An Indian group expanding into Europe usually arrives at the same architecture: a European holding company owning the operating subsidiaries, with the Indian parent above it. The rationale is commercial before it is fiscal. One counterparty for European banks, one entity for acquisitions, one place where the European management sits. The tax analysis follows the structure rather than driving it.
It still has to be defended. A holding company between an Indian parent and European operations is precisely the arrangement that treaty anti-abuse provisions were written for, and the Indian statute now says so in terms. The question is not whether the holding is legitimate but whether the group can show, on documents created at the time, why it exists and what it does.
What the India-Netherlands Convention actually provides
The Convention was done at New Delhi on the thirtieth day of July 1988 and entered into force on 21 January 1989. It remains the operative bilateral instrument, as modified by the multilateral convention discussed below. Its dividend article allows the state of the paying company to tax at source, but where the recipient is the beneficial owner the tax so charged shall not exceed 10 per cent of the gross amount of the dividends. That figure, in the amended text of article 10(2) reproduced in the Convention and Protocol published by the Indian income tax department, is the treaty ceiling, and it applies in both directions.
The rate lower than the treaty rate that appears in most planning memoranda does not come from the article. It comes from clause IV(2) of the Protocol, which provides that if, after the signature of the Convention, India limits its taxation at source on dividends, interest, royalties, fees for technical services or payments for the use of equipment, under any convention with a third state that is a member of the Organisation for Economic Co-operation and Development, to a rate lower or a scope more restricted than the Convention provides, then as from the date on which the relevant Indian convention enters into force the same rate or scope applies under this Convention.
This is a most favoured nation clause, and it was the source of a decade of dispute. Two questions were litigated: whether the third state must have been a member of the Organisation when it concluded its treaty with India or only when the benefit is claimed, and whether the clause operates automatically or requires an Indian notification. Both have now been answered, and the answer is the opposite of what a generation of structuring memoranda assumed.
The administration stated its position first. The Central Board of Direct Taxes issued Circular No. 3/2022 of 3 February 2022 on the most favoured nation clause, which names the Netherlands among the treaties concerned and sets out four conditions that must all be met before a lower rate agreed with a third state can be imported. The second treaty must have been entered into after the signature or entry into force of the first, depending on the language of the clause. The third state must have been a member of the Organisation at the time of signing. India must in fact have limited its taxing rights in the second treaty. And a separate notification must have been issued by India importing the benefit into the first treaty. The circular also records that India regarded the Dutch decree on the point as a unilateral act without binding force on the interpretation of the clause.
The Supreme Court of India then decided the question on 19 October 2023, in the appeals led by Assessing Officer Circle (International Taxation) 2(2)(2) New Delhi against Nestle SA. The Court held and declared that a notification is a necessary and mandatory condition for a court, authority or tribunal to give effect to a convention, or to a protocol changing its terms, which has the effect of altering existing provisions of law. It held that a stipulation requiring the same treatment does not automatically lead to the integration of a better term later agreed with another state, and that the earlier convention must be amended through a separate notification. And it held that the membership test has present signification, so that the relevant date is the date of entering into the treaty with India and not a later date on which that country becomes a member.
Those appeals included the Netherlands cases. Dutch resident shareholders of Indian companies had applied for certificates authorising deduction at 5 per cent on remitted dividends by reading the Protocol as operating automatically. The revenue issued the certificates at 10 per cent, the Delhi High Court held for the taxpayers, and the Supreme Court set those orders aside and allowed the revenue’s appeals. The authorities were decided under section 90(1) of the Income-tax Act, 1961, the corresponding provision of which is now section 159 of the Income-tax Act, 2025, under which the Central Government may enter into an agreement and may, by notification, make such provisions as are necessary for implementing it. The reasoning transfers unchanged.
The practical consequence is short. Five per cent is not a rate a group may assume. Absent a notification of the kind the Court required, the ceiling on source taxation of dividends between the two states is the 10 per cent in article 10(2), and a group relying on anything lower should establish, for each year in issue, on what instrument the claim rests and whether the Indian side has notified it. That is a question of published notifications, not of opinion, and it should be answered in writing before a distribution is made rather than after a deduction has been contested.
The clause that is easy to forget: three years to claim back
Clause IV(1) of the same Protocol is unglamorous and regularly missed. Where tax has been levied at source in excess of the amount chargeable under the provisions of article 10, 11 or 12, applications for the refund of the excess have to be lodged with the competent authority of the state having levied the tax within a period of three years after the expiration of the calendar year in which the tax has been levied.
The point is administrative and it costs money. A group that withholds at the domestic rate while an entitlement question is resolved has three calendar years plus the remainder of the year of deduction to reclaim, and a group that resolves the question in year four has lost the difference. Where treaty entitlement is genuinely uncertain, the safer sequence is to withhold, file protectively and argue afterwards, rather than to apply a reduced rate and defend it under penalty.
