DTAA of Nepal With India

Dual Residency, Article -4

For Individuals

Where an individual is a resident of both Contracting States, then his status shall be determined as follows:

• Permanent Home.
• If permanent home is Available in both states - he shall be deemed to be a resident only of the State with which his personal and economic relations are closer (center of vital interests);
• Permanent Home is not available in both states or center of vital interest cannot be determined - Habitual Abode
• Habitual abode in both states or neither of them - resident only of the State of which he is a national
• National of both states or neither of them - Competent authorities to settle by mutual agreement

Permanent home --- Center of Vital Interests --- Habitual Abode --- Nationality --- Mutual Agreement

For Other than individuals

• Place of Effective Management
• Place of Effective Mgmt. cannot be determined - Mutual Agreement



Permanent Establishment, Article -5

PE - a fixed place of business through which the business of an enterprise is wholly or partly carried on.

(a) a place of management;

(b) a branch;

(c) an office;

(d) a factory;

(e) a workshop;

(f) a sales outlet;

(g) a warehouse in relation to a person providing storage facilities for others;

(h) a farm, plantation or other place where agricultural, forestry, plantation or related activities are carried on; and

(i) a mine, an oil or gas well, a quarry or any other place of extraction of natural resources.

(j) A building site or construction, installation or assembly - last more than 183 days.

(k) Services - activities of that nature continue (for the same or connected project) within the country for a period or periods aggregating more than 90 days within any 12-month period.



PE shall not include

• use of facility for storage, or display of goods
• maintenance of stock solely for storage, display
• maintenance of stock solely for processing by another enterprise
• maintenance of a fixed place solely for the purpose of purchasing goods or of collecting information for the enterprise
• maintenance of a fixed place - any other activity of a preparatory or auxiliary character
• a combination of above mentioned activities if the combination results in the activity of preparatory or auxiliary character

PE through Agents other than independent agents -

• If agents concludes the contracts on behalf of enterprise except the activities as above
• habitually maintains in the contracting state a stock of goods or merchandise from which he regularly delivers goods or merchandise on behalf of the enterprise
• habitually secures orders in the first-mentioned State, wholly or almost wholly for the enterprise itself.

PE for Insurance Business -

Collects premiums in the territory of that other State or insures risks situated therein through a person other than an agent of an independent status.



Independent Agents -

Broker, general commission agent or any other agent of an independent status - acting in the ordinary course of business - activities of such an agent are not devoted wholly or almost wholly on behalf of that enterprise. If activities are conducted through independent Agents, it shall not constitute a PE.



Resident Company of a State controlled by Resident company of another state -

Not to constitute PE just because of the control. Only the above factors are to be considered













Article 6 - Income from immovable property

• Income derived by a resident of a Contracting State from immovable property situated in the other Contracting State may be taxed in that other State.(Taxed in the country of source)
• Ships, boats and aircraft shall not be regarded as immovable property

Income from immovable property - Taxed where the asset is situated (Country of source)



Article 7 - Business Profits

• The profits of the enterprise of one state may be taxed in the other State but only so much of them as is attributable to that permanent establishment.
• Calculation of profits of a PE-

1. Profit of PE to be calculated as if it were a separate and distinct entity.
2. Deduction of expenses shall be allowed.
3. No deduction of expenses or Inclusion in profits shall be allowed for royalties, fees or other similar payments in return for the use of the patent, knowhow or other rights, or commission expenses or other charges for specific services performed by the management, or interest on money lent to the PE (allowed for banking enterprise) paid to the Head Office of the enterprise.
4. Reimbursement of actual expenses of HO by the PE shall be allowed for deduction.

• Profits can also be attributed to PE by apportioning the total profits of an enterprise as is customary in a contracting state.
• The profits to be attributed to the permanent establishment shall be determined by the same method year by year unless there is good and sufficient reason to the contrary.
• Where profits include items of income which are dealt with separately in other Articles of this Agreement, then the provisions of those Articles shall not be affected by the provisions of this Article



Article 8 - Shipping and Air Transport

• Profits derived by an enterprise of a Contracting State from the operation of ships or aircraft in international traffic shall be taxable only in that Contracting State.

Profits of a Nepali enterprise by operating Ship in Indian Ocean shall be taxed in NEPAL.

International traffic means any transport by a ship or aircraft operated by an enterprise of a Contracting State, except when the ship or aircraft is operated solely between places in the other Contracting State.

• Profits derived by a transportation enterprise which is a resident of a Contracting State from use, maintenance, or rental of containers (including trailers and other equipment for the transport of containers) supplementary or incidental to operation of its ships or aircraft shall be taxed in such state.
• Such profits as above are taxed in the other state if the containers are solely used within the other contracting states.
• Interest on Investment directly related with the operation of ships or aircrafts shall be regarded as profits derived from the operation of such ships or aircraft if they are integral to the carrying on of such business. Article 11 shall not apply in such case



Article 10 - Dividends

• 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. (Taxed in the country of Residence).
• Such dividends may also be taxed in the State in which the company paying dividend is a resident and according to the tax laws of that state. but if the beneficial owner of the dividends is a resident of the other Contracting State, the tax so charged shall not exceed:

(a) 5 percent of the gross amount of dividends if the beneficial owner is a company which owns at least 10 percent of the shares of the company paying the dividends;



(b) 10 percent of the gross amount of dividends in all other cases.



