TAX TREATMENT OF DIVIDEND RECEIVED FROM A FOREIGN

COMPANY

Dividend received from an Indian company which has suffered dividend distribution tax
is exempt from tax under section 10(34). However, as per section 115BBDA, in the case
of a "specified assessee"* dividend shall be chargeable to tax at the rate of 10% if
aggregate amount of dividend received from a domestic company during the year exceeds
Rs. 10,00,000. Exemption under section 10(34) is granted to dividend received from an
Indian company and not to a dividend received from a foreign company. Thus, dividend
from a foreign company received by an Indian resident is taxable. In this part you can
gain knowledge about tax treatment of dividend received from a foreign company.
"specified assessee" means a person other than,—

(i) a domestic company; or

(ii) a fund or institution or trust or any university or other educational institution or
any hospital or other medical institution referred to in sub-clause (iv) or sub-
clause (v) or sub-clause (vi) or sub-clause (via) of clause (23C) of section 10; or
(iii)a trust or institution registered under section 12A or section 12AA.
Meaning of dividend
In common parlance ‘dividend’ means the profits distributed by a company to its
shareholders. Apart from that, i.e., dividend paid by a company to its shareholders,
section 2(22)(e) gives the definition of deemed dividend. Hence, under the Income-tax
Act, dividend includes deemed dividend. As per section 2(22), "dividend" includes
following payments or distribution to the extent of accumulated profits of the company
[i.e. whether capitalised profit or not for section 2(22)(a) to (d)excluding capitalised
profit in case of section 2(22)(e)] :
(a) any distribution if such distribution entails the release of all or any part of the
assets of the company ;
(b) any distribution of debentures, debenture-stock, or deposit certificates in any
form, whether with or without interest, and any distribution to its preference
shareholders of bonus shares ;
(c) any distribution made on liquidation of a company except where the shareholder
is not entitled to participate in the surplus asset in the event of liquidation and
shares were issued to him for full cash consideration.
(d) any distribution on the reduction of capital of a company except where the
shareholder is not entitled to participate in the surplus asset in the event of
liquidation and shares were issued to him for full cash consideration.
(e) Any payments in the form of loans or advances made by a closely-held company
(i.e. a company in which public are not substantially interested) to its shareholder
who is the beneficial owner of shares holding not less than 10% of voting power
in such company or to any concern in which such shareholder is a member or a

[As amended by Finance (No. 2) Act, 2017]

 partner and which he has a substantial interest or any payment made by on behalf
of such shareholder for his/her individual benefit. However, such payment would
not amount to dividend, if such payment is made in the ordinary course of
business and money lending is substantial part of the company’s business.
However, "dividend" does not include—
(i) any payment made by a company on purchase of its own shares from a
shareholder in accordance with the provisions of section 77A of the
Companies Act, 1956;
(ii) any distribution of shares made in accordance with the scheme of demerger by
the resulting company to the shareholders of the demerged company whether
or not there is a reduction of capital in the demerged company.
(iii) any dividend paid by a company which is set off by the company against the
whole or any part of any sum previously paid by it and treated as a dividend
within the meaning of sub-clause (e), to the extent to which it is so set off.
Head of taxability and applicable tax rate
Dividends are charged to tax under the head “Income from other sources” and hence
dividend received from a foreign company is charged to tax under the head “Income from
other sources”. Dividend received from foreign company will be included in the total
income of the taxpayer and will be charged to tax at the rates applicable to the taxpayer.
Relief from double taxation
Dividend received from a foreign company is charged to tax in India as well as in the
country to which the foreign company belongs. If the foreign dividend has suffered
double taxation, then the taxpayer can claim double taxation relief either as per the
provisions of Double Taxation Avoidance Agreement (if any) entered into with that
country (if any) by the Government of India or can claim relief as per section 91 (if no
such agreement exists).
To understand the tax treatment of the dividend received from a foreign company, the
taxpayer should keep in mind the provisions of Income-tax Law as well as the provisions
of Double Taxation Avoidance Agreement (DTAA) (if any) entered into with that
country (if any).
Concessional rate of tax to dividends received from foreign specified company
As discussed earlier, dividend received from a foreign company is taxed in the hands of a
resident taxpayer at the normal rates applicable to his income. Normal tax rate applicable
to an Indian company is 30% (plus surcharge and cess as applicable), hence, dividend
received from a foreign company is charged to tax at 30% in the hands of an Indian
company. However, section 115BBD provides a concessional rate of tax in respect of
dividend received by an Indian company from a foreign company in which the Indian
company holds 26% or more in nominal value of the equity share capital.
By virtue of section 115BBD, dividends [as defined in section 2(22) except dividend as
defined in section 2(22)(e)] received by an Indian company from a foreign company in
which the Indian company holds 26% or more in nominal value of the equity share
capital is charged to tax at a flat rate of 15% (plus surcharge and cess as applicable).

