How do you get tax benefits in the event of a double tax agreement with Sweden?
1. How can I claim the tax benefit of the DTAA agreement with Sweden (for 30% TDS on dividends) under any section for the annual dividend credited in the form of after-tax earnings reinvested by buying shares at market prices ?
2. How would the sale proceeds be treated for these shares since all the shares are now more than about 24 months old?
3. I want to include it in my ITRs as tough conditions have been added to my salary as per Form-16 and I have paid tax on each of these contributions (as post tax) and matching share benefits.
-Name withheld on request
Please note at the outset that we have not reviewed the actual share plan documents and transactions, therefore our comments below may be construed as generic in nature, based on limited facts provided and assumptions made.
It is assumed that you qualify as resident and ordinarily resident (‘ROR’) in India under the provisions of section 5 of the Income-tax Act, 1961 (‘the Act’) and have always physically worked in India, for all previous and future financial years (including financial years where dividends are received and shares are sold).
You work with an Indian company, which is a subsidiary of a company headquartered in Sweden (‘S Co.’), listed on NASDAQ. Pursuant to the Equity Linked Incentive Plan (‘ELIP’) of S Co. have you been allocated/purchased shares in S Co. under ELIP over the years.
1) We understand that the applicable Indian payroll taxes (perquisition) arising in your hands on purchase/allotment of the shares pursuant to ELIP, have been duly and properly deducted at source/paid by you during the respective Financial Years (FYs). Further appropriate disclosures in respect of these foreign shares have been made to you in the Foreign Asset Schedule and AL Schedule (if applicable) in the ITR forms for the respective FYs.
2) Since you qualify as a ROR in India, in the financial years in which the dividend income is earned/received from such shares held outside India, the same shall also be taxable in India as income from other sources in your hands.
We understand that tax @ 30% has been deducted and paid on the dividend received by you from such purchased/allotted shares in Sweden. Since the Government of India has a Double Taxation Agreement with Sweden (‘DTAA’), the provisions of Section 90 of the Act read with Rule 128 of the Income Tax Rules (‘IT Rules’) can be used to mitigate the effect of such double taxation, by applying the DTAA- regulations, if that is more beneficial to you.
According to Article 24 of the DTAA, if you qualify as a resident of India under the DTAA and the dividend has been taxed in Sweden in accordance with the DTAA provisions, a credit of the proportionate taxes paid in Sweden on the dividend income (Foreign Tax Credit or FTC) can be investigated against the tax payable in India on the dividend income. It would be important to review your Swedish domestic tax residence/domicile under the DTAA, basis of tax liability for dividends in Sweden, etc. to definitively comment on the scope of the FTC requirement.
Tax on such dividend income (net of above FTC claim) is payable by you in India through advance tax/self-assessment route. Further, the dividend income should be suitably disclosed in the respective schedules of the ITR form for the respective FYs, including the Foreign Assets Schedule. The FTC requirement would also have to be disclosed in the respective schedule of the ITR form. Further, a prescribed Form 67 would need to be filed online by the due date and before the original tax return (along with supporting documents) is filed to claim the FTC on the tax return.
3) In relation to the tax liability for the sale proceeds from the shares, as per the provisions of the Act, any profit or gain (including any loss) arising on the transfer of capital asset shall be chargeable to income tax under the heading “Capital”. Profit’ and shall be deemed to be the income for the financial year in which such transfer took place. Since you qualify as a ROR in India, the capital gain shall be taxable in India in your hands.
Because shares in S Co. are not listed in India, shares held for less than 24 months from the date of allotment shall be categorized as short-term capital asset and any gain/loss shall be short-term capital gain/loss (‘STCG’). Otherwise, the same shall be considered as a long-term capital asset and any gain/loss shall be a long-term capital gain/loss (“LTCG”).
Also, since the shares have been received by you under an ELIP and the tax due has been paid at the time of allotment, the cost of acquisition for the purpose of calculating STCG/LTCG on transfer will be replaced by the fair market value of the shares, as applied, to arrive at to the taxable acquisition value in previous accounting years.
STCG and LTCG will be taxable as follows:
– STCG: As per the provisions of Schedule I to the Finance Act, STCG from sale of shares will be taxable at the marginal tax rates applicable to the taxpayer in India.
– LTCG: As per Section 112 of the Act, LTCG from sale of shares will be taxable @20% (after adjustment for cost inflation index) – plus applicable surcharge and surcharge
In case of double taxation of gains from sale of such shares, limitation of double taxation may be examined under the provisions of section 90 of the Act / provisions of Article 13 (Capital Gains) and Article 24 of the DTAA, as applicable. .
Tax on such capital gains (net of DTAA relief) is payable by you in India through advance tax/self assessment route. Further, the capital gains should be appropriately disclosed in the respective schedules of the ITR form for the respective FYs, including the Foreign Assets Schedule. Any DTAA relief would also have to be disclosed in the respective schedule of the ITR form.
Questions answered by Parizad Sirwalla, Partner and Head, Global Mobility Services, Tax, KPMG in India.
(Write to [email protected] to get your personal finance questions answered by experts.)
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