India–Japan 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	10 per cent of the gross amount — a single flat ceiling, conditional only on the recipient being the beneficial owner. Art. 10(2).	None. There is no shareholding threshold in Article 10.	Article 10, paragraph 2
Interest	10 per cent of the gross amount — a single flat ceiling, conditional on the recipient being the beneficial owner. Art. 11(2).	Art. 11(3) is drafted as an exclusive-residence rule rather than a source exemption: 'interest arising in a Contracting State shall be taxable only in the other Contracting State if' either limb is met. Art…	Article 11, paragraph 2, 3 and 4
Royalties	10 per cent of the gross amount — Art. 12(2). A single flat ceiling covering royalties and fees for technical services.	Art. 12(3) is a single composite definition covering copyright of literary, artistic or scientific work (including cinematograph films and films or tapes for radio or television broadcasting), patent, trade…	Article 12, paragraph 2
Fees for technical services	10 per cent of the gross amount — the same single ceiling as royalties, Art. 12(2).	There is no make-available requirement. Art. 12(4) defines 'fees for technical services' as 'payments of any amount to any person other than payments to an employee of a person making payments and to any…	Article 12, paragraph 2 (rate); 4 (definition)

Status

In force	29 December 1989 (Convention signed 7 March 1989; entered into force on the exchange of Instruments of Ratification under Art. 28(1)). It replaced the earlier India-Japan agreement. Amending Protocols signed 24 February 2006 and 11 December 2015. MLI in force for Japan 1 January 2019 and for India 1 October 2019.
Given effect by	G.S.R. 101(E), dated 1-3-1990 — under s.90 of the Income-tax Act 1961.
Modified by the MLI	Yes — a synthesised text exists. Prepared on the basis of the reservations and notifications submitted to the OECD Depositary by Japan on 26 September 2018 and by India on 25 June 2019. The document states it covers the Convention signed 7 March 1989 as amended by the Protocols signed 24 February 2006 and 11 December 2015. It expressly states that it 'does not constitute a source of law' and that the authentic texts of the Convention and the MLI are the only legal texts applicable. No separate publication date is printed.
Principal purpose test	Present. MLI Art. 7(1) (Prevention of Treaty Abuse) is boxed into the synthesised text immediately before Article 28: notwithstanding any provisions of the Convention, a benefit shall not be granted in respect of an item of income if it is reasonable to conclude, having regard to all relevant facts and circumstances, that obtaining that benefit was one of the principal purposes of any arrangement or transaction that resulted directly or indirectly in that benefit, unless it is established that granting that benefit in these circumstances would be in accordance with the object and purpose of the relevant provisions of the Convention. In addition MLI Art. 10 applies — the anti-abuse rule for permanent establishments situated in third jurisdictions, with the threshold stated on the face of the synthesised text: benefits do not apply to an item of income on which the tax in the third jurisdiction is less than 60 per cent of the tax that would have been imposed in the first-mentioned State had the PE been situated there; income to which the paragraph applies remains taxable under the domestic law of the other State notwithstanding any other provision of the Convention. There is an active-conduct-of-business carve-out (excluding the business of making, managing or simply holding investments for the enterprise's own account unless banking, insurance or securities activities carried on by a bank, insurance enterprise or registered securities dealer) and a competent-authority discretion.

Dividends

Rate	10 per cent of the gross amount — a single flat ceiling, conditional only on the recipient being the beneficial owner. Art. 10(2).
The holding that unlocks it	None. There is no shareholding threshold in Article 10.
Where this comes from	Article 10, paragraph 2

Art. 10(4) disapplies paras 1 and 2 where the holding is effectively connected with a PE or fixed base. Separately, Art. 23(3)(b) gives a Japanese underlying tax credit: where a Japanese company owns not less than 25 per cent either of the voting shares of an Indian paying company or of the total shares issued by it, the credit takes into account the Indian tax payable by the paying company on its income. That 25 per cent test is in the relief article, not in Article 10, and it is easily mistaken for a dividend rate threshold.

