A long-standing treaty, and its once-favourable MFN clause
The India-Netherlands Double Taxation Avoidance Agreement was signed on 30 July 1988 and entered into
force on 21 January 1989. Beyond its standard provisions on business profits, dividends, interest, royalties,
and capital gains, the treaty's protocol includes a Most Favoured Nation (MFN) clause -- a mechanism under
which, if India later grants a more favourable rate or scope of taxation (for example, on dividends, interest,
royalties, or fees for technical services) to another OECD member country under a treaty signed after the
India-Netherlands DTAA, that more favourable treatment could potentially extend automatically to Netherlands
residents as well. For years, taxpayers relied on this clause to claim a lower dividend withholding rate by
reference to India's treaties with countries such as Slovenia, Lithuania, or Colombia.
The Supreme Court of India's 19 October 2023 ruling -- a significant narrowing
The Supreme Court of India ruled on 19 October 2023 that invoking MFN benefits under a protocol clause like
the one in the India-Netherlands treaty is not automatic -- it requires India to issue a specific government
notification giving effect to the MFN benefit for that particular treaty. The Court also held that the
referenced third country must have already been an OECD member at the time it signed its own tax treaty with
India, not merely by the time the MFN benefit is later claimed -- which excluded countries like Slovenia and
Lithuania, which joined the OECD only after signing their India treaties. The practical effect is that an
NRI or Netherlands-based investor should not assume a lower MFN-derived withholding rate applies automatically
to Indian-source dividends, interest, or royalties without a current, specific CBDT notification covering the
India-Netherlands treaty -- and should instead plan around the treaty's own stated 10% dividend rate unless a
chartered accountant confirms a currently valid notification applies.
Residential status, TDS, and claiming ordinary DTAA relief
Whether someone is treated as a Resident, Non-Resident, or Resident but Not Ordinarily Resident (RNOR)
under Indian tax law depends on the standard day-count tests under the Income-tax Act, applied the same way
regardless of whether the person is based in the Netherlands or any other country. Only income that is
received in India, accrues in India, or arises from an Indian source is generally taxable for a genuine
Non-Resident; foreign-sourced income earned and received in the Netherlands is not taxable in India for a
non-resident. Payments to a non-resident from an Indian source -- rent, interest, or capital gains on Indian assets, for
example -- are generally subject to withholding (TDS) under Section 195 of the Income-tax Act at the
applicable rate, with the payer typically responsible for deducting and depositing the tax. Where the
India-Netherlands DTAA provides a lower rate or different treatment for a specific income category, an NRI can
claim that relief by furnishing a Tax Residency Certificate from the Netherlands (issued by the Belastingdienst)
along with the prescribed Form 10F, consistent with how DTAA relief works for NRIs based in any treaty
country -- though, per the point above, the MFN-derived rate specifically should not be assumed without
current confirmation.
Common mistakes made in this area:
- Continuing to claim a lower MFN-derived dividend or royalty rate without checking whether a valid,
current CBDT notification supports it after the Supreme Court's October 2023 ruling.
- Not obtaining a Tax Residency Certificate before claiming any DTAA relief on Indian-source income.
- Continuing to file as a Resident after becoming a genuine NRI, missing the lower NRI tax treatment on
foreign income.
