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ARTICLE 10
DIVIDENDS
(1) Dividends paid by a company which is a resident of a
Contracting State to a resident of the other Contracting State may be taxed in that other
State.
(2) However, such dividends may also be taxed in the Contracting State of which the
company paying the dividends is a resident, and according to the laws of that State, but
if the recipient is the beneficial owner of the dividends the tax so charged shall not
exceed:
(a) ... per cent (the percentage is to be established through bilateral negotiations) 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
paving the dividends;
(b) ... per cent (the percentage is to be established through bilateral negotiations) of
the gross amount of the dividends in all other cases.
The competent authorities of the Contracting States shall by mutual agreement settle the
mode of application of these limitations.
This paragraph shall not affect the taxation of the company in respect of the profits out
of which the dividends are paid.
(3) The term "dividends" as used in this Article means income from shares
"jouissance" shares or "jouissance" rights, mining shares, founders'
shares or other rights, not being debt-claims, participating in profits; as well as income
from other corporate rights which is subjected to the same taxation treatment as income
from shares by the laws of the State of which the company making the distribution is a
resident.
(4) The provisions of paragraphs (1) and (2) shall not apply if the beneficial owner of
the dividends, being a resident of a Contracting State, carries on business in the other
Contracting State of which the company paying the dividends is a resident, through a
permanent establishment situated therein, or performs in that other State independent
personal services from a fixed base situated therein, and the holding in respect of which
the dividends are paid is effectively connected with such permanent establishment or fixed
base. In such case the provisions of Article 7 or Article 14, as the case may be, shall
apply.
(5) Where a company which is a resident of a Contracting State derives profits or income
from the other Contracting State, that other State may not impose any tax on the dividends
paid by the company, except insofar as such dividends are paid to a resident of that other
State or insofar as the holding in respect of which the dividends are paid is effectively
connected with a permanent establishment or a fixed base situated in that other State, nor
subject the company's undistributed profits to a tax on the company's undistributed
profits, even if the dividends paid or the undistributed profits consist wholly or partly
of profits or income arising in such other State.
55. Scope
This Article deals with dividends paid by a company which is a resident of a
Contracting State to a resident of the other Contracting State, which may be taxed in that
other State. It does not apply to dividends paid by a company which is a resident of the
third State, or by a company resident of a Contracting State which are attributable to a
permanent establishment which an enterprise of that State has in the other Contracting
State.
The primary right of the source country to impose tax on income arising from business
activities and from immovable property situated within its jurisdiction has not been in
dispute and is conceded in all tax agreements. Income from capital, goods and services by
way of dividends, interest and royalty originates from the cooperation of the capital,
goods and services with management, labour, work, efforts of the countries of source, viz,
infrastructure. Insistence upon the taxability of such income by the State of which the
provider of capital, goods or services is resident and also by the source State which is
the provider of labour, infrastructure and the base for the generation of income, has led
to the modification of the rule of exclusivity of exclusive taxation by the country of
residence to conceding rights of the source State to impose tax.
The tax agreements 'allocate' jurisdiction of the Contracting States. The source country
retains a fixed percentage of the gross income earned by a non-resident as dividend,
interest or royalty, known as withholding tax in international tax parlance. The fixity of
the fiat rate of withholding tax arises on account of the difficulty in assessing the
foreign shareholders because of their being beyond the reach of the country of the
residence of the company which has declared dividends.
