The Delhi Income Tax Appellate Tribunal (ITAT) has allowed limited liability companies (LLCs) and US tax residents to enjoy the benefits of the India-US tax treaty. The residency status and entitlement of U.S. LLCs to treaty benefits have been the subject of litigation, and this is a landmark ruling on the issue.
“This is a positive ruling not only for LLCs in the United States, but also for Financially Transparent Entities (FTEs) in other jurisdictions that have tax treaties with India containing similar provisions. “Tax treaty eligibility needs to be assessed from a holistic perspective, after taking into account the provisions of the tax treaty, the tax laws of the respective jurisdiction and the availability of a valid tax residence certificate,” says Partner, Khaitan & Co. Bijal Ajinkya said in a memo. .
A US LLC is a hybrid entity that is treated as a pass-through or FTE in the US, but continues to be treated as a company for Indian tax purposes.
That matter
General Motors Company USA (taxpayer), organized as an LLC under US law, is taxed at a rate of 15 percent on income through fees for technical or included services (FTS/FIS) pursuant to Article 12 of the India-US Agreement. I suggested that. Tax treaties. However, the income tax authorities considered that the income should be taxed at a rate of 25 per cent under Indian tax laws. The taxpayer is an FTE and has no tax liability in the United States and should not be treated as a U.S. resident for tax treaty purposes.
Taxpayers should infer that “liable to pay” means that a person is treated as a taxable person in the relevant jurisdiction and does not actually have to pay tax for the purposes of Article 4 of the Convention. He claimed that. I have submitted a valid tax residence certificate and Form 10F issued by the US authorities as per Section 90 of the IT Act.
wider impact
Harshal Bhuta, partner at PR Bhuta & Co., said the decision could have implications for S corporations that want to benefit from the India-US tax treaty. An S corporation is a business entity that transfers business profits and losses to shareholders.
However, Bhuta believes that the issue of treaty access by LLCs and S corporations cannot escape litigation because the ITAT ruling ignores the express provisions of the Indo-US DTAA. This provision restricts access to the Convention to only a limited number of financially transparent entities. .
He said the decision relied on the Mumbai court’s decision in Linklaters LLP, which held that treaty benefits were granted to income earned by a UK partnership under the unamended India-UK DTAA. He said he held a similar sympathetic view. The India-UK DTAA has been amended to provide DTAA benefits to income earned by UK LLPs which are treated as pass-through for tax purposes in the UK. Similarly, the United States and Germany revised their DTAA in 2006 to explicitly allow treaty access to income earned by financially transparent companies. “India should consider amending the treaty similar to the US to clarify India’s position on this issue,” Bhuta said.
“Companies with pass-through regimes in their host jurisdictions should assess their classification under corporate law and determine their entitlement to claim tax treaty benefits accordingly,” says Nishith Desai Associates, International Tax Leader added Ipsita Agarwalla.
