Treaty Interpretation & Income Characterisation | Shift by MLegal
Issues Relating to Treaty Interpretation, Such as Characterisation of Income
As global business becomes more interconnected, the importance of correctly interpreting Double Taxation Avoidance Agreements (DTAAs) and characterising income accurately has never been higher. At Shift by MLegal, we assist individuals, corporates, funds, and family offices in navigating the nuanced and often ambiguous landscape of international tax treaties — to ensure optimal tax treatment, prevent disputes, and maximise legitimate treaty benefits
Whether you're earning dividends from a foreign subsidiary, royalty from IP licensed abroad, or capital gains from selling shares in a foreign company, how that income is “characterised” under the relevant treaty determines how much tax you’ll pay and where.
Why Treaty Interpretation and Income Characterisation Matter
- Income may be taxed in both source and residence countries
- Mischaracterised income may lose treaty protection or attract higher tax
- Varying definitions under domestic laws vs. tax treaties create grey areas
- OECD Commentary, judicial precedents, and BEPS Actions all play a role in interpretation
- Accurate characterisation helps avoid tax disputes, penalties, and litigation
Misinterpret a treaty clause, and you could lose millions — or worse, face regulatory investigations.
Common Income Characterisation Challenges
| Income Type | Potential Characterisation Issues |
|---|---|
| Dividends | Whether paid out of profits or capital, beneficial ownership tests |
| Interest | Distinction between interest and disguised dividends or equity |
| Royalties | Differentiation from business income; classification of software |
| Capital Gains | Whether indirect transfers are covered, gains from shares/real estate |
| Technical Services | Whether fees qualify as FTS or business income |
| Business Profits | Whether Permanent Establishment (PE) is triggered |
Our Services in Treaty Interpretation & Income Characterisation
| Focus Area | What We Deliver |
|---|---|
| Treaty Analysis | Determining applicable clauses and character of income under relevant DTAA |
| Cross-Jurisdictional Mapping | Reconciling differences in domestic tax law vs. treaty definitions |
| Beneficial Ownership Advisory | Structuring to meet anti-abuse and BO tests under treaties |
| PE & Nexus Analysis | Advising whether income triggers a taxable presence under the treaty |
| Advance Ruling Support | Assistance with obtaining binding rulings from tax authorities |
| Dispute Representation | Defence during audits, appeals, and Mutual Agreement Procedure (MAP) resolution |
Relevant Jurisdictions & Treaties We Work With
- India’s DTAAs with over 90 countries
- UK tax treaties (including post-Brexit changes)
- UAE tax treaties with India, UK, EU, USA
- Singapore’s treaties favouring IP and service exports
- Mauritius, 🇳🇱 Netherlands, 🇲🇹 Malta treaties for holding structures
We also interpret treaties based on OECD Model Convention, UN Model, and non-OECD practices (e.g., US model).
When You Need Expert Treaty Interpretation
- Receiving passive income from abroad (dividends, interest, royalty)
- Engaging in cross-border service contracts
- Structuring intra-group transactions or IP licensing
- Investing in foreign companies or real estate
- Facing scrutiny by tax authorities on income sourcing or treaty misuse
Case Examples
| Scenario | Resolution Delivered |
|---|---|
| Software firm India → UK | Income characterised as business profit, not royalty — tax-neutral |
| IP license India ↔ Singapore | Royalty treated under DTAA, 10% withholding vs. 20% under domestic law |
| Fund exit India ↔ Mauritius | Capital gains exemption retained post-limitation of benefit (LOB) tests |
| Technical services UAE ↔ India | Treated as independent personal services, not FTS — zero tax outcome |
Our Legal Framework & Tools
- OECD Model Convention & Commentaries
- UN Model Treaty & Commentary (for developing countries)
- India’s Judicial Precedents (SC, AAR, ITAT)
- GAAR & LOB Clause Analysis
- BEPS Action Plans 6 (Treaty Abuse) & 7 (PE Avoidance)
- MAP and APA Processes under Indian and Global Tax Laws
The Shift by MLegal Edge
- Decades of experience in interpreting complex treaty provisions
- Integration of legal, tax, and business structuring advice
- Integration of legal, tax, and business structuring advice
- Proactive dispute prevention through documentation and compliance
- Deep understanding of economic substance and anti-abuse tests
Don’t Let Misinterpretation Cost You
Tax treaties are powerful — if used wisely. Shift by MLegal ensures you interpret and apply treaty provisions correctly, saving you time, tax, and trouble.