company having Indian parent company shares of which are listed in India stock exchange.

Article 24(6) of the Model convention reads as under –

This means that Article 24 is applicable to taxes of every kind and description notwithstanding the provisions of Article 2 of the convention.

Further, this clause does not appears in all the DTAA’s entered into by India, except for few like South Korea, Australia, Portugal etc. Generally the wordings found in Indian DTAA in are –

‘ the term “taxation” means taxes which are the subject of this Convention ‘

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