How to claim tax benefit on double tax treaty with Sweden?

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1. How can I claim the tax benefit of the DTAA treaty with Sweden (for 30% TDS on dividends) under some section for the yearly dividend being credited in the form of post-tax proceeds getting re-invested by buying shares at market prices?

2. How would the sale proceeds be treated for these shares as all stocks are now more than approximately 24 months old?

3. I wish to bring it in my ITRs as filing tough perquisites have been added to my salary as per Form-16 and I have been paying tax on each of these contributions (as post tax) and perquisites for matching shares.

-Name withheld on request

At the outset, please note that we have not reviewed the actual stock plan documents and transactions, hence our comments below may please 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 as per the provisions of section 5 of the Income-tax Act, 1961 (‘the Act’) and have always been physically working in India, for all the earlier and future FYs (including the FYs in which dividend is 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., you have been allotted / purchased shares of S Co. under the ELIP over the years.

1) We understand that the applicable Indian salary (perquisite) taxes arising in your hands, on the purchase/ allotment of the shares pursuant to the ELIP, have been duly and appropriately deducted at source/ paid by you over the respective Financial Years (FYs). Further appropriate disclosures with respect to these foreign shares shave been made you in the Foreign Asset Schedule and AL Schedule (if applicable) of the ITR forms for the respective FYs.

2) As you qualify as an ROR in India, in the FYs in which the dividend incomes are 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. As the Government of India has a Double Taxation Avoidance Agreement with Sweden (‘DTAA’), recourse to the provisions of section 90 of the Act read with Rule 128 of the Income-tax Rules (‘IT Rules’) may be taken to mitigate the impact of such double taxation, through application of the DTAA provisions, if more beneficial to you.

As per Article 24 of the DTAA, in case 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) may be explored, against the tax payable in India on the dividend income. It would be important to review your Sweden domestic tax residency/ residency under DTAA, basis of taxability of dividend in Sweden etc. to conclusively comment on the quantum of FTC claim.

Tax on such dividend income (net of above FTC claim) should be paid by you in India through the advance tax/ self-assessment tax route. Further, the dividend income should be appropriately disclosed in the respective schedules of the ITR form for the respective FYs, including the Foreign Assets Schedule. The FTC claim would also need to be disclosed in the respective schedules of the ITR form. Further, a prescribed Form 67 would need to be filed online within the due date and prior to filing of the original tax return (along with supporting documents) to claim the FTC in the tax return.

3) In relation to taxability of sale proceeds from the shares, as per the provisions of the Act, any profits or gains (including loss, if any) arising from the transfer of capital asset shall be chargeable to income tax under the head “Capital Gain” and shall be deemed to be the income of the FY in which such transfer took place. As you qualify as a ROR in India, the capital gains shall be taxable in India in your hands.

As shares of S Co. are not listed in India, shares held for less than 24 months from date of allotment, shall be categorized as Short-Term Capital Asset and any gain / loss shall be a Short-Term Capital Gain / Loss (‘STCG’). Else, the same shall be considered as a Long-Term Capital Asset and any gain / loss shall be a Long-Term Capital Gain / Loss (‘LTCG’).

Further, as the shares have been received by you under an ELIP and due perquisite tax has been paid at the time of allotment, the cost of acquisition for the purpose of computing the STCG/ LTCG on transfer, will be substituted by the Fair Market Value of the shares, as applied, for arriving at the taxable perquisite value in earlier FYs.

STCG and LTCG will be taxable as follows:

– STCG: As per 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 adjusting for the cost inflation index) – plus applicable cess and surcharge

In case of any double taxation on the gains from the sale of such shares, mitigation of double taxation can be explored as per 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) should be paid by you in India through the advance tax/ self – assessment tax 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 need to be disclosed in the respective schedules of the ITR form.

Queries answered by Parizad Sirwalla, partner and head, global mobility services, tax, KPMG in India.

(Write at [email protected] to get your personal finance queries answered by experts.)

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