Immovable property_International Tax

Income from

immovable property

1

Agenda

- Article 6

An introduction

OECD Model convention

Taxability of disposition of immovable property

- Article 13

2

An Introduction

3

Taxability in India

Taxable in India if property is situated in India - section 9(1)(i) of the Income-tax Act, 1961.

Section 9(1)(i) :

“all income accruing or arising, whether directly or indirectly, through or from any

business connection in India, or through or from any property in India, or through or

from any asset or source of income in India, [* * *] or through the transfer of a capital

asset situate in India”

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International Conventions and Treaties

Article 6 of the OECD, U.N., and U.S. model

conventions deal with income from Immovable

Property.

DTAA between India-Greece is an exception, income

from immovable property falls under Article 10.

The paragraphs of Article in all three conventions are

similar except for certain minor difference.

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OECD model

convention

6

OECD Model Convention – Article 6 - Paragraph 1

OECD Model Convention :

Income derived by a resident of a country from immovable property (including income fromagriculture or forestry) situated in the other country may be taxed in that other country

US convention uses the term ‘real property’ instead of ‘immovable property’

OECD, UN and US Model Conventions grant the primary right to tax income fromimmovable property to the State of Source as there is always a very close economicconnection between source of income from immovable property and the State of source

State of Source gets primary right but not the exclusive right as Paragraph 1 of OECDModel Convention uses the words ‘may be taxed in’

The State of Residence may also tax the income and double taxation can be mitigated bygranting tax credit or exemption

Taxable based on situs

Treaties between India and Bangladesh, Greece and Egypt provide that income shall betaxable only in the country where the property is situated

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OECD Model Convention – Article 6 – Case law

Supreme court decision -CIT v. P.V.A.L. Kulandagan Chettiar (267 ITR 654 )

Fact of the case:

The assessee was resident in India and owning some immovable properties at Malaysia.

The assessee earned income from rubber estates in Malaysia.

The assessee also sold some properties in Malaysia and earned short-term capital gains

The income tax officer held that both the incomes were assessable in India and brought the

same to tax.

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OECD Model Convention – Article 6 – Case law ….Cond’t

Question in dispute:

1. Whether the Malaysian income cannot be subjected to tax in India on the basis of the DTAA

entered between GOI and Government of Malaysia?

2. Whether the capital gains should be taxable only in the country in which the assets are situated?

Further, whether the same can be included within article 6 of the treaty?

HELD:

The court took cognizance of the fact that the taxpayer was resident of both India and Malaysia but

the ultimate fiscal domicile will have to be determined with references to the closeness of the

personal and economic relations.

The fact revealed that immovable properties were situated in Malaysia. There was no establishment

in India in connection with the business of rubber plantations carried in Malaysia i.e the entire

business profits were attributable only to the Malaysian establishment Hence the taxpayer had a

personal and economic relations closer to Malaysia and were resident of Malaysia.

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OECD Model Convention – Article 6 – Case law ….Cond’t

The taxpayers resident of Malaysia and carrying on business in Malaysia had no permanent

establishment in India.

In the absence of such permanent establishment in India, business profits arising in Malaysia

could not be subjected to tax in India.

With respect to capital gains, SC held that for the purpose of the Income Tax Act capital gains

is always treated as income arising from immovable property and therefore in case wherever

any expression is not defined in Treaty , the expression defined in the Act would prevail.

Thus, the capital gains derived from immovable property is income and article 6 would be

attracted.

In treaty between GOI and Government of Malaysia a person will be deemed to be a resident

of a contradicting state where his personal and economic relations were closer.

