I. Case Overview
A Dutch company, Company A, established a subsidiary in India. According to Indian tax laws, when Company A receives dividends from its Indian subsidiary, it must pay a withholding tax at a rate of 20%. However, under the India-Netherlands Tax Treaty (referred to as the “India-Netherlands Treaty”), a Dutch company receiving dividends from its Indian subsidiary can benefit from a reduced withholding tax rate of up to 10%, provided specific conditions outlined in the treaty are met. The treaty also includes a Most-Favored-Nation (MFN) clause, stating that if India signs a tax treaty with any other OECD member country after the India-Netherlands Treaty came into effect and agrees to lower rates for dividends, interest, or royalties, those lower rates should automatically apply to the India-Netherlands Treaty as well. Company A and the Indian tax authorities disagreed on whether the MFN clause could be used to allow Company A to pay a lower withholding tax rate. This led Company A to file a lawsuit with the Delhi High Court in India.
On April 22, 2021, the Delhi High Court ruled on the dispute, stating that the MFN clause is part of the protocol to the India-Netherlands Treaty and can be applied automatically without any additional conditions, allowing Company A to pay a 5% withholding tax on the dividends received from its Indian subsidiary.
II. Key Point of Dispute
The main issue in this case was whether the MFN clause could be applied to determine the withholding tax rate on dividends.
Company A argued that, based on the MFN clause in the protocol of the India-Netherlands Treaty, if India signed a tax treaty with another OECD member country after the India-Netherlands Treaty came into effect and that treaty offered more favorable rates for dividends, interest, or royalties, these more favorable rates should automatically apply to the India-Netherlands Treaty. India has signed tax treaties with several OECD countries, including Slovenia, Lithuania, and Colombia, which provide a lower 5% withholding tax rate on dividends (under certain conditions). Based on the MFN clause in the India-Netherlands Treaty, this 5% rate should automatically apply to the treaty between India and the Netherlands. Therefore, the dividends that Company A receives should be taxed at a 5% withholding rate.
The Indian tax authorities argued that when India signed tax treaties with Slovenia, Lithuania, and Colombia, these countries were not yet OECD members and only became members later. They claimed that the MFN clause could only apply if the countries were OECD members at the time the original treaty (the India-Netherlands Treaty) was signed.
III.Final Ruling
On April 22, 2021, the Delhi High Court ruled in favor of Company A. The reasons for the decision were as follows:
Conditions for Applying the MFN Clause: The MFN clause is part of the treaty protocol and includes a principle of equal treatment concerning withholding tax rates or the scope of taxable income such as dividends, interest, and royalties, as agreed in the India-Netherlands Treaty and any tax treaties India signs later with other countries. If India signs a tax treaty with a country that is an OECD member, and that treaty offers a lower withholding tax rate or a more restricted scope of taxation than the primary tax treaty (the India-Netherlands Treaty), the principle of equal treatment applies.
Timing of the MFN Clause Application: Once the above conditions are satisfied, the lower withholding tax rate specified in the treaty with the third country should apply to the India-Netherlands Treaty from the effective date of the treaty with the third country.
Misinterpretation by Indian Tax Authorities: The tax authorities believed the MFN clause could only apply if the countries with which India signed tax treaties were already OECD members when the primary treaty (the India-Netherlands Treaty) was signed. This interpretation is incorrect and contradicts the intent of the India-Netherlands Treaty. If a country was not an OECD member when India signed a tax treaty with it but became an OECD member later, the MFN clause in the India-Netherlands Treaty should apply from the date the country became an OECD member. To clarify the intention behind the MFN clause in the India-Netherlands Treaty, the Delhi High Court referred to a decree issued by the Netherlands. According to this decree, from the date Slovenia became an OECD member, the Netherlands has applied a 5% preferential withholding tax rate on dividends paid by Dutch companies to Indian residents.
The Delhi High Court also referenced a previous ruling by the court in a similar case.
IV. Insights for International Businesses
（A）Monitor the Host Country’s Tax Treaty Network
Companies expanding internationally face a complex tax environment involving local laws in China, the host country, and tax treaties between China and the host country. In addition, companies should be aware of the host country’s tax treaty network. These legal frameworks are interconnected and influence each other, creating significant challenges for tax compliance. In this case, the MFN clause in the India-Netherlands Treaty effectively extends the more favorable rates from India’s other tax treaties to Dutch taxpayers. Companies that do not pay attention to such clauses might miss opportunities to benefit from lower rates.
（B）Understand the Role of Precedents in Common Law Countries
In some countries, particularly those following the common law system, the principle of “stare decisis” means that court judgments can serve as precedents for other cases. In this ruling, the court referred to a past case as a legal precedent. Therefore, when companies encounter similar issues, they should consider looking at relevant court cases in the host country for guidance.
