Double Tax Avoidance Agreement (DTAA) Between India and Finland

A Double Tax Avoidance Agreement is between two countries to avoid taxation of the income in both countries of the same income. The very purpose behind such agreements is to promote economic cooperation between countries by removing barriers due to the imposition of double taxes. Therefore, the DTAA between India and Finland is quite an important agreement since, other than the relief it extends to taxpayers, it will also clarify the taxing rights of each country.

The economic relationship between India and Finland is growing fast, while trade and investment flows are rising. Against this backdrop, DTAA supplements this relationship because it guarantees no double taxation for the taxpayer and provides associated facilities for cross-border activities and investments. 

DTAA Between India and Finland

The DTAA between India and Finland was signed on 15th January 2010, with this Agreement coming into effect on 19th April 2010. This conven­tion is based upon the Model Tax Convention by the Organization for Economic Cooperation and Development.

The India-Finland DTAA is a bilateral agreement that aims to avoid double taxation of income acquired in one country by citizens of another. It applies to persons and undertakings who are residents of India or Finland and whose income originates in one or both of the Contracting States. It relates to income, including business profits, dividends, interest, royalties, and capital gains.

Importance of India and Finland DTAA to Both Countries

What makes the DTAA important for both India and Finland is that it provides impetus to economic cooperation and investments by the two countries. In this understanding, the agreement avoids double taxation on the same income in both countries and applies an avoidance policy. This would encourage businesspersons or individuals to participate in cross-border activities and allow higher trade and investments between the countries.

The last few years have seen India and Finland strengthen their economic links. In 2020, Finland was the 17th-largest investor in India, while the total stock of FDI by that country stood at $1.3 bln. On the other hand, India ranked 13th on the list of investors in Finland, with a total stock of FDI from that country amounting to €0.6 bln.

The DTAA provides a stable and predictable tax environment for taxpayers by reducing additional administrative burdens and related costs of double taxation to a substantial extent. This would further encourage businesses to invest in each other's markets, increasing economic activity and creating jobs.

It also avoids taxation of the same income in both countries and relieves taxpayers who have paid taxes. The relief can be either through credit for the taxes paid in another country or exemption from taxation in the country of residence.

Taxes Covered Under DTAA

The DTAA between India and Finland covers various taxes in each country, which include:

In Finland 

• State Income-taxes 
• Corporate Income-tax
• Communal Tax
• Church tax
• Tax withheld at source from interest
• Tax withheld at source from non-residents' income

In India

• Income tax, including any surcharge 

The agreement avoids the case wherein, due to differences in the laws of the two countries, the same income would be taxed twice by both countries. Therefore, it gives relief to taxpayers who are required to pay taxes on both.

India and Finland DTAA Tax Rates

The DTAA between India and Finland provides for the following tax rates for different types of income: 

• Dividends: 15% 
• Interest: 10% 
• Royalties: 10% 
• Fees for technical services: 10% 

These are much lower than the domestic taxation rates charged in both countries and, hence, extremely helpful to the taxpayer.

Taxation of Capital Gains Under DTAA

The DTAA between India and Finland also addresses the taxation of capital gains. In this respect, the agreement states that capital gains from the alienation of immovable property, which is situated in a Contracting State, may be taxed in that State. However, the capital gains from the alienation of shares or other rights in a company, whose assets consist principally of immovable property situated in a Contracting State, are taxable in that State.

This provision is of immense relevance to those individuals and companies handling real estate transactions between these two countries, India and Finland. Each country's taxing rights allocation in the DTAA model not only averts the problem of double taxation but also brings clarity and certainty to the taxpayer by rendering clear determinations for tax authorities.

Taxation of Employment Income Under DTAA

DTAA between India and Finland also stretches to the taxation of employment income. The agreement specifies that salaries, wages, and similar forms of remuneration earned by a resident of one Contracting State for employment are taxable solely in that state, except when the employment is conducted in the other Contracting State. In cases where the employment is exercised in the other  Contracting State—income from this employment may be taxed in the other state. This provision thus becomes very important for those personnel who work in both countries, India and Finland, on a trans-border basis or are expatriates. Through this agreement, an employee will not be under the dilemma of double taxation on their employment income, and hence, it ensures relief and clarity to taxpayers.

Final Word

It is an important treaty supporting economic cooperation and investment between India and Finland. The DTAA removes double taxation and, therefore, helps create an atmosphere where a clear distinction of taxing rights is conducive for the taxpayer and promotes cross-border activities. It applies to a wide range of taxes with special tax rates for certain types of income and benefits individuals and legal entities.

With the world economies increasingly integrating, the role and importance of DTAAs, like the DTAA between India and Finland, has been increasing. All such initiatives are instrumental in promoting international trade and investment and thus constitute a vital means of fostering economic growth and prosperity between the two countries. 

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