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June 2022

MLI SERIES MLI ASPECTS IMPACTING TAXATION OF CROSS-BORDER DIVIDENDS

By Rutvik Sanghvi
Chartered Accountant
Reading Time 19 mins
INTRODUCTION

The issues related to the taxability of dividends have always remained significant due to the inherent two-level taxation compared to other income streams like interest. Further, the taxing provisions are drafted in varied manners in an attempt to rein in any tax avoidance on such incomes. Taxation of dividends in the international tax arena has had its own set of complexities. In India, for a considerable period of time there used to be double taxation on foreign shareholders due to limited availability of credit for Dividend Distribution Tax (DDT) paid by Indian companies under the Income-tax Act. However, after the abolition of the DDT concept vide Finance Act 2020, cross-border dividends are now taxable in the hands of non-resident shareholders - bringing up issues of beneficial ownership, classification, conduit arrangements, etc.

This article concludes the series of articles for the BCAJ on Multi-lateral Instrument (MLI). The series of articles have explained the multilateral efforts to reduce tax avoidance and double non-taxation through MLI – a result of the Base Erosion and Profit Shifting (BEPS) Project of the G20 and OECD. MLI has acted as a single instrument agreed upon by a host of countries1 through which several anti-abuse rules are brought in at one stroke in the DTAAs covered by the MLI.

Article 8 of the MLI provides anti-avoidance rules for
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