An enterprise or a concern may engage in trade or business in a foreign country either
through a branch office, which is taken to be its permanent establishment, or through its
subsidiary. As a rule the computation of taxable income of the branch office and the rates
of tax are in principle the same as for the domestic corporations. Profits transferred by
a branch office to the foreign corporation are not subjected to withholding tax. Since a
branch office is not regarded as a legal entity separate from its 'principal', the profits
of such a branch office are included in the profits of such 'principal' for the purposes
of taxes in the country of the residence of the 'principal'. To what extent this
constitutes an additional tax burden depends upon any unilateral and agreement relief
provisions which may be applicable in that country. In case where a corporation chooses to
establish in a foreign country a subsidiary company the difficulty would arise because
such a company is an entity independent of the principal. The dividend from the subsidiary
company is to be taken as the income of the principal and is made to suffer tax in the
home country, besides such dividend has suffered the imposition of withholding tax in the
source country. The subsidiary has also paid tax on its profits also. The combination of
the corporate tax on the subsidiary and the withholding tax at the source on the dividend
is apt to exceed the tax payable by the parent corporation on the same amount of income
from operations within the country of its residence. The rates of withholding tax are to
be tailored to such a reasonable extent that there is no significant extra burden
constituting a barrier to capital movement and interfering with international tax
resources.
56. Residence State has not the exclusive right to tax dividends
Paragraph (1) of the Article does not grant to the residence State of the recipient of
the dividend exclusive right to tax dividend. The use of the expression 'may be taxed'
instead of 'shall be taxed suggests. It leaves open the possibility of taxation by the
State of which the company is resident that is the State in which the dividend originates.
If it is taxed by the State of the residence of the recipient and by the State in which it
originates, according to their domestic laws, the relief could be agreed upon in terms of
Article 23 to avoid double taxation.
57. Right of source State and withholding rate of tax
Paragraph (2) of the UN Model Convention extends to the source State right to impose
tax on dividends. The source country is entitled to levy tax on the profits of a
subsidiary functioning within its jurisdiction and also on the dividends paid by it and
the residence country on the amount of dividends received by the principal subject to any
unilateral relief. Since the combined effect of the withholding tax and tax on the profits
of the subsidiary be not exceedingly more than what the foreign company would have paid
had it carried its activities through a branch office or any other manifestation of its
establishment, and so that there is international tax neutrality towards investment, the rates of withholding tax should be reasonable.
The customary withholding rules with respect to dividends tend to be high' and such
tendency when juxtaposed with the effective rate of corporate taxation on the subsidiary
and also when seen in the context of the residence State right to tax the entire amount of
dividend at the normal rates, may have the effect of discouraging foreign investment. The
total tax burden is not only determined by the taxes of the home country where subsidiary
company is operative but also by the tax treatment of dividends received in the country of
the parent corporation. Tax agreements, therefore, attempt at removal of the deterrents,
and in their stead at providing for lower. rates of withholding tax and measures for
relief from double taxation.
The OECD Model Convention places a ceiling on withholding tax at five per cent of gross
amount of the dividends if the recipient is a company which holds at least 25 per cent of
the capital of the company paying dividends and at 15 per cent if the recipient is other
than such company. The UN Model Convention has left the figures of 5 and 15 per cent to be
decided through bilateral negotiation. The holding of the recipient company has, however,
been reduced to 10 per cent in place of 25 per cent in clause (a) of paragraph (2).
The influencing factors for the determination of the percentage to be negotiated
bilaterally are:
- Rates of taxes levied by the source country on the corporate profits.
- Rates of taxes levied on the income which the investor derives as dividends.
- The tax treatment of foreign income in the home country of the investor as also the
character of double taxation relief offered by the negotiating residence country, whether
the credit or exemption method.
- Whether limitation of the withholding tax benefits the international investor, since the
basic purpose of the limitation is to remove barriers to the movement of the capital, as
also to reduce the effective rate of the source country to the credit level of the
residence country.
While laying down the rates of withholding tax, the objective to be kept in view is that
under no circumstances should the total tax on a given portion of a company's income be
higher than that would have resulted by the application of the higher of tax rates of the
Contracting States, i.e., there should be tax neutrality. The tax rates should be effective rates in the sense that incentives
offered by a State are taken into consideration and the tax thereby spared. The
withholding tax to be levied by the country of source should be such as that if the
residence country uses a credit system, the withholding tax rate in combination with a
corporate tax rate does not exceed the tax in the residence country (the corporate tax
rate means the effective tax rate).
The line which demarcates the direct and the portfolio investment has been laid down in
paragraph (2) as 10 per cent share ownership. This has been done only in case of
companies. Individuals are not covered.