• If a resident of a contracting state pays dividend and the beneficial owner is a resident of another contracting state conducting business in the other contracting state through a PE, or Fixed Base the above provisions shall not apply. The dividend effectively connected with such PE or Fixed Base shall be taxed as per Article-7 (Business Profits) or Article 14(independent Provisional Services).
• Where a resident company of a contracting state derives income or profits from another contracting state, such other contracting state may not impose tax on the dividend paid by the company, except in cases where such dividends are paid to resident of the other state or the holding in respect of which dividends are paid are effectively connected with a permanent establishment or a fixed base situated in the other state
• also such other contracting state shall not subject the undistributed profits of the company to tax even if such dividend paid or undistributed profits consists of the profits or income arising in such other state.





Suppose we have a company Ind Co. in india and a company Nep co. in Nepal which has holding in Ind Co. If Ind Co. distributes dividend to Nep co, will it be taxable in Nepal or India itself? The article provides the country of residence i.e. Nepal may tax dividends. Also the source country i.e. India may deduct tax on the dividend complying the conditions set out above.











Suppose a case like in the picture, Nepali company conducts business in India through a PE. Nepali CO. also has holding in Indian CO. The indian co is just a shell company with no business. The indian company charges the PE for some fictitious expenditures. The indian company then distributes its profits to the Nepali Co. As a result of this arrangement, the profit of the PE has declined and the shell co makes profits which is then taxable at 5%(suppose) when distributed to Nepali Co. But had there not been any shell co, the PE would be charged at 30%(Suppose), because it is taxed as business profits as per Article 7. So, as a result of this arrangement, the Nepali co has reduced its overall tax liability.

To discourage such arrangements, paragraph 4 states that, if such distributed profit is effectively connected with the PE, then, such distribution is taxed under Article 7 i.e. Business Profits.









As per paragraph 5, If indian co pays dividend to a Nepali co and the Nepali co distributes dividend to another company in a different country other than the contracting state (India), Indian cannot tax on such distribution. But if the Nepali co distributes dividend to Indian Co. then India can tax on such distribution



Article 11 - Interest

• This article is similar to article 7 (dividend. 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 per cent of the gross amount of the interest.
• Notwithstanding the provisions of paragraph 2, interest arising in a Contracting State shall be exempt from tax in that State, provided that it is derived and beneficially owned by: (a) (i) in the case of Nepal, the Nepal Rastra Bank and, (ii) in the case of India, the Reserve Bank of India; or (b) the Government, a political sub-division or a local authority of the other Contracting State; or (c) any other institution as may be agreed upon from time to time between the Competent authorities of the Contracting States through exchange of letters.
• The provisions of paragraphs 1 and 2 shall not apply if the beneficial owner of the interest, being a resident of a Contracting State, carries on business in the other Contracting State in which the interest arises, through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the debt-claim in respect of which the interest is paid is effectively connected with such permanent establishment or fixed base. In such cases the provisions of article 7 or article 14, as the case may be, shall apply.

e.g. - Nabil Bank limited opens a branch in India and earns interest income. The branch constitutes PE in india, then the Income of the branch in India, such interest income irrespective of the fact that it is paid directly to Nabil bank in Nepal is effectively connected with the PE, hence, the interest is taxed as per article 7 (Business income)





• Interest shall be deemed to arise in a Contracting State when the payer is a resident of that State. Where, however, the person paying the interest, whether he is a resident of a Contracting State or not, has in a Contracting State a permanent establishment or a fixed base in connection with which the indebtedness on which the interest is paid was incurred, and such interest is borne by such permanent establishment or fixed base, then such interest shall be deemed to arise in the State in which the permanent establishment or fixed base is situated.







Here, in both the cases, the source of Interest shall be in India





• Where, by reason of a special relationship between the payer and the beneficial owner or between both of them and some other person, the amount of the interest, having regard to the debt claim for which it is paid, exceeds the amount which would have been agreed upon by the payer and the beneficial owner in the absence of such relationship, the provisions of this Article shall apply only to the last mentioned amount. In such case, the excess part of the payments shall remain taxable according to the laws of each Contracting State, due regard being had to the other provisions of this Agreement



If the interest paid in not in arms length, then only the interest upto the arms length amount will fall under this article, the excess will be taxed according to the laws of the respective state





Article 12 - Royalties

This article is similar to article 11. except subparagraph (b) of paragraph 5. Under the said sub-paragraph, if the royalty is not deemed to arise in either of the contracting states as per sub-paragraph (a) and the royalties relate to the use of, or the right to use, the right or property, in one of the Contracting States, the royalties shall be deemed to arise in that Contracting State. also, the rate of tax in the source state shall not exceed 15%.