Interest

Rate	10 per cent of the gross amount — a single flat ceiling, conditional on the recipient being the beneficial owner. Art. 11(2).
Exemptions	Art. 11(3) is drafted as an exclusive-residence rule rather than a source exemption: 'interest arising in a Contracting State shall be taxable only in the other Contracting State if' either limb is met. Art. 11(3)(a): the interest is derived and beneficially owned by the Government of that other State, a political sub-division or local authority thereof, or the central bank of that other State or any financial institution wholly owned by that government. Art. 11(3)(b): the interest is derived and beneficially owned by a resident of that other State with respect to debt-claims guaranteed, insured or indirectly financed by the Government, a political sub-division or local authority, the central bank, or any financial institution wholly owned by that Government. 'Indirectly financed' is unusually wide and appears in none of the other seven treaties reviewed here. Art. 11(4) defines the two terms by named lists. For japan: the Bank of Japan; the Japan Bank for International Cooperation; the Japan International Cooperation Agency; the Nippon Export and Investment Insurance; and such other financial institution the capital of which is wholly owned by the Government of Japan as may be agreed upon from time to time between the Governments. For india: the Reserve Bank of India; the Export-Import Bank of India; the General Insurance Corporation of India; the New India Assurance Company Limited; and such other financial institution the capital of which is wholly owned by the Government of India as may be agreed upon from time to time between the Governments. Unlike the German treaty, these lists are open — each ends with an 'as may be agreed upon from time to time' limb.
Where this comes from	Article 11, paragraph 2, 3 and 4

Art. 11(6) disapplies paras 1, 2 and 3 where the debt-claim is effectively connected with a PE or fixed base, so the government/financial-institution rule falls away on a PE connection. Art. 11(5) does not exclude penalty charges for late payment from 'interest' — an omission relative to the USA, UK, Singapore, UAE and Mauritius treaties, all of which carve them out expressly.

Royalties

Rate	10 per cent of the gross amount — Art. 12(2). A single flat ceiling covering royalties and fees for technical services.
Where this comes from	Article 12, paragraph 2

Art. 12(3) is a single composite definition covering copyright of literary, artistic or scientific work (including cinematograph films and films or tapes for radio or television broadcasting), patent, trade mark, design or model, plan, secret formula or process, the use of or right to use industrial, commercial or scientific equipment, and information concerning industrial, commercial or scientific experience. Equipment royalties take the same 10 per cent rate. Note A trap: the heading of Article 12 reads 'royalties' only, but paragraphs 1, 2, 4, 5, 6 and 7 all deal expressly with 'royalties and fees for technical services'. The heading understates the article's scope.

Fees for technical services

Rate	10 per cent of the gross amount — the same single ceiling as royalties, Art. 12(2).
Make-available requirement	No
Where this comes from	Article 12, paragraph 2 (rate); 4 (definition)

There is no make-available requirement. Art. 12(4) defines 'fees for technical services' as 'payments of any amount to any person other than payments to an employee of a person making payments and to any individual for independent personal services referred to in Article 14, in consideration for the services of a managerial, technical or consultancy nature, including the provisions of services of technical or other personnel.' There is no ancillary-and-subsidiary limb, no make-available limb, no development-and-transfer limb, and no separate exclusions paragraph. The only carve-outs are built into the definition itself and they are two: payments to an employee of the payer, and payments to any individual for independent personal services referred to in Article 14. Note that this is slightly wider in the taxpayer's favour than the German Art. 12(4), which excludes only Article 15 (dependent personal services) payments — the Japanese definition excludes both employee payments and individual independent-services payments. But it remains far broader than the USA, UK, Singapore or Netherlands definitions, and it tracks the Indian domestic s.9(1)(vii) formulation closely.

