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April 29, 2021

Indian Court rules on applicability of Most Favored Nation clause for determining withholding tax rate on dividend payments

Executive summary

On 22 April 2021, India’s Delhi High Court (the Court) ruled in favor of non-Indian taxpayers on the issue of the rate of withholding tax applicable to dividend income received from Indian subsidiaries under the India-Netherlands tax treaty.1 The Court applied the principle of parity and granted a 5% withholding tax rate under the Most Favored Nation (MFN) clause of the treaty. The Court also noted that as the MFN clause is part of the protocol to the India-Netherlands tax treaty, no separate notification is required to apply the MFN provisions.

This Alert summarizes the decision of the Court and implications for taxpayers.

Detailed discussion


Pursuant to the India-Netherlands tax treaty, dividends paid by Indian entities to residents of the Netherlands, who are beneficial owners of such dividends, are liable to withholding tax at a rate not to exceed 10%. Further, the protocol of the tax treaty has an MFN clause which states that if India enters into a tax treaty on a later date with a third country, which is an OECD2 member, providing a beneficial rate of tax or restrictive scope for taxation of dividends, interest and royalties, a similar benefit should be accorded to the India-Netherlands tax treaty.

Some Indian tax treaties with OECD member countries such as Slovenia, Lithuania and Colombia provide for a lower withholding tax rate of 5% for dividend taxation (subject to conditions). However, these countries were not OECD members when the respective tax treaties were entered into by India but became OECD members only at a later date.

There has been a lack of judicial guidance on whether the beneficial tax rate under the tax treaties with Slovenia, Lithuania and Colombia could be applied to other tax treaties with the MFN clause, and this ruling provides the much-needed guidance.

The Court’s ruling

The Court’s considerations from its ruling are summarized as follows:

  • The protocol of a tax treaty forms an integral part of the tax treaty and there is no requirement to issue a separate notification in order to apply the provisions of the protocol.3
  • The MFN clause, which forms part of the protocol, incorporates the principle of parity between the India-Netherlands tax treaty and the tax treaties executed with the third states thereafter by India in respect of the rate of withholding tax or the scope of the tax treaties in respect of items of income concerning dividends, interest and royalties. The principle of parity is applicable where the third state with whom India enters into a tax treaty should be a member of the OECD and the tax treaty executed with the third state limits the rate of withholding tax imposed by India at a rate lower or a scope more restricted, than the rate or scope provided in the subject tax treaty.
  • Once the foregoing conditions are satisfied, the benefit of the lower withholding tax or the restricted scope of the tax treaty with the third state should be applicable to the India-Netherlands tax treaty from the date when the tax treaty with the third country comes into force.
  • The contention of the tax authority that the benefit of the MFN clause should be available only if the country with which India enters into a tax treaty was an OECD member at the time of execution of the subject tax treaty (i.e., India-Netherlands in the present case) is misconceived and contrary to the plain language of India-Netherlands tax treaty. Rather, there could be a gap between the dates on which the tax treaty is executed between India and the third state and the date when such third state becomes a member of OECD. The MFN clause can only apply when the third state fulfils the requirement of being a member of the OECD.
  • To understand the intent of India and the Netherlands in framing the MFN clause, reliance was placed on the decree issued by the Netherlands, wherein the Netherlands has provided the benefit of 5% withholding tax with reference to participation dividends paid by companies resident in the Netherlands to a resident in India from the date when Slovenia became a member of the OECD.


This decision provides timely guidance on the potential for lower withholding tax rates pursuant to the MFN clause amid the recent adoption of the classical system of dividend taxation in India from the tax year 2020-21 onwards. The Court reiterated that the MFN clause has automatic application and there is no requirement for any notification to trigger the MFN clause. Further, by applying the principle of parity, the Court has granted the benefit of the lower tax treaty rate pursuant to the MFN clause as agreed by India in other relevant tax treaties entered into after the India-Netherlands tax treaty was executed.

This is a significant ruling as many tax treaties entered into by India with countries such as France, Spain, Switzerland and Hungary have comparable MFN clauses. Furthermore, as the MFN clauses also apply to income in the nature of interest, royalties and fees for technical services, it is recommended that multinational companies with Indian investments through these countries or operations in these countries evaluate the impact of this favorable ruling on dividends and other streams of income.


For additional information with respect to this Alert, please contact the following:

Ernst & Young LLP (India)

Ernst & Young LLP (United States), Indian Tax Desk, New York

Ernst & Young LLP (United States), Indian Tax Desk, San Jose

Ernst & Young Solutions, Indian Tax Desk, Singapore

Ernst & Young LLP (United Kingdom), Indian Tax Desk, London

Ernst & Young LLP (United States), Asia Pacific Business Group, New York



  1. See Concentrix Services Netherlands B.V. and Optum Global Solutions International B.V.
  2. Organisation for Economic Co-operation and Development.
  3. The Court referenced the Delhi High Court decision in Steria (India) Ltd. v. CIT [[2016] 386 ITR 390].

The information contained herein is general in nature and is not intended, and should not be construed, as legal, accounting or tax advice or opinion provided by Ernst & Young LLP to the reader. The reader also is cautioned that this material may not be applicable to, or suitable for, the reader's specific circumstances or needs, and may require consideration of non-tax and other tax factors if any action is to be contemplated. The reader should contact his or her Ernst & Young LLP or other tax professional prior to taking any action based upon this information. Ernst & Young LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect the information contained herein.


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