India and Netherlands to amend bilateral tax treaty

After the successful renegotiation of bilateral tax treaties with Mauritius and Singapore, India is now starting negotiations with the Netherlands. India aims to secure the power to levy more tax on the sales of shares of Indian companies by Dutch firms.

In recent times, there has been an increase in the investments Indian companies have received from firms of Dutch origin. An Indian government official has reportedly said, “We are in talks with the Netherlands to amend the treaty, especially on matters of capital gains taxation. But, we cannot predict the outcome at present.”

In the first half of FY 2018-2019, our country witnessed an inflow of $2.95 billion in foreign direct investment (FDI) from the Netherlands. In light of the substantial FDI inflow, India aims to widen its tax base by levying taxes on share transactions related to Indian companies.

At present, as per the ‘agreement for avoidance of double taxation and prevention of fiscal evasion with the Netherlands,’ investment from Dutch firms while selling shares of Indian companies are exempt from capital gains.

According to the current treaty, the sale of unlisted shares of Indian companies is taxable in India under selective situations. For example, when the shares acquire value from ownership of real estate in the country except for the times the property is used for business purposes.

The treaty also allows levying of capital gains in India if 10% or more of the shares are sold to a resident of India. Although this clause comes with a significant exception – the capital gains may be taxed in the Netherlands if the sale of shares is a part of corporate restructuring.

This attempt to put an end to double taxation has led to claims that entities have escaped taxation in both countries. India and the Netherlands are both striving to amend the treaty to plug this leak.