Substance is not a slogan, it is a set of documents
Whether a European holding is entitled to treaty benefits is decided on facts. The recurring evidence points are the same across European administrations, and none of them is expensive to satisfy if it is addressed from the outset.
An administration will ask where the board meets and who attends, and will read the minutes to see whether they record deliberation or merely ratification of something decided elsewhere. It will ask whether the directors have the competence to take the decisions attributed to them and whether enough of them are resident in the holding jurisdiction. It will look at whether the bank account is operated from that jurisdiction, whether the accounts were filed on time, and whether the premises are appropriate to the activity, which for a genuine holding company is modest but not nothing.
Two failures recur in Indian groups specifically. The first is a board composed entirely of persons who live in India and travel for meetings, which invites the argument that the place of effective management is elsewhere. The second is a decision trail that runs through the Indian parent, where the European board approves what a promoter’s committee has already resolved. Both are fixable, and both are much harder to fix retrospectively than to design correctly.
What the Indian statute now says about treaty shopping
Section 159(3)(b) of the Income-tax Act, 2025 states one of the purposes for which the Central Government may enter into an agreement with another country: the avoidance of double taxation of income under the Act and under the corresponding law in force in that country, without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance, including through treaty-shopping arrangements aimed at obtaining reliefs provided in the said agreement for the indirect benefit to residents of any other country or territory.
That language is not decorative. It sits in the section that also provides, at subsection (4), that where such an agreement has been entered into for granting relief of tax or the avoidance of double taxation, the provisions of the Act apply in relation to the assessee to whom the agreement applies to the extent they are more beneficial to that assessee. The taxpayer takes the better of the Act and the agreement, and nothing more. Subsection (6) then provides that, irrespective of subsection (4), the provisions of Chapter XI apply to the assessee even if they are not beneficial to him. The relief and the limit are in the same section.
Subsection (8) adds the documentary condition. An assessee who is not a resident is entitled to claim relief under an agreement only where a certificate of being a resident in the other country or specified territory has been obtained from the government of that country, and where such other documents and information as may be prescribed are provided. A tax residence certificate is necessary. It has never been sufficient, and the structure of section 159 makes that explicit.
The general anti-avoidance rule and what triggers it
Chapter XI of the 2025 Act contains the general anti-avoidance provisions. Section 178 provides that, irrespective of anything contained in the Act, an arrangement entered into by an assessee may be declared to be an impermissible avoidance arrangement and the consequence in relation to tax arising from it determined subject to the Chapter, and that the Chapter may be applied to any step in, or a part of, the arrangement. Section 179 defines the term, and the definition has two limbs that must both be satisfied. The arrangement must be one the main purpose of which is to obtain a tax benefit, and it must additionally create rights or obligations which are not ordinarily created between persons dealing at arm’s length, or result directly or indirectly in the misuse or abuse of the provisions of the Act, or lack commercial substance, or be entered into or carried out by means or in a manner which are not ordinarily employed for bona fide purposes. Subsection (2) then presumes, unless the assessee proves the contrary, that the whole arrangement was entered into for the main purpose of obtaining a tax benefit where that is the main purpose of a single step in it, irrespective of the fact that the main purpose of the whole arrangement is not to obtain a tax benefit.
Section 181 sets out what follows once the declaration is made. The consequences are to be determined in the manner deemed appropriate in the circumstances and expressly include the denial of a benefit under a tax treaty, and the listed powers include disregarding, combining or recharacterising any step or the whole of the arrangement, treating it as if it had not been entered into, disregarding an accommodating party, and treating the place of residence of a party or the situs of an asset as being somewhere other than where the arrangement places it.
The practical significance for an Indian group with a European holding is that the treaty and the domestic anti-avoidance rule are not alternatives. A structure can be within the letter of the Convention and still be examined under Chapter XI, and section 181 says in terms that the treaty benefit itself is what may be withdrawn. What defends it is the same evidence that defends the treaty claim: a commercial reason for the holding that would exist if the tax result were neutral, decisions actually taken where the entity is, and a chronology in which the structure preceded the transaction rather than being assembled for it.
The withholding tax on the way back up
From the European side, article 5 of the Wet op de dividendbelasting 1965 sets Dutch dividend withholding tax at 15 per cent of the proceeds. Where the recipient is an Indian parent, article 10(2) of the Convention caps the charge at 10 per cent, so the treaty does reduce the domestic rate, by five points rather than by the ten that an automatic most favoured nation claim would once have produced.
