Double Taxation Relief for GMC Companies: Treaties, Tax Credits and Tax Residence

SummaryThe whole answer in six points:

• A company is "resident in GMC" when "the control and management of [its] business is exercised in GMC" (Income Tax Act 2025, s. 2). Residence, not incorporation, is what unlocks foreign tax credits.
• Treaty relief only exists where the designated officer makes an order under s. 49 declaring that an arrangement with another government has effect. Whether any such order covers a given country must be checked at the time; this article does not list treaties.
• Where an arrangement applies, s. 50 allows foreign tax as a credit against GMC tax on the same income, capped at the GMC effective rate on that income (s. 50(3)) and at the person's total GMC income tax for the year (s. 50(4)). Claims must be made within 4 years after the end of the year of assessment (s. 50(9)).
• Section 50A provides unilateral credits for foreign tax on listed categories of foreign income where no arrangement exists.
• A pooling election under s. 50C lets a company aggregate credits across income streams, provided the foreign headline corporate rate is at least 15% and GMC tax on the income is not nil.
• Parts 20A and 20B (ss. 105A–105HA and 105I–105Q) give the Comptroller power to exchange information with foreign tax authorities and to implement FATCA, common reporting, country-by-country and crypto-asset reporting agreements once declared by order.

Why this question matters for a GMC company

The GMC corporate rate is 15% on every dollar of chargeable income (Income Tax Act 2025, s. 43(1)(a)). A GMC company that earns income abroad may also pay tax where that income arises. Without relief, the same profit is taxed twice.

The Income Tax Act 2025 deals with this in Part 14 (ss. 49–50C). The mechanics are familiar to anyone who has worked with a credit-method tax system, but the GMC version has its own features, and two of them deserve attention: treaty relief depends on an order under s. 49, and unilateral credits under s. 50A have their own categories and conditions.

Throughout this article, "$" means United States dollars. All monetary references in the Act are read as USD (s. 2AA).

Step one: is the company resident in GMC?

Every form of credit in Part 14 is available only to a person "resident in GMC". Section 50(2) is explicit: credit "is not allowed against income tax for any year of assessment unless the person entitled to the income is resident in GMC during that year".

Section 2 defines residence differently for individuals and companies:

For a company, incorporation in GMC is neither necessary nor sufficient. A company incorporated abroad whose board decides strategy and exercises real control from Gelephu can be resident in GMC. A GMC-incorporated company whose decisions are actually taken elsewhere may not be. The test looks at where the highest level of control is exercised in fact, which for most companies means where the directors meet and take decisions, supported by minutes, resolutions and records kept in GMC.

Practically, boards that want GMC residence should hold substantive meetings in GMC, ensure directors who attend have real authority, and avoid a pattern where decisions are pre-made abroad and merely ratified locally. The residency of directors also matters for company law: every company must have at least one director "ordinarily resident in GMC", meaning resident in GMC or holding a valid work visa or work pass (Companies Act 2025, s. 145(1) and (1A)). The two tests are different, and satisfying the Companies Act requirement does not by itself make the company tax resident.

Tax residence certificates

Foreign tax authorities and withholding agents commonly ask for a certificate of residence before granting treaty benefits. Confirmation of residence is an administrative matter for the Comptroller of Income Tax (the officer appointed under s. 3 to administer the Act), and Basnet Law can confirm current practice.

Step two: does an arrangement apply?

How treaties take effect (s. 49)

An arrangement with another government has no effect in GMC by itself. It takes effect only "if the designated officer by order declares" that the arrangement has been made "with a view to affording relief from double taxation" and that it is "expedient" for it to have effect (s. 49(1)). Once declared, the arrangement applies "despite anything in any written law". An order may be revoked by a later order (s. 49(4)), and the designated officer may make rules to carry the arrangement into effect (s. 49(6)).

Section 49(2) describes what such arrangements may do. They may allocate taxing rights between countries, provide for full or partial exemption in one country, deem the source of income to lie in one country, and permit exempt income to be taken into account in setting the effective rate on other income (the formula for that effective rate is in s. 49(2A)).

Two points follow. First, the existence of an order is a matter of fact to be verified for each counterparty country before any treaty position is taken in a return; no list of countries appears in the Act. Second, s. 49(5) lifts the official secrecy rule in s. 6 so that the Comptroller can disclose information to the treaty partner where the arrangement requires it. A company that claims treaty benefits should assume its information can travel.

The credit itself (s. 50)

Where an arrangement provides for foreign tax to be credited, s. 50 governs the computation:

1. Reduction of GMC tax. The GMC tax chargeable on the income is reduced by the credit (s. 50(2)).
2. Per-income cap. The credit cannot exceed the GMC tax on that income computed at the person's average effective rate, that is, GMC tax on assessable income divided by assessable income (s. 50(3)). For most companies this will be close to 15%; foreign tax above that rate is not creditable.
3. Overall cap. Total credits under all arrangements for a year cannot exceed the person's total GMC income tax for the year, excluding withholding tax on interest under s. 45 (s. 50(4)).
4. No deduction for foreign tax. Foreign tax cannot also be deducted as an expense, and income assessed on a remittance basis is grossed up for the foreign tax (s. 50(5)(a) and (b)).
5. Underlying tax on dividends. Where the arrangement allows it, tax paid by the foreign company on the profits out of which a dividend is paid can be taken into account, with the dividend grossed up accordingly (s. 50(5)(c)). Where the arrangement extends this only to some classes of dividend, a GMC company controlling at least half the voting power of the payer gets the same treatment on other classes (s. 50(7)).
6. Election out. A person may elect that no credit be allowed for a year (s. 50(8)). This can be useful where a loss position makes the credit worthless and a deduction elsewhere would be better.