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OECD Model Convention – Article 6 - Paragraph 1 …Cond’t

Income from agriculture and forestry included as

these incomes primarily concern the use of land

• Ownership of immovable property exploited for

agriculture not necessary

Treaty between India and Armenia, Austria, France,

Indonesia include this income in Article 6 whereas

treaty with Australia, China, Denmark, Japan do not

include this income in Article 6

Where such income is not covered in Article 6, it shall

be governed by Article 7

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Income from property situated in third country

Illustration

a) Mr. A, resident of India who owns property in France has let it out to a resident of

Netherlands, Mr. B.

b) Treaty between India and The Netherlands cannot apply as the property is situated in France

c) If Mr. B sublets the property to Mr. C of France, income of Mr. B will be covered by Article 6 of

France Netherlands treaty

Mr. A

Resident of India

Mr. B

Resident of

Netherlands

Mr. C

Resident of

France

Lets Out the residential property in France

Sublets the

property in

FranceTreaty between India and

Netherlands not applicable

Treaty between

France and

Netherlands

applicable

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OECD Model Convention - Article 6 - Paragraph 2

• Definition of Immovable Property would be governed by country specific laws in order to

avoid difficulties in interpretation

• OECD has given general guidance for immovable property -

property accessory to immovable property

live stock and equipment used in agriculture and forestry

rights to which the provisions of general law relating to landed property apply

usufruct of immovable property

Rights to variable or fixed payments as consideration for the working of mineral

deposits, sources and other natural resources

Ships, boats, aircrafts have been excluded from the scope of Article 6 as Article 8

specifically deals with such income

Exception-

India Turkey tax treaty includes fishing places of every kind within the meaning of

Immovable Property

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OECD Model Convention - Article 6 - Paragraph 3

• Income from all forms of exploitation of immovable

property (industrial, commercial and other enterprises)

falls within the scope of this Article – direct use or letting

out or use in any other form is also covered

However, income from alienation (transfer) of

immovable property falls within the scope of Article 13

of the model convention

• Tax treaties of India with Finland, Kyrgyz Republic and

Namibia provide that where a shareholder or owner of

other rights in a company is entitled to enjoyment of

immovable property held by the company, on account of

direct or indirect use or letting or use of such right, it is

taxable under Article 6

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OECD Model Convention – Article 6 -Paragraph 4 & 5

Paragraph 4:

• Article 6 takes precedence over Articles 7 (Business Profits)

• As per the OECD Model Convention, the right to tax of the State of source has priority over

the right to tax of the other State

• This does not prevent income from immovable property, when derived through a permanent

establishment, from being treated as income of an enterprise, but secures that income from

immovable property will be taxed in the State in which the property is situated

• The provisions of the Article do not prejudge the application of domestic law as regards the

manner in which income from immovable property is to be taxed

Paragraph 5:

• Article 6 deals only with attribution of taxation on income from immovable property, it is silent

on the modalities of determining income

• In the absence of specification, the computation shall be as per the domestic law

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Taxability on disposition of

Immovable Property

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OECD Model Convention – Article 13 (1)

• Paragraph 1 preserves the right of the ‘State of Source’ to tax gains from alienation of

immovable property situated in that State.

• The term ‘immovable property’ means property as explained in Article 6.

• It is immaterial whether the property is residential or commercial, capital asset or stock-in-trade

- the state of source can levy tax on disposals.

• The treatment of income as capital gains or business income or other income depends on the

domestic law.

• India characterizes capital assets as capital gains and stock-in-trade as business income

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Can possession of property for part performance of contract be considered as

transfer??

• Under treaty laws, the term used is 'alienation’ - the term ‘transfer 'is not used.

• The term ‘alienation’ has not been defined

• The UN and OECD commentaries state that alienation includes several kinds of transactions

• It includes sale or exchange of property including a partial alienation, the expropriation,

the transfer to a company in exchange for stock, the sale of a right, the gift and even

passing of property on death.

