India–Lithuania 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	15%	The beneficial owner is a company (other than a partnership) which holds directly at least 10 per cent of the capital of the company paying the dividends (Article 10(2)(a)).	Article 10, paragraph 2(b)
Interest	10%	Article 11(3) exempts interest from source tax where it is derived and beneficially owned by (a) the Government, a political subdivision or a local authority of the other State; (b)(i) in India, the Reserve…	Article 11, paragraph 2
Royalties	10%	Royalties and fees for technical services share one 10 per cent gross cap. The royalty definition in Article 12(3)(a) expressly extends to "films or tapes and other means of image or sound reproduction used…	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 in consideration for the services of a managerial or technical…	Article 12, paragraph 2

Status

In force	The Agreement and the Protocol were signed at New Delhi on 26 July 2011. The notification recites that "the date of entry into force of the said Agreement is the 10th July, 2012, being the date of the later of the notifications of completion of the procedures as required by the respective laws for entry into force of the said Agreement, in accordance with paragraph 2 of Article 31 of the said Agreement". Article 31(2) provides that the Agreement "shall enter into force on the date of the later of the notifications referred to in paragraph 1 of this Article." Article 31(3)(a) gives it effect in India in respect of taxes withheld at source on income derived on or after the first day of April next following the calendar year in which the Agreement enters into force, and in respect of other taxes on income and taxes on capital for any fiscal year beginning on or after that date. The Central Government directed that the provisions be given effect in the Union of India from 1 April 2013, i.e. From previous year 2013-14 / assessment year 2014-15. Done in duplicate at New Delhi in the Hindi, Lithuanian and English languages, all texts equally authentic; "In the case of divergence of interpretation, the English text shall prevail."
Given effect by	Notification No. 28/2012 [F. No. 503/02/1997-ftd-1], dated 25 July 2012, issued in exercise of the powers conferred by section 90 of the Income-tax Act, 1961 (43 of 1961). The copy read here does not print an S.O. Or G.S.R. Number on its face.
Modified by the MLI	No synthesised text was found for this treaty in the source searched.
Principal purpose test	Article 30(1): "Benefits of this Agreement shall not be available to a resident of a Contracting State, or with respect to any transaction undertaken by such a resident, if the main purpose of the creation or existence of such a resident or of the transaction undertaken by him, was to obtain the benefits under this Agreement that would not otherwise be available." Article 30(2) requires the denying State's competent authority to notify the other. The test is a main purpose test, applied both to the existence of the resident and to the transaction; there is no qualified-person or ownership-based limitation of benefits article.

Dividends

Rate	15%
Lower rate on a qualifying holding	5%
The holding that unlocks it	The beneficial owner is a company (other than a partnership) which holds directly at least 10 per cent of the capital of the company paying the dividends (Article 10(2)(a)).
Where this comes from	Article 10, paragraph 2(b)

Two rates: 5 per cent on a qualifying direct 10 per cent holding of capital, 15 per cent in all other cases. The test is direct holding of capital, not of voting power, and partnerships are excluded from the lower rate. Paragraph 2 does not affect the taxation of the company on the profits out of which the dividends are paid.

Interest

Rate	10%
Exemptions	Article 11(3) exempts interest from source tax where it is derived and beneficially owned by (a) the Government, a political subdivision or a local authority of the other State; (b)(i) in India, the Reserve Bank of India, the Export-Import Bank of India or the National Housing Bank, and (b)(ii) in Lithuania, the Bank of Lithuania; or (c) any other financial institution wholly owned by the Government of the other State as may be agreed between the competent authorities.
Where this comes from	Article 11, paragraph 2

The scan of the notification prints the Indian central bank as "the Reserve Rank of India", an evident typographical slip for the Reserve Bank of India. Interest does not include income treated as a dividend under Article 10, and penalty charges for late payment are not interest (Article 11(4)).