With reference to portfolio investment, residence and the source countries assert their
jurisdiction to tax income arising from such investment in the form of dividends. The
income has to be shared by them. Such sharing involves a reduction in the withholding rate
of the source country and credit in the residence country. The rate of withholding tax
should, therefore, be lower than the customary one normally applicable.
Commenting as to what should be the reasonable rate of withholding tax, Mr. M.B. Rao in
his book on the subject states thus:
"As has been pointed out earlier, the developing countries have made large sacrifices
in revenue by providing tax incentives in various form -- tax holidays, development
rebate, extra depreciation, export allowance, etc. -- thereby bringing down the effective
rate, say, to 30 per cent as against 45 to 55 per cent in the developed countries.
Depending on the nature of activity of the corporation (priority sector undertakings),
certain inter-corporate dividends are also not subject to tax. It is, therefore, only fair
that the withholding tax rate on other dividends should in no case be less than the rate
on inter-corporate dividend payable in that (developing) country. It may be recalled that
the EEC directive on harmonisation of corporate tax systems within EEC envisages a 25 per
cent withholding tax. The USA and West Germany also impose 25 per cent withholding tax.
Therefore, a 25 per cent withholding tax rate in the case of inter-corporate dividends,
where investment in the corporation of the source country is not less than 25 per cent
holding .shares and 35 per cent in the case of portfolio investments, seems reasonable."
58. Tax agreements between Pakistan and other countries
The right of the State where the company is registered to tax income earned as
dividends has been retained in the older Pakistani tax agreements. Such agreements provide
that dividends paid by a company which is a resident of one of the territories to the
resident of the other territory may be taxed only in the first-mentioned State, e.g., agreements with Austria, Denmark and Sweden.
The word 'may' contextually has to be read as 'shall', which means imperativeness. The use
of the word 'shall' or 'may' is not conclusive on the question whether the particular
requirement of the provision is mandatory or directory. The phraseology of a provision,
though relevant, is not so important as its nature, design and the consequences which
would follow from construing it in one way or the other, in interpreting whether it
intends compulsion and imperativeness, or permissiveness. Such as the expression 'may not
drive on the wrong side of the road' has to be read 'shall not drive on the wrong side of
the road', the expression 'may be taxed only in the first-mentioned State' has to be read
as meaning 'shall be taxed only in the first-mentioned State'. The language used here has
a compulsive force is also inferred by the presence of the word 'only' which shows that
the State of the residence of the company and no other State, has the right to tax.
The provision in agreement with Syrian Arab Republic is more emphatic when it pronounces
that dividends 'shall not be taxable' in the State in Which the company making payment of
dividend is resident. Negative words compel an imperative constitution.
In agreement with Libya taxability is decided with reference to the place of registration
.of the company declaring dividend; and in agreement with Japan, with reference to the
place of declaration of dividends.
The more recent agreements follow the UN Model and recognise the appropriateness of
sharing of income by the source State and the State providing the capital by stating that
dividends paid by a company which is resident of a Contracting State to a resident of the
other Contracting State is taxed in both the Contracting States. Agreements with Belgium, Canada, China, Federal Republic of Germany,
Finland, Hungary, Indonesia, Italy, Korea, Mauritius, Singapore, Sri Lanka, Norway,
Uzbekistan give rights to both countries.
The rates of withholding tax have been decided differently in different agreements,
depending upon whether the residence country uses a credit or exemption method for
providing relief from double taxation, whether the company declaring income is a
subsidiary company of the recipient principal or the recipient is other than such company,
and the tax structure of both the countries. The basic consideration of all these has been
to avoid too heavy a cumulative tax on profits that are distributed to non-residents,
whether parent corporations or individual shareholders. If the residence country uses a
credit system, the limitation on the withholding tax rates at source is placed so that
such a rate in combination with the basic corporate tax of the source country produces a
combined effective rate which does not exceed the tax in the residence country.
