After all, the grand introductions let us step into the eye of the storm. Article 23A often knows as the Exemption method.

The body of the Article has four essential paragraphs, covering the following aspects:
- Obligation of the State of Residence;
- Impact on income related to Article 10 and 11; and
- Tax Rate progression.
- Non-application of Article 23(1)
Obligation of the State of Residence: Article 23A(1)
According to Paragraph 1 of Article 23A, the State of Resident will exempt the income when:
- When a resident of a State (say State A)
- Derives income which is taxable in another State (say State B)
- As per the provisions of the Convention.
Subject to:
Provisions of Article 23A(2) and Article 23A(3), and
The State of the source ( say State B) does not tax the income considering the income of the resident of its State.

We can also say that when the State of Source or the State where Permanent Establishment exists has the right to tax the income, the State of Residence is to provide an exemption.
The obligation to provide exemption depends on whether the State of Source may tax the income/capital by the Convention. But we need to remember, that it does not oblige the State of Residence to exempt the income if the State of Source treats the income taxable considering the income as earned by its resident. Article 4 to resolve the issues of dual residency using the tie-breaker test.
Credit for income earned under Article 10/11: Article 23A(2)
According to Paragraph 2 of Article 23A, the State of Resident will provide credit for the tax paid in the State of Source for the dividends/interest when:
- When a resident of a State (say State A)
- Derives interest or dividends from another State (say State B)
- As per the provisions of Article 10 or Article 11 of the Convention
Subject to:
State of the source (State B) does not tax the income considering the income of the resident of its State.

Article 10 and Article 11 provides both the State of Residence and the State of Source the right to tax the income. For such cases, if the State of Residence uses the exemption method, it cannot tax the income. Hence for such scenarios, when the State of Residence wishes to retain its right to tax the income and provide relief from double taxation, it will resort to the credit method for the elimination of double taxation.
Dividends from the substantial holding of a company
How will the Article 23(2) impact the taxation of the dividends received by the parent company? As we are aware, Article 10(2)(a) applies to the State when the Subsidiary company pays dividends to the Parent company established in another state. As per that Article, the withholding tax of the State of Source (State of Subsidiary company) will be no more than 5%. So this eliminates the juridical double taxation of the dividends.
But it will not prevent the recurrent corporate taxation on the profits distributed to the parent company.
Such a situation is prevented by tweaking the treaty in the following three ways:
- Exemption with Progression as guided by Article 23(3) by exempting the dividends it receives from the subsidiary in the other State, but take dividends into consideration for computing the tax payable in the State of the Parent company.
- Credit for underlying tax paid on dividends and also the tax paid on the profits on the profits distributed as per Article 23(2)
- Assimilation to a holding in a domestic company by treating the dividends received by the Foreign company similar to the treatment for dividends received from a domestic company.
Exemption with Progression
1963 Draft Convention reserved the application of the progressive of tax rates by the State of residence, but most OECD member countries have adopted this principle.
According to Paragraph 3 of Article 23A, when the State of residence exempts the income from taxation, it still has the right to include the income for calculating the tax amount in the State of Residence. It generally works in the states where there are progressive tax rates based upon the amount of income.

Non-applicability of Article 23A(1)
Paragraph 4 of Article 23A avoids double non-taxation resulting from disagreements between the State of Residence Source on the fact of the case or difference in interpretation of the provisions of the Convention.
According to Article 23A(4), the provisions of the Article 23A(1) is not applicable when :
- The resident of a State derives the income (Say State A)
- From the Other contracting State (State B)
- The other Contracting State applies the provisions of this Convention to exempt such income or capital from tax; or
- Applies the provisions of Article 10(2) or Article 11(2) of the Convention.
In other words, Article 23(4) assists the State of Residence by avoiding the applicability of Article 23A(1) when:
- The State of Source interprets the facts of a case or the provisions of the Convention in such a way that an item of income or capital falls under the provision of the Convention and eliminates the State of Source’s right to tax that item or limits the tax it can impose ; and
- The State of residence adopts a different interpretation of the facts or the provisions of the Convention, which provides then income taxable in the State of Source and hence places an obligation on the State of residence to exempt the income.
If the State of Source has taxation right as per the Convention, on the income which is exempt as per domestic laws?
In such cases, the State of residence cannot forgo the obligation to provide exemption as Article 23A(4) will not be applicable.
Note:
Like all the other Articles of the OECD Model Tax Convention, there is no clarity provided on the application of Article 23A. Hence it is silent on the following issues which may arise:
a. What amount to be exempted?
b. Treatment of losses
c. Taxation on the rest of the income.