India–Ethiopia tax treaty — rates, PE and MLI

The rates, at a glance

Every figure below is taken from the article named beside it, not from a rates table. Read the condition in the same row before you use the rate — in this treaty the condition is usually the whole answer.

Income	Rate	The condition attached to it	Article
Dividends	7.5%	A single flat ceiling with no qualifying-holding split — and at 7.5 per cent one of the lowest dividend caps in India's treaty network. The cap applies only where the beneficial owner is a resident of the…	Article 10, paragraph 2
Interest	10%	Article 11(3) exempts interest at source where it is derived and beneficially owned by (a) the Government, a political sub-division or a local authority of the other Contracting State; or (b)(i) in the case of…	Article 11, paragraph 2
Royalties	10%	Royalties and fees for technical services share one 10 per cent ceiling. The Article 12(3)(a) definition covers copyright of literary, artistic or scientific work including cinematograph films or films or…	Article 12, paragraph 2
Fees for technical services	10%	Article 12(3)(b) defines fees for technical services as "payments of any kind, other than those mentioned in Articles 14 and 15 of this Agreement as consideration for managerial or technical or consultancy…	Article 12, paragraph 2

Status

In force	The Agreement was signed at Addis Ababa on 25 May 2011 — "done in duplicate at Addis Ababa this 25th day of May, 2011, each in the Hindi and English languages, both texts being equally authentic. In case of divergence of interpretation, the English text shall prevail." Entry into force is fixed by Article 30(2): "This Agreement shall enter into force on the date of the later of the notifications referred to in paragraph 1 of this Article." The notification records that the Agreement "shall come into force on the 15th day of October, 2012, being the date of later of the notifications after completion of the procedures as required by the respective laws for the entry into force of this Agreement, in accordance with Article 30 of the said Agreement", and gives effect to its provisions in the Union of India with effect from 1 April 2013. That matches Article 30(3)(a): in India the provisions have effect "In India, in respect of income derived in any fiscal year beginning on or after the 1st of April next following the calendar year in which the Agreement enters into force" — the fiscal year beginning 1 April 2013, assessment year 2014-15. In Ethiopia they have effect for fiscal years beginning on or after the 8th day of July next following the calendar year of entry into force.
Given effect by	Notification No. 14/2013-ft&tr-II [F. No. 503/01/1996-ft&tr-II] / S.O. 418(E), dated 21 February 2013, made in exercise of the powers conferred by section 90 of the Income-tax Act, 1961 (43 of 1961), notifying that all the provisions of the annexed Agreement shall be given effect to in the Union of India with effect from 1 April 2013.
Modified by the MLI	No synthesised text was found for this treaty in the source searched.
Principal purpose test	Article 28(2): a resident "shall not be entitled to the benefits of this Agreement if its affairs were arranged in such a manner as if it was the main purpose or one of the main purposes to take the benefits of this Agreement".

Dividends

Rate	7.5%
Where this comes from	Article 10, paragraph 2

A single flat ceiling with no qualifying-holding split — and at 7.5 per cent one of the lowest dividend caps in India's treaty network. The cap applies only where the beneficial owner is a resident of the other State. Article 10(4) switches off paragraphs 1 and 2 where the holding is effectively connected with a permanent establishment or fixed base, in which case Article 7 or Article 14 governs.

Interest

Rate	10%
Exemptions	Article 11(3) exempts interest at source where it is derived and beneficially owned by (a) the Government, a political sub-division or a local authority of the other Contracting State; or (b)(i) in the case of India, the Reserve Bank of India, and (ii) in the case of Ethiopia, the National Bank of Ethiopia; or (c) any other institution as may be agreed upon from time to time between the competent authorities of the Contracting States through exchange of letters.
Where this comes from	Article 11, paragraph 2

Penalty charges for late payment are excluded from "interest" by Article 11(4). Because sub-paragraph (c) works by exchange of letters, the exempt list can grow without any amendment to the Agreement.