Tax incentives and rebates in the source country are taken into account in ascertaining
effective rate. Agreements, therefore, provide for different rates at different stages of
activity of an enterprise. Distinction is made between old and new investments. The
exemption method also favours reduction in the rate of withholding tax as such a reduction
is consistent with the concept of non-taxing of inter-corporate dividends and also with
the step that exemption and consequent departure from tax neutrality with domestic
investment are of a benefit to the international investor.
Since dividends distributed by the subsidiary to the parent foreign company have to be
taxed less heavily than the portfolio investment, the definition of the subsidiary company
is not constant but differs from agreement to agreement. The OECD Model Convention
prescribes holding of a minimum of 25 per cent of the capital by the principal company,
and the UN Model Convention, 10 per cent. There are two rates of withholding tax, one when
the recipient is a foreign company with the minimum holding as aforesaid of the-capital of
the company paying dividend, and the other for other recipients. In some of the other
agreements no discrimination is maintained between the recipients, the rate of withholding
tax is the same for all.
Reduction in rates of withholding tax is provided in some of the agreements only where the
dividends relate in whole or in part to a new contribution, as for example, FGR, Canada, Belgium and Great Britain.
In case of Hungary and Canada, the benefit of reduced rate is available if not only do the
dividends relate to new contribution, but also the recipient is a foreign company which
owns at least some percentage of the shares of the company paying dividends. The minimum
percentage of holding in the case of China is ten and in the case of many other countries
is as high as twenty-five.
The variation of rate of withholding tax depending on whether credit or exemption method
is followed by a country in providing relief from double taxation is well illustrated by
the provision in an agreement with Great Britain. It holds that a resident of Pakistan who
receives a dividend from a company which is resident of UK is entitled to the tax credit
in respect of that dividend which an individual resident in the UK would have been
entitled to had he received that dividend, and to the payment of any excess of that tax
credit over his liability to the UK tax. Tax may be charged in the UK on the aggregate of
the amount or value of the dividend and the amount of tax credit, at the rate not
exceeding 15 per cent. Excepting this, the dividend derived from a company resident in UK
is exempt from any tax in the UK which is chargeable on dividends.
59. Dividends
The notion of dividends basically concerns distribution by companies of their profits.
The definition, therefore, relates to distribution of profits the title to which are
constituted by shares, that is holdings in a company limited by shares. The definition
assimilates to shares all securities issued by the companies which carts, right to
participate in the companies' profits without being debt-claims. A share is a
chose-in-action. A chose-in-action implies the existence of some persons entitled to the
rights, which are rights in action as distinct from right in possession. A share itself is an object of dominion, i.e., of right in rein and
not so to regard it would be barren and academic in the extreme. A shareholder has rights to receive dividends, to attend meeting and
vote, right to participate in the assets of the company on its winding and liquidation.
59.1. Dividends, meaning of - The term 'dividends' means the
distribution of profits to the shareholders limited by shares. It represents the
stockholder's share of that part of the profit of the business which the Board of
Directors decides to distribute. The ordinary meaning of the term 'dividend' is share of
profits, whether at a fixed rate, otherwise allocated to the holder of shares in a
company. The term is generally used with reference to the trading and other companies and
to the payments made to the members of a company as such and not by way of remuneration
for services. It may also refer to such shares of profits as are divided only occasionally
and are usually called bonuses or 'bonus dividends'." The Income Tax Ordinance, 1979
does not contain any exhaustive or restrictive definition of dividend, it contains only an
inclusive definition.
Any dividend declared by a company or distributed or paid by it within the meaning of
sub-clause (a), (b), (c), (d) or (e) of clause (20) of section 2 of the Ordinance is
deemed to be the income of the income year in which it is so declared, distributed or
paid, as the case may be [section 12(11) of the Ordinance]. Three contingencies relating
to the inclusion of dividend income in the total income are postulated
--- Declaration by the company
--- Distribution by the company
--- Payment by the company
The last two contingencies would arise in regard to deemed dividend under the provisions
of section 2(20)(a), (b), (c), (d) and (e). The expression dividend', as defined in
section 2(20) extends its scope. Apart from declaration, distribution or some payment is
contemplated to mean dividend. Only such ‘payment’ as contemplated in section
2(20)(e) and not any other is taken to mean dividend and the expression 'paid' in section
2(11) has to be read in the context of such payment, it refers to it (the payment).
