For years Dutch shareholders claimed a reduced dividend rate by invoking the most-favoured-nation clause in the protocol, on the strength of lower rates India had agreed with other countries. In October 2023 the Supreme Court held that an MFN clause cannot be invoked without a separate notification, and there was none. The rate went back to ten per cent — and a good deal of material online still says otherwise.
That a most-favoured-nation clause in a protocol does not operate automatically. To import a more favourable rate or a narrower definition from another treaty, a separate notification under the Act is required — and for the claims before the Court, none had been issued.
Dividend withholding for a Dutch shareholder sits at the treaty rate of ten per cent rather than the five per cent that had been claimed. The same reasoning applies to other benefits sought through the MFN route, and to other treaties with similar clauses.
Positions taken before the ruling, on the basis of decisions that then favoured taxpayers, are exposed where the year is still open. Whether to revise, and how to deal with an assessment already in progress, is a judgement that depends on the year and the amounts.
France and Switzerland have comparable clauses and were part of the same argument. Switzerland went further and suspended the MFN treatment it had been applying to India. If your structure relies on an MFN-imported rate anywhere, it needs checking.
Holding Indian subsidiaries and receiving dividends.
That withheld at the lower rate in earlier years.
Where the MFN position is in issue.
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💬 Get my quote →Dividends at ten per cent, interest at ten per cent, and royalties and fees for technical services at ten per cent. The figure that has changed in practice is dividends: for several years Dutch shareholders withheld at five per cent by invoking the most-favoured-nation clause in the protocol, relying on lower rates India had agreed with other countries. After the Supreme Court ruling that route is closed absent a notification, so ten per cent is the operative rate.
In a judgment delivered in October 2023 it held that a most-favoured-nation clause does not take effect of its own force. Where a protocol says India will extend a more favourable rate or a narrower scope agreed with a third country, that benefit becomes available only when a separate notification is issued under the Act giving effect to it. No such notification had been issued for the claims before the Court, so the reduced rates could not be applied. It also addressed the timing question of whether the third country needed to be an OECD member at the date the treaty was signed or later.
It depends on whether those years are still open and on what stage any proceedings have reached. Where a year is closed, it is closed. Where an assessment is open or a notice has been issued, the position now runs against the taxpayer and the realistic questions are about quantum, interest and whether penalty is defensible given that the law at the time was genuinely unsettled — several High Courts had decided the other way. This is not a situation to leave and hope about: the exposure is the differential rate across every distribution in the affected years, and it compounds with interest.
Yes, and this is under-appreciated. The MFN mechanism was used to import narrower definitions as well as lower rates — for example a make-available condition on technical services taken from another treaty. The reasoning applies to the mechanism itself, so any benefit claimed through an MFN clause without a notification is on the same footing. If your treaty position anywhere depends on importing something from a different treaty, it should be re-examined rather than assumed to survive.
France and Switzerland have comparable most-favoured-nation clauses and were caught up in the same dispute, and Switzerland subsequently suspended the most-favoured-nation treatment it had been applying to India. So the ruling is not a Netherlands-specific event; it settles how the mechanism works across India's treaty network. Any structure whose economics depend on an MFN-imported rate is worth revisiting, whichever country it sits in.
It can be, but the case has to be made on something other than an MFN-reduced dividend rate, because that is gone. Ten per cent on dividends is still materially better than the domestic rate, the Dutch participation exemption may be valuable at the parent level depending on your group, and the Netherlands remains a well-regarded jurisdiction with substance genuinely available. What no longer works is a holding company whose only purpose was the five per cent. As everywhere, substance and commercial purpose are what hold up.
A Dutch residency certificate for the period, the declaration in Form 41 filed electronically, and Form 145 on the remittance with an accountant's certificate in Form 146 where required. Given the history here, a prudent Indian payer will also want to see that the rate being claimed is the treaty rate rather than an MFN-derived one — and after the Supreme Court ruling it is the payer who carries the exposure if it withholds too little, so expect the question.
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