Royalties

Rate	10%
Where this comes from	Article 12, paragraph 2

Royalties and fees for technical services share one 10 per cent ceiling. The Article 12(3)(a) definition covers copyright of literary, artistic or scientific work including cinematograph films or films or tapes used for television or radio broadcasting, patents, trade marks, designs or models, plans, secret formulae or processes, industrial, commercial or scientific equipment rental, and information concerning industrial, commercial or scientific experience.

Fees for technical services

Rate	10%
Make-available requirement	No
Where this comes from	Article 12, paragraph 2

Article 12(3)(b) defines fees for technical services as "payments of any kind, other than those mentioned in Articles 14 and 15 of this Agreement as consideration for managerial or technical or consultancy services, including the provision of services of technical or other personnel". No make-available condition appears; the article is silent, so make_available is false rather than null.

Capital gains on shares

Treatment	Source-State taxation of share gains. Article 13(4) allows the State where the immovable property is situated to tax gains on shares of the capital stock of a company whose property consists directly or indirectly principally of immovable property there; Article 13(5) allows gains on shares other than those in paragraph 4, in a company which is a resident of a Contracting State, to be taxed in that State. Article 13(6) leaves everything else to residence-State taxation only.
Grandfathering	None in the notified text.
Conditions	Paragraph 5 depends only on the company being a resident of the taxing State; there is no holding threshold and no value test.
Where this comes from	Article 13, paragraph 5

Permanent establishment

Construction or installation PE	183 days (Article 5(3)(a) is expressed in days, not months)
Service PE	More than six months within any twelve-month period
Agency PE	Article 5(5): a dependent person is a permanent establishment if he (a) has and habitually exercises authority to conclude contracts in the name of the enterprise, unless limited to the paragraph 4 activities; (b) has no such authority but habitually maintains a stock of goods or merchandise in the first-mentioned State from which he regularly delivers on behalf of the enterprise; or (c) habitually secures orders wholly or almost wholly for the enterprise. Article 5(6) denies independent status to an agent devoted wholly or almost wholly to the enterprise.
Where this comes from	Article 5, paragraph 3

The two limbs of Article 5(3) are different thresholds and must not be merged. Sub-paragraph (a): a building site or construction, installation or assembly project or supervisory activities in connection therewith constitutes a permanent establishment only if it lasts more than 183 days. Sub-paragraph (b): the furnishing of services, including consultancy services, through employees or other personnel is a permanent establishment only if activities of that nature continue, for the same or a connected project, for more than six months within any twelve-month period. Paragraph 1 of the annexed Protocol adds that the 183 days run from the date the project itself begins, excluding time spent solely on preparatory activities and time taken for obtaining licences.

Anti-abuse: limitation of benefits, and the MLI

LOB	Article 28 is headed "Limitation of Benefits" but is a purpose test, not a qualified-person or ownership test. Paragraph 1 preserves each State's domestic anti-avoidance law: the Agreement "shall in no case prevent a Contracting State from the application of the provisions of its domestic law and measures concerning tax avoidance or evasion, whether or not described as such". Paragraph 3 extends the article to legal entities without bona fide business activities.
PPT	Article 28(2): a resident "shall not be entitled to the benefits of this Agreement if its affairs were arranged in such a manner as if it was the main purpose or one of the main purposes to take the benefits of this Agreement".
Where this comes from	Article 28

The text notified under section 90 is what this page carries. The Income Tax Department publishes MLI synthesised texts for some treaties; no such page was found for Ethiopia. Nothing in the notified text shows any MLI modification, and the MLI position has not been checked from this source.

The protocols, in order

A treaty read without its protocols is a wrong answer.