Otherwise, the right of a shareholder accrues on the declaration of dividend by the
company.
59.2. Declaration of dividend - The scheme of the Income Tax
Ordinance postulates attraction of tax at the first stage of accrual, which in the case of
dividend takes place on the declaration by the company. Section 12(11) of the Ordinance
supports the postulate, when it provides. by fiction of law, that income from dividend is
the income of the income year in which it is declared by the company. However, the interim dividend declared by a resolution of the Board
of Directors of a company is not dividend 'declared... by the company'.
The power to pay an interim dividend is usually
vested by the Articles of Association in the directors. For paying interim dividend, a
resolution of the company is not required; the directors are authorised by the Articles of
Association to pay the said amount which they think proper having regard to their estimate
of profits made by the company. On payment, the interim dividend becomes the property of
the shareholders, but a mere resolution of the directors involving to pay a certain amount
as interim dividend does not create a debt enforceable against the company for, it is
always open to the directors to rescind the resolution before the payment of the interim
dividend. Thus the nature of interim dividend is quite different from the dividend, which
upon declaration by a company in its general meeting gives rise to debt.
This rule applies only in the case of dividends declared by the
company in a general meeting.
59.3. Distribution of dividend - Besides declaration of
dividend, certain mode of payment or advance is taken as distribution or payment of
dividend. Dividend may be distributed by delivery of a property or a right having a
monetary value.
59.4. Payment of dividend - The word 'payment' is given a wider
meaning and should not be confined to the actual payment, but be extended to where the
amount is unconditionally made available to another person. In general the dividend could be said to be paid when the company has
discharged its liability and made the amount Of dividend unconditionally available to the shareholder.
59.5. Deemed dividend - Section 2(20) of Income Tax Ordinance,
1979 gives an artificial definition of dividend. It does not deal with dividend actually
declared or received. The dividend taken note by that provision is a deemed dividend and
not a real dividend. The loan granted to a shareholder or advance given to him in the
circumstances mentioned therein, has to be returned or accounted for. It does not become
the income of the shareholder. For certain purposes, the Legislature has deemed such loan
or advance as dividend. Under section
2(20), the following payments or distribution by a company to its shareholders are deemed
dividend to the extent of the accumulated profits:
- Any distribution of accumulated profits entailing the release of company's assets.
- Any distribution of debentures, debenture stock, deposit certificates and bonus to
preference shareholders.
- Distribution on liquidation of company or distribution on reduction of capital.
- Any payment by way of loan or advance by a private company to a shareholder provided the
loan should not have been made in the ordinary course of business, or payment by any such
company on behalf of or for the individual benefit of any such shareholders.
Distribution of accumulated profits through release of assets or property or payment of
loan or advances is deemed dividend. The expressions 'distribution', 'payment',
'accumulated profits', 'loan' and 'advances' require examination.