Capital gains on shares

Treatment	Source state may tax. Art. 13(3): 'Unless the provisions of paragraph 2 are applicable, gains derived by a resident of a Contracting State from the alienation of shares of A company which is A resident of the other Contracting State may be taxed in that other Contracting State.' A bare rule with no participation threshold, no immovable-property condition, no listing exception and no acquisition-date test. Art. 13(5) is the residual: gains on any property other than that referred to in paragraphs 1 to 4 are taxable only in the alienator's State of residence.
Grandfathering	None. There is no acquisition-date grandfathering and no transitional rate window.
Conditions	Art. 13(3) itself is unconditional. But MLI Art. 9(4) now applies to article 13 as a whole and adds an independent source-taxing right: gains on shares or comparable interests, such as interests in a partnership or trust, may be taxed in the other State if at any time during the 365 days preceding the alienation those shares or interests derived more than 50 per cent of their value directly or indirectly from immovable property situated there. Since Art. 13(3) already gives India the right to tax gains on shares of Indian companies, the practical work of MLI Art. 9(4) here is to extend source taxation to comparable non-share interests — partnership and trust interests — which Art. 13(3) does not reach.
Where this comes from	Article 13, paragraph 3 and 5; MLI Art. 9(4)

Permanent establishment

Construction or installation PE	More than six months for a building site or construction, installation or assembly project — Art. 5(3), a stand-alone paragraph. Separately, Art. 5(4) is a distinct deeming provision: an enterprise is deemed to have a PE if it carries on supervisory activities in that State for more than six months in connection with such a site or project. Supervisory activity is therefore tested on its own six-month clock, not aggregated into the site's own duration. A third rule, Art. 5(5), applies notwithstanding paras 3 and 4: providing services or facilities for more than six months in connection with the exploration, exploitation or extraction of mineral oils creates a PE. And Art. 5(2)(j) treats an installation or structure used for the exploration of natural resources as a PE only if so used for more than six months.
Service PE	None. There is no general service PE limb in the India-Japan Convention. Furnishing services through employees or other personnel does not of itself create a PE however long it continues, outside the mineral-oils rule in Art. 5(5) and the supervisory rule in Art. 5(4). The MLI did not add one.
Agency PE	True
Where this comes from	Article 5

This is the only treaty reviewed here where MLI Article 12 applies, and it changes the agency PE rule materially. The treaty's own Art. 5(7) has the familiar three limbs — authority to conclude contracts, stock-and-delivery, and habitually securing orders wholly or almost wholly for the enterprise or its common-control group. MLI Art. 12(1) now applies in respect of Art. 5(7)(a) and extends it: a person who habitually concludes contracts, or who habitually plays the principal role leading to the conclusion of contracts that are routinely concluded without material modification by the enterprise, creates a PE where those contracts are (a) in the name of the enterprise, (b) for the transfer of ownership of, or the granting of the right to use, property owned by the enterprise or that it has the right to use, or (c) for the provision of services by the enterprise. Limb (c) is significant: a services-only arrangement can now create an agency PE. MLI Art. 12(2) then replaces Art. 5(8): a person acting exclusively or almost exclusively on behalf of one or more closely related enterprises is not an independent agent. The treaty's own Art. 5(8) had no such exclusivity limb at all — it was the most permissive independent-agent provision of the eight — so this is a real tightening. Art. 5(6) preparatory/auxiliary exemptions are replaced by MLI Art. 13(2) and supplemented by MLI Art. 13(4) anti-fragmentation.