Article 13 - Capital Gains

• Gains derived by a resident of a Contracting State from the alienation of immovable property referred to in Article 6 and situated in the other Contracting State may be taxed in that other State.
• Gains from the alienation of movable property forming part of the business property of a permanent establishment which an enterprise of a Contracting State has in the other Contracting State may be taxed in the other state(state of source).
• Gains from the alienation of ships or aircraft operated in international traffic, or movable property pertaining to the operation of such ships or aircraft, shall be taxable only in the Contracting State of which the alienator is a resident. (Country of Residence).
• Gains from the alienation of shares of the capital stock of a company the property of which consists directly or indirectly principally of immovable property situated in a Contracting State may be taxed in that State. Gains from the alienation of shares other than those mentioned in paragraph 4 in a company which is a resident of a Contracting State may be taxed in that State.
• Gains from the alienation of any property other than that referred to in paragraphs 1, 2, 3, 4 and 5 shall be taxable only in the Contracting State of which the alienator is a resident.



Article 14 - Independent personal services

Income from professional services or independent activities of similar character shall be taxed in the state in which the person deriving such person is a resident. (State of Residence). Except in the following cases-



a) Such person has Fixed Base in the other contracting state. In such case income attributable to the Fixed base is taxable in the other state. (State of Source)

b) if his stay in the other Contracting State is for a period or periods amounting to or exceeding in the aggregate 183 days in any period of 12 – months; in that case only so much of the income as is derived from his activities performed in that other State may be taxed in that other State. (Similar to constituting a PE).





Professional Services - independent scientific, literary, artistic, educational or teaching activities as well as the independent activities of physicians, lawyers, engineers, architects, surgeons, dentists and accountants.

Article 15 - Dependent Personal Services

Income from salary, wages or other similar remuneration derived by a resident of a contracting state where the employment is exercised in the other contracting state may be taxed in the other contracting state. (State of Source). However, such remuneration shall be taxable in the state of residence if the following conditions are fulfilled -

a) Not present in the other state for more than 183 days in the last 12 months,

b) Remuneration is paid by a employer who is not a resident of the other contracting state and,

c) the remuneration is not borne by a permanent establishment or a fixed base which the employer has in the other State.



Exception - remuneration derived in respect of an employment exercised aboard a ship or aircraft operated in international traffic, by an enterprise of a Contracting State may be taxed in that State. (State of Residence).



Article 16 - Directors Fee

Directors' fees and other 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.

Mr. A of Nepal is a Director in an Indian Company. He received a sitting fee in the BOD meeting of that company, Such fee shall be taxed in India.



Article 17 - Artists and Sportsperson

• Taxed in the country of Source. Mr. A of Nepal plays cricket in the IPL, income received is taxed in India.
• Income accrues to another person and not the artist/sportsperson - Taxed in the state in which the activities are performed (State of Source).
• Exception - if the activities are substantially supported by public funds of one or both of the contracting states or of political sub-divisions or local authorities thereof, the income shall be taxed in the country of residence. i.e. the income shall be taxable only in the Contracting State of which the entertainer or sportsperson is a resident.



Article 18 - Pensions

• Subject to the provisions of paragraph 2 of article 19, pensions and other similar remuneration paid to a resident of a Contracting State in consideration of past employment shall be taxable only in that State.



Article 19 - Government Services

• Salaries, wages and other similar 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.
• However, such salaries, wages and other similar 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.



• 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.
• However, such pension shall be taxable only in the other Contracting State if the individual is a resident of, and a national of, that other State.
• The provisions of articles 15, 16, 17 and 18 shall apply to salaries, wages and other similar remuneration and to pensions in respect of services rendered in connection with a business carried on by a Contracting State or a political subdivision or a local authority thereof.

Article 20 - PROFESSORS, TEACHERS AND RESEARCH SCHOLARS

• A professor, teacher, research scholar who was a resident of a contracting state immediately before leaving the state for the purpose of teaching or research or both at a university, college or other similar approved institutions in the other contracting state shall be exempt from tax in the other state for a period not exceeding 2 years from the date of his first arrival in the other state.
• Income from research - Research should be undertaken by the individual in the public interest and not for a private benefit.
• Resident of a contracting state - Resident of that state in the fiscal year in which he leaves for another country or the fiscal year immediately preceding that fiscal year.



Article 21 - Students

• Following incomes are exempt of an student who is a resident of a contracting state immediately before leaving to the other contracting state for education or training in such state -

a) Payment made to him by persons residing outside that other state for the purpose of his maintenance, education or training.

b) Remuneration derived from employment if such remuneration is directly related to his studies.



Such incomes are exempt in the other contracting state if the student leaves the contracting state solely for the purpose of the study or research.



• Such exemption shall be available for a reasonable time as may be required to complete the education or training and shall not exceed 6 years in any circumstances from the date of first arrival.



Article 22 - Other Income

• Items of income of a resident of a Contracting State, wherever arising, not dealt with in the foregoing Articles of this Agreement shall be taxable only in that State. (State of Residence)
• Above provision shall not apply to PE(Article 7) or Fixed base (Article 14).
• Income from lotteries, crossword puzzles, races including horse races, card games and other games of any sort or gambling or betting of any nature to be taxed in the other contracting states (State of Source).