Article 15 - Dependent Personal Services -Short Stay Exemption
Last week one of my cousins had called me asking for some advice on his tax matters. He is travelling to Germany somewhere in Jan 2014 1st week. He will be on deputation till May 2014. So , he was asking whether the salary recieved by him from the german company will be taxable in germany, if yes , can he apply DTAA for the salary income since he feels the same may be taxed in india as well. How to plan his tax expense?
My professional friends here, can anyone give suitable advice in this matter ?
We have to understand some basics as the first step for giving advice.
First of all we should find out his residential status for FY 2013-2014
Then determine the chargeability of the income for his status
Then apply the DTAA
Lets find out his residential status for FY 2013-2014 assuming he left India on Jan 1, 2014.
- 1st April 2013 - 31st Dec 2013 = 275 days . He is a resident
- He was in India from his birth, hence he also satisifies the conditions for ordinarily resident also
- Hence his status RESIDENT & ORDINARILY RESIDENT (ROR)
His stay in germany for FY 13-14 is 90 days
Now, what is the scope of his income
For an ROR , the following incomes are taxable
1. Income accrued or recieved / deemed to accrue or arise or recieved in India
2. Income accrued/ deemed to accrues/arise outside India
So basically he is taxable for both Indian income as well as Global Income.
Hence, as per IT Act the salary he recieves in germany for Jan-14 to Mar -14 is taxable in india.
Now lets come apply DTAA (entered into with germany) provisions to this income and see whats the treatment for the salary income under DTAA
Extracts of the DTAA Article 15
ARTICLE 15 - Dependent personal services - 1. Subject to the provisions of Articles 16, 18, 19 and 20, salaries, wages and other similar remuneration derived by a resident of a Contracting State ( India) in respect of an employment shall be taxable in the other Contracting State ( Germany) only if the employment is exercised there.
2. Notwithstanding the provisions of paragraph 1, remuneration derived by a resident of a Contracting State in respect of an employment exercised in the other Contracting State shall be taxable only in the first-mentioned State if :
(a) the recipient is present in the other State for a period or periods not exceeding in the aggregate 183 days in the fiscal year concerned,
(b) the remuneration is paid by, or on behalf of, an employer who is not a resident of the other State, and
(c) the remuneration is not borne by a permanent establishment or a fixed base which the employer has in the other State.
3. Notwithstanding the preceding provisions of this Article, remuneration derived in respect of an employment exercised aboard a ship or aircraft operated in international traffic may be taxed in the Contracting State of which the enterprise operating the ship or aircraft is a resident.
Para 1 states salary income is taxable in in the place where employment is exercised. OECD Guidelines explain the meaning of "Exercise of employment" as the place where employee is physically present. This para makes it clear that when employee is working in germany , he has to pay tax on salary only in Germany.
Para 2 starts with "notwithstanding" i.e. to say, it is an independent charging section and para 1 cannot be considered while applying Para 2
It says that the remuneration income cannot be taxed in germany , but will be taxed in India only if all the 3 conditions are satisfied
1. Period of stay in germany is upto 183 days in the FY 13-14
2. Remuneration is PAID by employer who is not a resident in Germany i.e to say the salary is paid by the indian company which sent him on deputation and not by the germany company
3. Remuneration is not borne by the Permanent establishment (PE) of the indian company which is established in Germany
So, now the solution is -
Germany company should not deduct tax on salary since he satisfies all the 3 conditions as per Para 2 of the Article 15. He will offer this tax to indian income tax in his ITR-1.
The above solution is called generally as Short stay Exemption method.
Waiting for other experts in the forum to reply to this practical problem
~CA Vedanta Deshika
Kindly revert for any expert advice in International Taxation