Anti-abuse: limitation of benefits, and the MLI

LOB	There is no limitation-of-benefits article in the Convention.
PPT	Present. MLI Art. 7(1) (Prevention of Treaty Abuse) is boxed into the synthesised text immediately before Article 28: notwithstanding any provisions of the Convention, a benefit shall not be granted in respect of an item of income if it is reasonable to conclude, having regard to all relevant facts and circumstances, that obtaining that benefit was one of the principal purposes of any arrangement or transaction that resulted directly or indirectly in that benefit, unless it is established that granting that benefit in these circumstances would be in accordance with the object and purpose of the relevant provisions of the Convention. In addition MLI Art. 10 applies — the anti-abuse rule for permanent establishments situated in third jurisdictions, with the threshold stated on the face of the synthesised text: benefits do not apply to an item of income on which the tax in the third jurisdiction is less than 60 per cent of the tax that would have been imposed in the first-mentioned State had the PE been situated there; income to which the paragraph applies remains taxable under the domestic law of the other State notwithstanding any other provision of the Convention. There is an active-conduct-of-business carve-out (excluding the business of making, managing or simply holding investments for the enterprise's own account unless banking, insurance or securities activities carried on by a bank, insurance enterprise or registered securities dealer) and a competent-authority discretion.
Subject to tax	No subject-to-tax clause. Art. 4(1) uses the formula 'liable to tax therein by reason of his domicile, residence, place of head or main office or any other criterion of a similar nature' — note 'place of head or main office' rather than the usual 'place of management' — and, unlike the UK and German treaties, carries no exclusion for persons liable to tax only on source income. Art. 4(2) as originally drafted was itself unusual: it had no objective tie-breaker at all for anyone, individual or company, and simply required the competent authorities to determine residence by mutual agreement. MLI Art. 4(1) has now replaced that only so far as it concerns non-individuals, adding the place-of-effective-management / place-of-incorporation / other-relevant-factors guidance and the denial of all relief absent agreement. For individuals the bare mutual-agreement rule still stands, with no permanent home, centre of vital interests, habitual abode or nationality ladder — a striking gap by comparison with every other treaty reviewed here.
Where this comes from	Article MLI Art. 7(1) and MLI Art. 10; no LOB in the Convention

Heavily modified — eleven boxes, and the only treaty reviewed here where the MLI's commissionaire agency PE rule applies. (1) MLI Art. 6(1): anti-treaty-shopping preamble inserted. (2) MLI Art. 4(1), as modified by Art. 4(3)(e), replaces Art. 4(2) but only to the extent that paragraph relates to a person other than an individual — so the treaty's original competent-authority tie-breaker survives for individuals and is replaced for entities by the MLI version, which adds the sting that in the absence of agreement the person gets no relief or exemption at all. (3) MLI Art. 13(2) replaces Art. 5(6): every specific-activity exemption is now subject to a preparatory-or-auxiliary condition. (4) MLI Art. 13(4) adds the anti-fragmentation rule to Art. 5(6) as so modified. (5) MLI Art. 12(1) applies in respect of Art. 5(7)(a): the commissionaire rule — a person who habitually concludes contracts, or habitually plays the principal role leading to the conclusion of contracts routinely concluded without material modification by the enterprise, creates a PE where those contracts are in the name of the enterprise, for the transfer of ownership of or the right to use property owned by it, or for the provision of services by IT. (6) MLI Art. 12(2) replaces Art. 5(8): an agent acting exclusively or almost exclusively for one or more closely related enterprises is not independent. (7) MLI Art. 15(1) supplies the 'closely related' definition. (8) MLI Art. 17(1) replaces Art. 9(2) (corresponding adjustments), removing the requirement that the competent authorities first agree upon consultation before the adjustment is made — a real improvement for taxpayers. (9) MLI Art. 9(4) applies to Article 13: gains on shares or comparable interests such as interests in a partnership or trust may be taxed in the other State if at any time during the 365 days preceding the alienation they derived more than 50 per cent of their value directly or indirectly from immovable property there. (10) MLI Art. 10: the anti-abuse rule for permanent establishments situated in third jurisdictions, and the Japan synthesised text spells out the threshold — benefits do not apply to an item of income on which the tax in the third jurisdiction is less than 60 per cent of the tax that would have been imposed in the first-mentioned State had the PE been situated there; with an active-conduct carve-out and a competent-authority discretion. (11) MLI Art. 7(1): the principal purposes test, placed immediately before Article 28. MLI effect dates: in Japan, withholding taxes where the triggering event occurs on or after 1 January 2020 and other taxes for taxable periods beginning on or after 1 April 2020; in India, withholding taxes from 1 April 2020 and other taxes for taxable periods beginning on or after 1 April 2020.