[As amended by Finance (No. 2) Act, 2017]

It should however be noted that, in the above case no deduction on account of any
expenditure or allowance will be allowed from the amount of the dividend covered under
section 115BBD. In other words, the gross amount of dividend (without deducting any
expenditure/allowance) will be taxed at the rate of 15% (plus surcharge and cess as
applicable).

[As amended by Finance (No. 2) Act, 2017]

 MCQ ON TAX TREATMENT OF DIVIDEND RECEIVED FROM A
FOREIGN COMPANY

Q1. Dividend received from an Indian company which has suffered dividend distribution
tax is exempt from tax under section__________.
(a) 10(32) (b) 10(33)
(c) 10(34) (d) 10(38)
Correct answer : (c)
Justification of correct answer :
Dividend received roman Indian company which has suffered dividend distribution tax is
exempt from tax under section10(34). However, as per section 115BBDA, in the case of
a "specified assessee"* dividend shall be chargeable to tax at the rate of 10% if aggregate
amount of dividend received from a domestic company during the year exceeds Rs.
10,00,000.
"specified assessee" means a person other than,—

(i) a domestic company; or

(ii) a fund or institution or trust or any university or other educational institution
or any hospital or other medical institution referred to in sub-clause (iv) or
sub-clause (v) or sub-clause (vi) or sub-clause (via) of clause (23C) of section
10; or
(iii) a trust or institution registered under section 12A or section 12AA.
Thus, option (c) is the correct option.
Q2. Exemption under section 10(34) is granted to dividend received from an Indian
company as well as from a foreign company.
(a) True (b) False
Correct answer : (b)
Justification of correct answer :
Exemption under section 10(34) is granted to dividend received from an Indian company
and not to a dividend received from a foreign company. Thus, dividend from a foreign
company is taxable in the hands of the shareholder.
Thus, the statement given in the question is false and hence, option (b) is the correct
option.
Q3. As per section 2(22), "dividend" includes any distribution if such distribution entails
there lease of all or any part of the assets of the company to the extent of accumulated

[As amended by Finance (No. 2) Act, 2017]

profits of the company [i.e. whether capitalized profit or not except in case dividend is
covered by section 2(22)(e)]
(a) True (b) False
Correct answer:(a)
Justification of correct answer:
As per section 2(22), "dividend" includes following payments or distribution to the extent
of accumulated profits of the company [i.e. whether capitalised profit or not for section
2(22)(a) to (d)excluding capitalised profit in case of section 2(22)(e)] :
(a) any distribution if such distribution entails the release of all or any part of the
assets of the company ;
(b) any distribution of debentures, debenture-stock, or deposit certificates in any
form, whether with or without interest, and any distribution to its preference
shareholders of bonus shares ;
(c) any distribution made on liquidation of a company except where the shareholder
is not entitled to participate in the surplus asset in the event of liquidation and
shares were issued to him for full cash consideration.
(d) any distribution on the reduction of capital of a company except where the
shareholder is not entitled to participate in the surplus asset in the event of
liquidation and shares were issued to him for full cash consideration.
(e) Any payments in the form of loans or advances made by a closely-held company
(i.e. a company in which public are not substantially interested) to its shareholder
who is the beneficial owner of shares holding not less than 10% of voting power
in such company or to any concern in which such shareholder is a member or a
partner and which he has a substantial interest or any payment made by on behalf
of such shareholder for his/her individual benefit. However, such payment would
not amount to dividend, if such payment is made in the ordinary course of
business and money lending is substantial part of the company’s business.
Thus, the statement given in the question is true and hence, option (a) is the correct
option.
Q4. As per section 2(22), dividend does not include________.
(a) Any distribution if such distribution entails the release of all or any part of the assets
of the company to the extent of accumulated profits of the company
(b) Any distribution made on liquidation of accompany to the extent of accumulated
profits of the company
(c) Any distribution on the reduction of capital of a company to the extent of accumulated
profits of the company
(d) Any payment made by a company on purchase of its own shares from a shareholder in
accordance with the provisions of section 77A of the Companies Act, 1956
Correct answer: (d)