Royalties

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

Royalties and fees for technical services share one 10 per cent gross cap. The royalty definition in Article 12(3)(a) expressly extends to "films or tapes and other means of image or sound reproduction used for television or radio broad casting", and covers the use of, or right to use, industrial, commercial or scientific equipment.

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 in consideration for the services of a managerial or technical or consultancy nature, including the provision of services of technical or other personnel." There is no make-available condition anywhere in Article 12; the article does not require the transfer of technology or know-how to the payer.

Capital gains on shares

Treatment	Article 13(4) is short and wide: "Gains from the alienation of shares in a company which is a resident of a Contracting State may be taxed in that State." India therefore retains the right to tax gains on shares of an Indian company held by a Lithuanian resident. Unusually, there is no separate immovable-property-rich company paragraph; paragraph 4 catches shares in a resident company whatever the company's assets consist of. Article 13(5) leaves any other property taxable only in the State of residence of the alienator.
Conditions	No holding threshold, no de minimis and no grandfathering date. Note also that this Agreement covers taxes on capital as well as income (Article 23).
Where this comes from	Article 13, paragraph 4

Permanent establishment

Construction or installation PE	9
Service PE	180
Agency PE	Article 5(5): a dependent person creates a PE if he has and habitually exercises authority to conclude contracts in the name of the enterprise, or habitually maintains a stock of goods from which he regularly delivers on behalf of the enterprise, or habitually secures orders wholly or almost wholly for the enterprise itself. Article 5(6) treats an agent devoted wholly or almost wholly to one enterprise as not of independent status. There is no insurance-agent deeming limb; Protocol item 1 explains why and provides for it to be reconsidered if Lithuania adopts one in another treaty.
Where this comes from	Article 5, paragraph 3(a), 3(b), 3(c), 5

Three separate thresholds in paragraph 3. Construction: a building site, construction, installation or assembly project or connected supervisory activities is a PE only if it lasts more than nine months (Article 5(3)(a)). Services: furnishing of services including consultancy services through employees or other personnel is a PE only where activities of that nature continue, for the same or connected project, for periods aggregating more than six months within any twelve-month period (Article 5(3)(b)); six months, not 183 days, is the drafting used. Offshore: activities carried on offshore in connection with exploration or exploitation of the sea bed and sub-soil and their natural resources are a PE if they exceed 30 days in the aggregate in any twelve-month period (Article 5(3)(c)) - a much shorter fuse than the other two.

Anti-abuse: limitation of benefits, and the MLI

PPT	Article 30(1): "Benefits of this Agreement shall not be available to a resident of a Contracting State, or with respect to any transaction undertaken by such a resident, if the main purpose of the creation or existence of such a resident or of the transaction undertaken by him, was to obtain the benefits under this Agreement that would not otherwise be available." Article 30(2) requires the denying State's competent authority to notify the other. The test is a main purpose test, applied both to the existence of the resident and to the transaction; there is no qualified-person or ownership-based limitation of benefits article.
Where this comes from	Article 30

PPT

Article 30(1): "Benefits of this Agreement shall not be available to a resident of a Contracting State, or with respect to any transaction undertaken by such a resident, if the main purpose of the creation or existence of such a resident or of the transaction undertaken by him, was to obtain the benefits under this Agreement that would not otherwise be available." Article 30(2) requires the denying State's competent authority to notify the other. The test is a main purpose test, applied both to the existence of the resident and to the transaction; there is no qualified-person or ownership-based limitation of benefits article.