There is also a domestic exemption that is easy to overlook because it is not in the treaty at all. Article 4(2) of the same Act disapplies withholding where the recipient is a body resident, under the tax law of its state, in a state with which the Netherlands has concluded a double taxation treaty that provides for dividends, which India is, and where at the moment the proceeds are made available the recipient holds an interest in the withholding agent to which the participation exemption or the participation credit would have applied had the recipient been established in the Netherlands. The exemption carries its own anti-abuse conditions. Under article 4(3)(c) it does not apply where the recipient holds that interest with the main purpose or one of the main purposes of avoiding the levy of tax from another and there is an artificial arrangement or series of transactions, artificiality being defined as not having been put in place on the basis of valid commercial reasons which reflect economic reality. Article 4(4) requires the recipient to make it plausible that it is the beneficial owner. Those are the conditions that the substance file discussed above actually has to satisfy.
This is the arithmetic Indian groups should run before deciding how profits will move. Where the European holding reinvests within Europe, the withholding question does not arise, and article 13 of the Wet op de vennootschapsbelasting 1969 leaves out of account the benefits derived from a participation, which exists where the taxpayer holds at least 5 per cent of the nominal paid-up capital of a company whose capital is divided into shares. That relief is not unconditional either. Under the ninth paragraph it does not apply to a participation held as a portfolio investment unless the participation qualifies, and under the eleventh it qualifies where the subsidiary is subject to a profits tax resulting in a real levy by Dutch standards, or where its assets consist, directly or indirectly, usually for less than half of low-taxed free portfolio investments. Where profits are instead to be repatriated to India, the withholding is a real cost, and whether India will credit it against Indian tax on the same income is a separate question governed by the elimination article and by the Indian rules on foreign tax credit.
The structuring conclusion is unromantic. A European holding is worth building where the group intends to operate in Europe, acquire in Europe and reinvest in Europe. It is a poor instrument for extracting cash to India quickly.
Capital gains, and the article that decides who taxes a sale
Article 13 of the Convention allocates taxing rights on the alienation of property, and it is the provision that matters when the group eventually sells. Its fifth paragraph opens with the general rule that gains from the alienation of property not covered by the earlier paragraphs are taxable only in the state of which the alienator is a resident. That rule is then qualified twice in ways that decide real cases.
The fourth paragraph allows the other state to tax gains on shares that are not quoted on an approved stock exchange, that form part of a substantial interest in the capital stock of a company resident in that other state, and the value of which is derived principally from immovable property situated there other than property in which the business of the company was carried on. A substantial interest exists where the resident owns 25 per cent or more of the shares of the capital stock. The second sentence of the fifth paragraph goes further and allows the other state to tax gains on shares forming part of an interest of at least 10 per cent in a company resident there where the alienation takes place to a resident of that state, unless the gain is realised in the course of a corporate organisation, reorganisation, amalgamation, division or similar transaction in which the buyer or the seller owns at least 10 per cent of the capital of the other. An exit to a local buyer and an exit to a third-country buyer are therefore not the same transaction for treaty purposes.
Two further consequences follow for the file. Both states notified the Convention of 30 July 1988 as a covered tax agreement under the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting, and the principal purpose test in its article 7(1) accordingly applies to the Convention. On the entry into effect rules in article 35, and on the dates on which the instrument entered into force for each state as recorded in the depositary’s list of signatories and parties, which are 1 July 2019 for the Netherlands and 1 October 2019 for India, it has effect for taxes withheld at source where the triggering event occurs on or after 1 January 2020 as applied by the Netherlands and on or after 1 April 2020 as applied by India, which notified the depositary that it substitutes taxable period for calendar year for its own application of that rule, and for all other taxes for taxable periods beginning on or after 1 April 2020. The allocation therefore has to be read against the Convention as modified at the date of the disposal, not as it stood in a memorandum written years earlier. And the entitlement to invoke the article at all depends on the same residence and substance evidence discussed above, which by then will be several years old and either exists or does not.
Where the work belongs in the timeline
The pattern that produces problems is familiar. The holding is incorporated quickly to complete an acquisition, staffed with whoever is available, and left alone. The substance conversation happens when the first dividend is paid or the first buyer conducts diligence, by which point the record covers years in which nothing was written down.
The alternative costs very little at the outset. Decide before incorporation what the holding is for, who will sit on its board, where its decisions will be taken and what it will own. Record those decisions where they are taken. Obtain the residence certificate each year rather than when it is needed. Keep the analysis of the treaty rate applied to each distribution, with the instrument relied on and the date it was checked. All of it is evidence, and evidence created at the time is the only kind that answers a question asked five years later.
This article is informational and does not constitute tax or legal advice. The treatment of any structure depends on its facts and on the law of each jurisdiction involved. Each engagement is subject to scope and applicable regulation.