A Protocol signed at Addis Ababa on the same day, 25 May 2011, is annexed and forms an integral part of the Agreement. Paragraph 1 provides that for computing the time limit in Article 5(3)(a) "the 183 days period begins as of the date on which the construction, installation or assembly project or supervisory activity itself begins; it does not take into account the time spent solely on preparatory activities. The time taken for obtaining licenses etc., shall also be excluded for this purpose." Paragraph 2 provides that Article 24 (non-discrimination) does not prevent India from charging the profits of an Ethiopian company's Indian permanent establishment at a higher rate than a similar Indian company, nor conflicts with Article 7(3). Paragraph 3 provides that where the domestic law of a Contracting State is more beneficial to a resident of the other State than the Agreement, the domestic law applies to the extent it is more beneficial.
No amending notification and no later protocol was found for this Agreement on the Income Tax Department's site.

The words themselves

Quoted from the treaty as notified.

However, such dividends may also be taxed in the Contracting State of which the company paying the dividends is a resident and according to the laws of that State, but if the beneficial owner of the dividends is a resident of the other Contracting State, the tax so charged shall not exceed 7.5 per cent of the gross amount of the dividends.

Article 10, paragraph 2 of the treaty as notified.

(a) A building site or construction, installation or assembly project or supervisory activities in connection therewith constitutes a permanent establishment only if such site, project or activities last more than 183 days.

Article 5, paragraph 3(a) of the treaty as notified.

The furnishing of services, including consultancy services, by an enterprise through employees or other personnel engaged by the enterprise for such purpose, but only if activities of that nature continue (for the same or a connected project) within a Contracting State for a period or periods aggregating more than six months within any twelve-month period.

Article 5, paragraph 3(b) of the treaty as notified.

For the purpose of computing the time limit in paragraph 3 (a) of Article 5 (Permanent Establishment), the 183 days period begins as of the date on which the construction, installation or assembly project or supervisory activity itself begins; it does not take into account the time spent solely on preparatory activities. The time taken for obtaining licenses etc., shall also be excluded for this purpose.

Article Protocol, paragraph 1 of the treaty as notified.

A resident of a Contracting State shall not be entitled to the benefits of this Agreement if its affairs were arranged in such a manner as if it was the main purpose or one of the main purposes to take the benefits of this Agreement.

Article 28, paragraph 2 of the treaty as notified.

What to watch

The dividend cap is 7.5 per cent flat, not 10 per cent, and there is no parent-subsidiary split. It is the lowest rate in the treaty and the field most often mis-stated, because a defective copy of this notification circulates in which the figure is cut off at the right margin.
Article 12 puts royalties and fees for technical services under one 10 per cent ceiling, so characterisation between them does not move the rate. It moves the source rule instead: Article 12(5) has a services-performed limb that can bring in payments made by a resident of neither State.
The two Article 5(3) thresholds are separate: 183 days for a construction, installation or assembly project, six months in any twelve-month period for furnished services. A contract that mixes supply and supervision has to be split before either clock is applied.
Protocol paragraph 1 is the provision to plead on a marginal construction permanent establishment: the 183 days start when the project itself starts, and preparatory work and licence-obtaining time are excluded.
Protocol paragraph 3 expressly preserves the more-beneficial domestic law, which lines up with section 90(2) of the Income-tax Act and matters where the Act gives a lower effective rate than Article 12.
Article 28 is a main-purpose test with no safe harbour and no list of qualifying persons, so there is nothing objective to fall back on; the argument is about purpose and about whether the entity has bona fide business activities.
Article 27 gives assistance in the collection of taxes, which is uncommon in India's treaties of this vintage and means an Ethiopian revenue claim can be collected in India.

What this page does not tell you. This record is written from the Income Tax Department's own html record of the notification, which carries the Agreement and Protocol in full and without the right-margin truncation that spoils the pdf generated from that page. The dividend rate, which could not be read from the pdf, is recovered here. What the page still does not do is set out Articles 6 to 9 and 14 to 27 in detail — non-discrimination, mutual agreement, the elimination-of-double-taxation article and the collection assistance machinery are only summarised. The Hindi text was not used. The MLI position is unchecked: no synthesised text for Ethiopia was found on the department's site, and the absence of a page there is not proof that the MLI does not apply. Nothing has been checked against the printed Gazette.

The India–Ethiopia tax treaty