Where this comes from

Article 30

This page carries the treaty text as notified in the Gazette. Nothing in the notification 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 was signed at New Delhi on the same day, 26 July 2011, and is notified together with the Agreement; the notification's opening words are that "an Agreement and the Protocol ... Was signed at New Delhi on 26th July, 2011". The Protocol states that its provisions "shall form an integral part of the Agreement". It has four items: (1) Ad Article 5 - Lithuania's treaties contain no insurance-agent deeming provision at the date of the Agreement, but if one is later included in a Lithuanian treaty it shall be considered for this Agreement after consultation between competent authorities; (2) Ad Article 6 - where shares or corporate rights entitle the owner to the enjoyment of immovable property held by the company, income from the direct use or letting of that right may be taxed where the property is situated; (3) Ad Article 7(3) - head office expense deductions shall in no case be less than those allowable under the Indian Income-tax Act as on the date of entry into force, and no deduction is allowed for royalties, fees, commissions for specific services or management, or interest charged by the permanent establishment to the head office (except interest for a banking institution); (4) Ad Article 8(1) - container profits supplementary or incidental to international traffic, and interest on funds directly connected with the operation of ships or aircraft, are treated as shipping and air transport profits and Article 11 does not apply to such interest.
No later amending protocol or amending notification appears in the notification read.

The words themselves

Quoted from the treaty as notified.

5 per cent of the gross amount of the dividends if the beneficial owner is a company (other than a partnership) which holds directly at least 10 per cent of the capital of the company paying the dividends

Article 10, paragraph 2(a) of the treaty as notified.

Activities carried on offshore in a Contracting State in connection with the exploration or exploitation of the sea bed and sub-soil and their natural resources constitute a permanent establishment if such activities are carried on for a period or periods exceeding in the aggregate 30 days in any twelve month period.

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

Gains from the alienation of shares in a company which is a resident of a Contracting State may be taxed in that State.

Article 13, paragraph 4 of the treaty as notified.

Benefits of this Agreement shall not be available to a resident of a Contracting State, or with respect to any transaction undertaken by such a resident, if the main purpose of the creation or existence of such a resident or of the transaction undertaken by him, was to obtain the benefits under this Agreement that would not otherwise be available.

Article 30, paragraph 1 of the treaty as notified.

What to watch

The 5 per cent dividend rate turns on a direct holding of at least 10 per cent of capital by a company that is not a partnership. Indirect holdings and holdings measured by votes rather than capital do not qualify; a Lithuanian partnership is outside the lower rate whatever its holding.
Article 5(3) has three limbs with different clocks - nine months for construction, six months in any twelve for services on the same or connected project, and only 30 days in any twelve for offshore exploration or exploitation activity. Offshore oil and gas service contracts hit a PE far sooner than anything else in this treaty.
Article 13(4) is not confined to immovable-property-rich companies. Any gain on shares in an Indian company is taxable in India under this treaty, so residence in Lithuania gives no shelter for share exits.
This is one of the Indian treaties that also covers taxes on capital (Article 2 lists the Indian wealth tax and the Lithuanian immovable property tax; Article 23 allocates capital). Check Article 23 before assuming a capital-tax question is outside the treaty.
Protocol item 3 fixes a floor for head office expense deductions - not less than those allowable under the Indian Income-tax Act as on the date of entry into force - and bars deduction of notional royalties, management commissions and internal interest charged by a PE to head office, with a banking exception. That is the answer to most branch-attribution arguments under Article 7(3).
Article 30 is a main purpose test only. There is no qualified-person test, so denial requires the revenue to establish purpose rather than to point to a failed ownership or listing condition.

What this page does not tell you. This page reproduces the Agreement and the Protocol as notified in 2012 and nothing later. Whether the treaty has been modified by the Multilateral Instrument is not shown by this notification and has not been checked from this source. The notification as read does not print an S.O. Or G.S.R. Number. The text carries at least one evident typographical slip ("Reserve Rank of India" in Article 11(3)(b)(i)), and the numbering of Article 31 runs from paragraph 2 straight into the effect provisions without a printed "3.", so the effect rule is cited here by its position; the notification's own recital calls it sub-paragraph (a) of paragraph 3 of Article 31. Nothing here covers Indian domestic overrides such as section 206AA, or Lithuanian domestic law.

The India–Lithuania tax treaty