Fiscally Transparent Entities: Issues When Accessing Indian Tax Treaties

Abstract:

Fiscally transparent entities face hurdles when trying to access tax treaties, because they may not meet the ‘person’ and ‘resident’ criteria usually contained in Article 1 of a tax treaty. In particular, courts may often consider them as not being ‘liable to tax’ in the residence State. This article aims to present an analysis of how Indian courts have dealt with fiscally transparent entities that claim the benefits of an Indian tax treaty. To this end, the Organization for Economic Co-operation and Development’s (OECD) jurisprudence on fiscally transparent entities as well as case law on the interpretation of the words ‘liable to tax’ has been laid out. With this background, the article examines the few cases in which fiscally transparent entities have claimed treaty benefits. Conclusions are then culled out from these cases, and the article deals with the possible outcome of a situation wherein a partnership – involving partners who are residents of numerous different states – tries to access an Indian tax treaty. The article ends by suggesting that India needs to clarify its position on fiscally transparent entities by attaching Protocols to its network of tax treaties.

Fiscally transparent entities are popular across the world because of the tax efficiency they offer. Fiscally transparent entities, such as partnerships or trusts, usually allow income to ‘pass through’ them: there is no taxation at the entity level. However, this ‘fiscally transparent’ attribute throws doubt on whether such entities can claim the protection of a Double Tax Avoidance Agreement (‘DTAA’ or ‘tax treaty’) with India. This is because the (otherwise highly beneficial) absence of taxation at the entity level may be used by Indian tax authorities to contend that a fiscally transparent entity is not a ‘resident’ in its State of incorporation/location, and therefore should not be granted treaty benefits. Indian tax authorities (Revenue) may also contend that such entities do not fall under the definition of ‘person’ in a DTAA.