[As amended by Finance (No. 2) Act, 2017]

Justification of correct answer :
With effect from assessment year 2000-01,"dividend" does not include—
(i) any payment made by a company on purchase of its own shares from a
shareholder in accordance with the provisions of section 77A of the
Companies Act, 1956;
(ii) any distribution of shares made in accordance with the scheme of demerger by
the resulting company to the shareholders of the demerged company whether
or not there is a reduction of capital in the demerged company.
(iii) any dividend paid by a company which is set off by the company against the
whole or any part of any sum previously paid by it and treated as a dividend
within the meaning of sub-clause (e), to the extent to which it is so set off.
Thus, option (d) is the correct option.
Q5. Dividend received from a foreign company is charged to tax under the head______.
(a) Profits and gains of business or profession (b) Capital gains
(c) Income from other sources (d) Income from salaries
Correct answer: (c)
Justification of correct answer :
Dividend received from a foreign company is charged to tax under the head “Income
from other sources”.
Thus, option (c) is the correct option.
Q6. Dividend received from foreign company will be included in the total income of the
tax payer and will be charged to tax at___________.
(a) 15% (b) 20%
(c) 30% (d) Normal rate of tax applicable to the assessee
Correct answer : (d)
Justification of correct answer :
Dividend received from foreign company will be included in the total income of the tax
payer and will be charged to tax at the rates applicable to the taxpayer.
Thus, option (d) is the correct option.
Q7. A foreign company in which the Indian company holds ___________ in nominal
value of the equity share capital will be treated as foreign specified company for the
purpose of section 115BBD of the Act.
(a) 25% or more (b) 26% or more
(c) 50% or more (d) 51% or more
Correct answer : (b)

[As amended by Finance (No. 2) Act, 2017]

Justification of correct answer:
A foreign company in which the Indian company holds 26% or more in nominal value of
the equity share capital will be treated as foreign specified company for the purpose of
section 115BBD of the Act.
Thus, option (b) is the correct option.
Q8. Section ________ provides a concessional rate of tax in respect of dividend received
by an Indian company from a foreign specified company.
(a) 115A (b) 115B
(c) 115BBD (d) 115BBE
Correct answer: (c)
Justification of correct answer :
Section 115BBD provides a concessional rate of tax in respect of dividend received by an
Indian company from a foreign company in which the Indian company holds 26% or
more in nominal value of the equity share capital (i.e., a foreign specified company).
Thus, option (c) is the correct option.
Q9. By virtue of section 115BBD, dividends [as defined in section 2(22) except dividend
as defined in section 2(22)(e)] received by an Indian company from a foreign specified
company is charged to tax at a flat rate of 15% (plus surcharge and cess as applicable).
(a) True (b) False
Correct answer : (a)
Justification of correct answer :
By virtue of section 115BBD, dividends [as defined in section 2(22) except dividend as
defined in section 2(22)(e)] received by an Indian company from a foreign company in
which the Indian company holds 26% or more in nominal value of the equity share
capital is charged to tax at a flat rate of 15% (plus surcharge and cess as applicable).
Thus, the statement given in the question is true and hence, option (a) is the correct
option.
Q10. No deduction on account of any expenditure or allowance will be allowed from the
amount of the dividend covered under section 115BBD.
(a) True (b) False
Correct answer : (a)
Justification of correct answer :
No deduction on account of any expenditure or allowance will be allowed from the
amount of the dividend covered under section 115BBD. In other words, the gross amount
of dividend (without deducting any expenditure/allowance) will be taxed at the rate of
15% (plus surcharge and cess as applicable).

[As amended by Finance (No. 2) Act, 2017]

Thus, the statement given in the question is true and hence, option (a) is the correct
option.

[As amended by Finance (No. 2) Act, 2017]