Dutch FPIs face tax concerns following apex court ruling

Foreign portfolio investors (FPIs) based in the Netherlands face tax concerns following a Supreme Court verdict last week pertaining to the interpretation of Double Taxation Avoidance Agreements (DTAAS).

- Pavan Burugula

In its verdict, the Supreme Court clarified that the most favoured nation (MFN) clause in a tax treaty is not automatically triggered and has to be notified separately by the central government.

It is common for FPIs based in the Netherlands to believe that their dividends will be subject to a 5% withholding tax in India. However, the recent ruling by the apex court has clarified that they will be subject to a 10% withholding tax instead. This means that all Netherlands-based entities receiving dividends must pay an additional withholding tax. The verdict on the issue of withholding tax has put FPIs in a quandary, as they have in the past taken advantage of the 5% withholding tax rate, according to tax experts.

This decision has become more significant now, as many FPIs are currently undergoing an audit by the tax department for their 2021-22 filings. Every year, the revenue department selects a sample of FPIs for auditing purposes.