The dictionary meaning of the expression 'distribution' is to give each a share; to give
to several persons. The expression 'distribution' connotes something actual and not
notional. It can be physical; it can also be constructive. One may distribute amounts
between different shareholders either for crediting the amount due to each in his account
or by actually paying to him the due amount. Distribution is culmination of a process. Distribution means any payment to owners of
shares, including any of the various forms of dividend.19
59.5-1 Accumulated profits - Accumulation implies some
gradual accretion, a heaping of matter increasing from day-to-day. Accumulated profits
mean income retained and not paid out in dividends or dissipated by subsequent losses. Only when are there profits
accumulated over a number of years, can there be possibility of payment in the
circumstances mentioned in sub-clauses (a) to (e) of clause (20) of section 2. The
accumulated profits originally did not include current profits.20 However, the
amended position under the Income Tax Ordinance, 1979 does include current profits as it
defines "accumulated profit" to include all profits upto the date of
distribution/liquidation [Sec. 2(20) Explanation]. These mean profits in the commercial
sense and not assessable or taxable profits liable to tax as income. The accumulated profits could be in any of the following form:
- General reserves, unless the profits so transferred to reserves are capitalised in one
form or other
- Specific reserves, the fact that the amounts standing to the credit of the reserves can
be used only under certain circumstances and subject to certain conditions cannot change
the character of the amounts as profits as also forming part of the accumulated profits23
- Building reserves
- Development rebate reserve/investment allowance
- Tax-free profits, e.g., agricultural income
- Initial depreciation
The following are not taken as accumulated profits:
- Provision for taxation
- Provision for dividend
- Normal depreciation
- Balancing charge
- Expenditure disallowed in the assessment
- Capital gains not chargeable to tax
59.5-2 Loans and advances to registered shareholders -
Loan or advance allowed to a shareholder is dividend. The shareholder should be a
registered shareholder. When, suppose an advance or loan is given to a Hindu undivided
family, whose karta is the registered shareholder of the advancing or lending company, the
amount thus advanced or loaned cannot be taken deemed dividend, because the karta is the
registered owner, though the beneficial ownership vests with the Hindu undivided family
and it is not the registered owner who is getting advance or loan.
59.5-3 Loan and advance - Payment of loan is taken as
dividend irrespective of the fact that such loan is temporary for a few days.
The fiction comes into operation at the time of payment of advance
or loan to shareholder. The tax is attracted to the amount thus paid to the extent of
accumulated profits.
Even if the loan or advance is subsequently repaid or adjusted so that no amount is
outstanding at the end of the year, it would still be assessed as deemed dividend. However, the assessee can claim relief in terms of
section 96(2) of the Income Tax Ordinance, 1979.
In Dictionary for Accountants, 'advance' has been defined as payment of cash or the
transfer of goods for which accounting must be rendered by the recipient at some later
date. Section 2(20)(e) makes it clear that any
payment by any company at any sum representing a part of the assets by way of advance
would come within the mischief of the said section· The Calcutta High Court in M.D. Jindal v. CIT held that value
of the goods supplied by the company to the assessee and his wife could be treated as
dividend.
60. Removal of limitations as laid down in paragraphs (1) and (2)
Paragraph (4) spells out circumstances which exclude the applicability of paragraphs
(1) and (2) in relation to dividend income and instead seek to make Article 7 or 14
applicable. Exclusion means the removal of limitation on the State of source of the
dividends which this Article prescribes, and does not mean prevention of the source State
from taxing the dividends or exclusion of its jurisdiction or as also of the jurisdiction
of residence State. This paragraph does not, therefore, contemplate a fiction or
presumption by virtue of which the dividend income could be related to permanent
establishment so that the source State would not be obliged to limit its taxation. What it
contemplates is the removal of limitations referred to paragraphs (1) and (2) under
certain circumstances. The rates of withholding tax imposed by the agreements would not
apply, if the beneficial owner of the dividends carries on business in Pakistan through a
permanent establishment or performs in Pakistan services from a fixed base, and the
shareholdings in respect of which dividends are paid are effectively connected with such
permanent establishment or fixed base. In such a case, the shareholder's dividend income
is treated as normal business profits, subject to agreement rules dealing with such
profits.