The protocols, in order

A treaty read without its protocols is a wrong answer.

Notification No. S.O. 753(E), dated 16-8-2000.
Notification No. S.O. 1136(E), dated 19-7-2006 — corresponds to the Protocol signed 24 February 2006. On the evidence of the footnote markers in the text, the 2006 round is what produced the present flat 10 per cent ceilings in Art. 10(2), Art. 11(2) and Art. 12(2).
Notification No. S.O. 2528(E), dated 8-10-2008.
Notification No. S.O. 3346(E) [No. 102/2016 (F. No. 506/69/81-ftd-I)], dated 28-10-2016 — corresponds to the Protocol signed 11 December 2015. On the evidence of the footnote markers, this is the round that replaced Art. 11(3) and inserted Art. 11(4) (the named financial-institution lists), replaced Art. 26 (Exchange of Information) and inserted Art. 26A (Assistance in the Collection of Taxes).
Important caveat: the Introduction lists these four notifications and the affected paragraphs are marked with superscript numerals, but the amending Protocols themselves are not reproduced as separate documents. Which notification made which change is therefore an inference from the footnote markers and from the synthesised text's statement that the Convention was amended by Protocols signed 24 February 2006 and 11 December 2015. Verify against the notifications before publishing any attribution.
The MLI modifies the Convention; see synthesised_text.

The words themselves

Quoted from the treaty as notified.

The term "fees for technical services" as used in this Article means payments of any amount to any person other than payments to an employee of a person making payments and to any individual for independent personal services referred to in Article 14, in consideration for the services of a managerial, technical or consultancy nature, including the provisions of services of technical or other personnel.

Article 12, paragraph 4 of the treaty as notified.

Unless the provisions of paragraph 2 are applicable, gains derived by a resident of a Contracting State from the alienation of shares of a company which is a resident of the other Contracting State may be taxed in that other Contracting State.

Article 13, paragraph 3 of the treaty as notified.

the interest is derived and beneficially owned by a resident of that other Contracting State with respect to debt-claims guaranteed, insured or indirectly financed by the Government of that other Contracting State, a political sub-division or local authority thereof, or the central bank of that other Contracting State or any financial institution wholly owned by that Government.

Article 11, paragraph 3(b) of the treaty as notified.

Where by reason of the provisions of paragraph 1 a person is a resident of both Contracting States, then the competent authorities of the Contracting States shall determine by mutual agreement the Contracting State of which that person shall be deemed to be a resident for the purposes of this Convention.

Article 4, paragraph 2 (as it stands for individuals; replaced by MLI Art. 4(1) for non-individuals) of the treaty as notified.

where a person is acting in a Contracting State on behalf of an enterprise and, in doing so, habitually concludes contracts, or habitually plays the principal role leading to the conclusion of contracts that are routinely concluded without material modification by the enterprise, and these contracts are: (a) in the name of the enterprise; or (b) for the transfer of the ownership of, or for the granting of the right to use, property owned by that enterprise or that the enterprise has the right to use; or (c) for the provision of services by that enterprise, that enterprise shall be deemed to have a permanent establishment in that Contracting State

Article MLI Art. 12(1), applying in respect of Convention Art. 5(7)(a), paragraph 1 of the treaty as notified.

An enterprise shall be deemed to have a permanent establishment in a Contracting State and to carry on business through that permanent establishment if it carries on supervisory activities in that Contracting State for more than six months in connection with a building site or construction, installation or assembly project which is being undertaken in that Contracting State.

