India signed a Double Taxation Avoidance Agreement (DTAA) with the Government of Iceland, here today for the avoidance of double taxation and for the prevention of fiscal evasion with respect to taxes on income. The Agreement also aims at promoting economic cooperation between the two countries. The Agreement was signed by Shri P. Chidambaram, Finance Minister on behalf of the Government of India and Mr. Arni Mathiesen, the Minister of Finance of Iceland on behalf of the Government of Iceland. Welcoming the 45 member business delegation, Shri Chidambaram expressed the confidence that the agreement would result in high degree of comfort level of investors of both the countries. Mr. Arni Mathiesen, in his response, said that the DTAA would facilitate flow of more investment in both the countries and would further enhance mutual economic relationship.

The DTAA between India and Iceland which will come into force on a date to be notified in due course, covers in the case of India, income-tax including any surcharge thereon and in the case of Iceland, income-tax to the State and to the municipalities. The DTAA provides for taxation of dividend, interest, royalties and fees for technical services-both in the country of residence as well as the country of source. However, the rate of tax in the country of source shall not exceed ten percent of the gross amount of payment in case the beneficial owner of the payments is a resident of the Contracting State.

The DTAA provides that capital gains from alienation of shares of a company shall be taxable in the country where the company is a resident. The incidence of double taxation shall be avoided by one country giving credit for taxes paid by its residents in the other country. There is a provision for exchange of information in cases, which are under investigation in either of the two countries. Both the countries shall assist each other in collection of revenue claims. There is also a provision for limitation of benefits under the DTAA to prevent misuse of the provisions of the DTAA.

The Agreement will further stimulate the flow of capital, technology and personnel between the two countries. It will also contribute to the tax stability and facilitate mutual cooperation.

Double taxation avoidance: source-country withholding capped and treaty provides tax credit, information exchange and collection assistance. Bilateral agreement establishes taxing rights on income, taxes dividends, interest, royalties and technical service fees in residence and source states with a source-country withholding cap of ten percent for beneficial owners resident in the other Contracting State; capital gains on company shares taxable in the company's state of residence; relief via credit for taxes paid abroad; and provisions for exchange of information, mutual assistance in recovery of revenue claims, and a limitation of benefits to prevent treaty abuse.