61. Criterion for tax liability in the source State is the payment of
dividends and not the origin of the corporation profits
Paragraph (5) does not permit the source principle to have its full operation in
relation to dividends declared or paid by a company resident of a Contracting State to the
resident of that State out of the profits originated in the other Contracting State save
under the exceptional circumstances mentioned therein. In fact the Article deals with the
payment of dividend by the company which is resident of one State to the person resident
of another State, and not when the company and the recipient both belong to the same
State. The origin of profit in one Contracting State is not a relevant consideration for
that State to assert its right to tax under this Article, when neither the company
declaring the dividends out of such profit, nor the recipient is resident of that State. A
State may have a right to tax profits arising in its territory which are made by the
non-resident companies. But when it
comes taxing of dividends, the position is different. It is an established law that in the
case of a company, a company itself is chargeable to tax on its profits and that it pays
tax in discharge of its own liability and not as agent for its shareholders. At one time
it was thought that the company in paying tax, paid on behalf of the shareholders, but
this theory is now exploded.39 A company
pays tax on its profits and having paid that tax it distributes dividends to its
shareholders. Actually it is the company which is assessed and which suffers tax on its
profits. It does not pay tax on behalf of its shareholders. When the shareholder receives
the dividends from the company, the dividends constitute his income and he is obliged to
pay tax on that income. Thus, when a
non-resident company earns income in a State it pays tax to that State. But on
distribution of such profit a shareholder does not become obliged to pay tax on the
amounts received by him as dividends only on the basis that what is received' is income
earned in that country, if he is not otherwise obliged under the law. The shareholder
cannot be taxed unless he is the resident of the State.
Paragraph (5), therefore, clarifies what is axiomatic. It rules out extra territorial
taxation of dividends, i.e., the practice by which States tax dividends distributed by the
non-resident company solely because the corporate profits from which distributions are
made originate from their territory (for example, realised through a permanent
establishment situated therein). There is, of course, no question of extra-territorial
taxation when the country of source of the corporate profits taxes the dividends because
they are paid to a shareholder who is a resident of that State or to a permanent
establishment or fixed base situated in that State. Paragraph
(5) further provides that non-resident companies are not to be subjected to special
taxes on undistributed profits.
Section 12(10) of the Income Tax Ordinance, 1979 creates a legal fiction in respect of
"place" when it says: "Any dividend paid to any share-holder without
Pakistan by a Pakistani company shall be deemed to be income accruing or arising in
Pakistan to such share-holder". This provision may come in conflict with a treaty
provision. In such a case, the treaty provision will overrule this provision as held by
superior courts and conceded by CBR in its letter No. C.No. 2(6)TL/65 dated 30.12.1979.
61.1 Dividend income derived from income of industrial undertaking--
In the context of Pak-Switzerland Convention an interesting point came before the ITAT
in a case reported as 1998 PTD (Trib.) 1971. The facts of the case and decision is
summarised below:
"As the facts are, the appellant/assessee is a Swiss based company earning income
from dividend on investment made with two Pakistani companies M/s. Packages Ltd., and
Tetra Pakistan Ltd. The dividend income from Packages Ltd., amounting to Rs. 17,20,015 was
taxed at 15% by the assessing officer and about it there is no dispute. The assessee had
also declared dividend income from M/s. Tetra Pakistan Ltd. at Rs. 37,230,000 on which tax
at the rate of 10% was offered in terms of clause (a) of the said Article of the Double
Taxation Agreement between Pakistan and Switzerland. According to the assessing officer
the dividend declared by M/s. Tetra Pakistan Ltd. did not fall for the purpose of tax
within the concession offered by the provisions of Article (VI) of the Treaty which
envisaged tax at reduced rate in respect of dividend derived income of an "Industrial
Undertaking" in Pakistan only. According to the assessing officer examination of
accounts of M/s. Tetra Pakistan Ltd., revealed that apart from industrial income it had
also received other income being return on "deposits and others". Such other
income constituted 1.29% of the total income. Accordingly the assessing officer bifurcated
the dividend income in the ratio of 1.29%: 98.71% in respect of dividend originating from
income of the "Industrial Undertaking" and income derived from other
source."
"This interpretation by the Department is in our views not correct. The Income of
"Industrial Undertaking" has to be taken as composite whole as there is no
provision in clause (a)(i) of Article (VI) of the Convention denoting any bifurcation of
income from manufacturing/industrial and non-industrial activity. The expression used is
"dividend derived from the income of an Industrial Undertaking in Pakistan." In
our view the only interpretation to be given to this expression is that the entire amount
of dividend declared has to be treated as arising out of income from such "Industrial
Undertaking ...... ".