• The meaning of any term has to be applied as per the domestic law if it is not defined in the

treaty

• Under section 2(47) of the Income-tax Act, 1961, allowing the possession of any

immovable property to be taken for part performance a contract is considered a ‘transfer’

• Hence, there can be capital gain on possession of property for part performance of a contract

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• Paragraph 2 deals with gains on alienation of –

movable property forming part of the business property of a PE or pertaining to a

fixed base

the permanent establishment or fixed base

• Such gains may be taxed in the State where such PE or fixed base is situated i.e. the

‘State of Source’

• This clause applies only if the property sold forms part of the PE or fixed base

• This article does not apply to stock-in-trade. For stock-in-trade, Article 7 – Business Profits

applies

• If there is PE in India and the assets sold are stock-in-trade, then gains can be taxed in

India. If there is no PE in India, then sale of stock-in-trade cannot be taxed in India

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• Gains on alienation of –

Ships or aircraft operated in international traffic;

Boats engaged in inland waterways transport; or

Movable property pertaining to the operation of such ships, aircrafts or boats

Paragraph 3 states that it can be taxed ONLY in the Contracting State in which the place

of effective management (POEM) of the enterprise is situated.

• Paragraph 3 states that any movable property relating to operation of ships andaircrafts in international traffic can be taxed only where the POEM is situated

• It is immaterial whether there is a PE or not or whether the asset is a part of the PE ornot

Article 13(3) being a specific article takes precedence over article 13(2)

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• Paragraph 4 - Gains on sale of shares of a company or an interest in a partnership, trust or

estate, the property of which consists ‘principally’ of immovable property situated in a

Contracting State be taxed by the State in which the property is situated

• This paragraph is applicable regardless of whether the company or shareholder,

partnership, trust or estate is a resident of the Contracting State in which the

immovable property is situated or a resident of another State.

• Paragraph 4 defines the expression ‘principally’ in relation to ownership of immovable

property to mean the value of such immovable property exceeding fifty per cent of the

aggregate value of all assets owned by the company, partnership, trust or estate.

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Situs of immovable property

• If the property has situs in India and it is

owned by an Indian entity or a foreign entity,

India has the right to tax the income on sale of

interest or shares in the entity

• Effective AY 2013-14, as per Explanation 5 to

section 9(1)(i), if immovable property in India is

held through a foreign company and the value

of the share is substantially derived from the

value of the immovable property then the

shares will be deemed to be located in India

Situs of property is relevant

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OECD Model Convention – Article 13 (4) - Exception

• Gains from the alienation of share of the capital

stock of the company, partnership, trust or estate are

to be taxed only if such an entity is engaged in the

management of the said immovable properties

• This paragraph shall not apply if the immovable

property is used by such entity in its business

activities

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Illustration

Situation Taxability of Article 13(4)

US resident has invested in ABC India.

ABC India has a flat in Mumbai - this

represents substantial asset

On sale of shares of ABC India, Capital

gains can be taxed in India and US as per

the treaty

In the above example, the immovable

property is used for ABC India’s own

business

On sale of shares of ABC India, Capital

gains will be taxed according to Article 7

ABC India is in the business of

management of immovable property

On sale of shares of ABC, capital gains

can be taxed in India and US as per the

treaty

A resident of US, situated in India transfers assets under the following situations:

Extent of holding by the Non Resident in the Indian Company is not relevant

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• All other assets –

Shares of other companies

• Residence country has exclusive taxation rights

• Taxability in Residence depends on domestic law, e.g. Mauritius does not tax capital

gains

• The UN model of 2011 states that if “at any time during the 12 month period preceding

such alienation, if the alienator directly or indirectly held at least __% of the shares”, then

the same will be taxable in India.

• The shareholding prescribed in the India – Netherlands DTAA is 10%

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OECD Model Convention – Article 13 (5) – Residuary clause

• Residence country exclusive taxation rights from alienation of any property other than that

referred to in paragraph 1 to 5

• For example gains derived from –

Movable property other than that described in paragraph 2;

Know how, patents not forming part of PE

Debt instruments and various financial instruments to the extent such income is not

characterised as income taxable under another Article example. Article 10 (dividends)

or Article 11 (interest)

• Taxability in Residence country depends on domestic law

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Q&A

&Questions

Answers

Thank You

Name : Pradeep A

Email : [email protected]

Documents

Immovable property_International Tax