Article 5, paragraph 4 of the treaty as notified.

Notwithstanding any provisions of the Convention, a benefit under the Convention shall not be granted in respect of an item of income if it is reasonable to conclude, having regard to all relevant facts and circumstances, that obtaining that benefit was one of the principal purposes of any arrangement or transaction that resulted directly or indirectly in that benefit, unless it is established that granting that benefit in these circumstances would be in accordance with the object and purpose of the relevant provisions of the Convention.

Article MLI Art. 7(1), applying to the Convention, paragraph 1 of the treaty as notified.

What to watch

The FTS definition has no make-available test. The only carve-outs are payments to an employee of the payer and payments to an individual for Article 14 independent personal services. Make-available arguments that work under the USA, UK, Singapore or Netherlands treaties have no foothold here.
Article 12 is titled 'royalties' in the article heading, but it governs fees for technical services throughout. Anyone scanning the article headings for an FTS article will not find one and may wrongly conclude the treaty has none.
The MLI has changed the agency PE position more in this treaty than in any other reviewed here. MLI Art. 12(1) brings in the principal-role-leading-to-conclusion test, and it expressly covers contracts for the provision of services by the enterprise. MLI Art. 12(2) then replaces an independent-agent provision that previously had no exclusivity limb at all. A Japanese group's Indian arrangements that were safe on the bare treaty text may not be safe on the synthesised text from 1 April 2020.
There is no general service PE article, and the MLI did not add one. Personnel can be present in India indefinitely without creating a PE unless a fixed place, a construction site, supervisory activity, mineral-oils services or the agency limb is engaged.
Art. 5(4) gives supervisory activities their own six-month clock, separate from the site's duration under Art. 5(3). A supervisor present for seven months on a five-month project creates a PE under 5(4) even though 5(3) is not met.
The individual residence tie-breaker is a bare mutual-agreement procedure. Art. 4(2) contains no permanent home, centre of vital interests, habitual abode or nationality ladder, and the MLI replaced it only for non-individuals. A dual-resident individual under this treaty has no self-executing test to apply and must go to the competent authorities.
For dual-resident companies the MLI outcome is harsh: if the competent authorities do not agree, the company is entitled to no relief or exemption under the Convention at all.
MLI Art. 17(1) replaced Art. 9(2), removing the original requirement that the competent authorities first agree upon consultation before a corresponding adjustment is made. That is a genuine improvement in transfer pricing cases and dates from 1 April 2020.
Article 11(3) is drafted as 'taxable only in the other Contracting State', not as an exemption from source tax, and its limb (b) reaches debt-claims merely guaranteed, insured or indirectly financed by a government or wholly-owned financial institution. That is the widest such limb in this set. But Art. 11(6) takes it all away where the debt-claim is effectively connected with a PE.
Article 11(5) does not exclude penalty charges for late payment from 'interest', unlike five of the other seven treaties reviewed here.
MLI Art. 9(4) extends source taxation of immovable-property-rich interests beyond shares to interests in partnerships and trusts, with a 365-day look-back on the value test. Since Art. 13(3) already covers shares, this is where MLI Art. 9(4) does its real work here.
MLI Art. 10 imports a quantified third-jurisdiction PE rule with a 60 per cent comparative-tax threshold spelled out on the face of the synthesised text. Japanese groups routing Indian income through a third-country branch need to run that computation.
The 25 per cent shareholding figure in the treaty is in Art. 23(3)(b) — the Japanese underlying tax credit — and has nothing to do with the dividend withholding rate, which is a flat 10 per cent with no threshold.
Article 26A (Assistance in the Collection of Taxes) reaches well beyond the taxes covered by Article 2: Japanese consumption tax, inheritance tax and gift tax, and Indian wealth tax, excise duty, service tax, sales tax and value added tax, plus any other tax the Governments agree.

The India–Japan tax treaty