Section 50(1A) excludes two categories of foreign tax from credit: an "excluded top-up tax" in all cases, and a "qualified domestic minimum top-up tax" except where it is paid by a company on the profits out of which it pays a dividend to the GMC claimant. These terms are defined in s. 2 and reflect global minimum tax concepts; groups within the scope of such rules abroad should model this carefully.

Deadlines and foreign adjustments

A claim for credit must be made "not later than 4 years after the end of the year of assessment to which the claim relates" (s. 50(9)). Disputes over the amount are handled by objection and appeal in the same way as an assessment.

If a foreign or GMC adjustment later makes the credit too large or too small, the usual time limits do not apply to the consequential assessment or claim, provided it is made within 3 years of the final adjustment (s. 50(10)). Where the foreign adjustment reduces the foreign tax and the GMC credit becomes excessive, the person must give the Comptroller written notice of the particulars within one year after the adjustment (s. 50(11)). Failure without reasonable excuse is an offence carrying a penalty up to the amount of the excess credit (s. 50(11A)), which the Comptroller may compound (s. 50(11B)).

Step three: unilateral credits where no arrangement exists (s. 50A)

Section 50A gives a GMC resident a credit under s. 50 for foreign tax on listed categories of foreign income "even if there are no arrangements in force under section 49". The categories include professional and consultancy services rendered abroad, royalties and interest not borne by a GMC person or deductible against GMC income, foreign dividends, employment income earned abroad, branch profits, permanent establishment profits, foreign rent, and a residual category of income-nature gains (s. 50A(1)(a)–(i)). For foreign dividends, the credit takes account of underlying corporate tax where the GMC recipient owns at least 25% of the paying company's shares (s. 50A(2)), a requirement the designated officer may waive (s. 50A(6)).

This is the provision that matters most to a GMC holding or services company with income from countries that have no arrangement with GMC. Section 50A(1A) also excludes top-up taxes in the same way as s. 50.

Trusts and estates (ss. 50B and 50BA)

Where a trustee receives foreign income in GMC on which a credit is allowable, and a beneficiary resident in GMC is entitled to a share of it, the credit "must be given to the beneficiary instead of the trustee", computed as if the beneficiary had received the income directly (s. 50B(1) and (2)). Section 50B(3) carves out certain trusts, including real estate investment trusts, s. 13F foreign trusts, s. 13N locally-administered trusts, trusts with a s. 13D prescribed trustee and s. 13U approved funds. Section 50BA applies the same approach to estates administered in GMC.

Pooling credits (s. 50C)

Credits under Part 14 are otherwise computed income stream by income stream. That means excess foreign tax on one stream cannot shelter GMC tax on another. Section 50C lets a person with two or more credits in a year elect "to be given a pooled credit for that year of assessment in lieu of any 2 or more of those credits" (s. 50C(1)).

Each pooled income stream must satisfy three conditions (s. 50C(2)):

• tax of a similar character to income tax has actually been paid on it in the source territory;
• at the time the income is received in GMC, the highest corporate tax rate on trade or business profits in that territory is "not less than 15%" (disregarding top-up taxes); and
• the GMC tax on the income before credit is not nil.

The pooled credit is the lower of the aggregate GMC tax on all the elected income (computed at the average effective rate) and the aggregate foreign tax paid on it (s. 50C(4) and (5)). Streams not elected continue under ss. 50, 50A, 50B or 50BA as applicable (s. 50C(7)). The election is worthwhile where some streams carry foreign tax above the GMC rate and others below it.

Exchange of information (Part 20A)

Relief from double taxation comes with transparency. Part 20A (ss. 105A–105HA) allows a "competent authority" of a treaty partner, or of a country with which GMC has an exchange of information arrangement declared under s. 105BA, to request information about a person's "tax position" (s. 105D). The request must contain the particulars in the Eighth Schedule unless the Comptroller permits otherwise (s. 105D(2)). The Comptroller cannot decline merely because GMC does not need the information itself or because it is held by a bank, nominee or fiduciary or concerns ownership of an entity (s. 105D(4)).

To obtain the information the Comptroller may use the general information powers in ss. 65 to 65D (s. 105F) and may call on the Comptroller of Sales Tax, the Comptroller of Property Tax, the Chief Assessor or the Commissioner of Stamp Duties (s. 105G). Information obtained may also be used for GMC's own tax administration (s. 105GA). Where the information is protected by banking or trust company confidentiality laws, the Comptroller must generally serve notice of the request on the person concerned (s. 105E), subject to exceptions where notice would delay the exchange or prejudice a foreign investigation. Any judicial review is heard in private with sealed documents (s. 105HA).

International tax compliance agreements (Part 20B)

Part 20B (ss. 105I–105Q) lets the designated officer declare by order, once they have entered into force for GMC, four families of agreement: a FATCA agreement with the United States; competent authority agreements for automatic exchange of financial account information; country-by-country reporting exchange agreements; and crypto-asset reporting framework (CARF) agreements (s. 105K(1)). Prescribed persons, typically financial institutions, must then supply information to the Comptroller in the prescribed form and through the electronic service (s. 105L). Legal privilege is preserved (s. 105L(5)). Failure to comply without reasonable excuse is an offence with a fine up to $5,000 and up to $100 per day for a continuing offence (s. 105M(1A)). Regulations may also require a country-by-country report from a prescribed person resident in GMC or with a permanent establishment in GMC (s. 105P(1A)).

For a GMC financial services firm or a multinational group, this means the reporting architecture is in the statute and takes effect by order. Whether any order has been made under s. 105K should be confirmed at the time.

Practical checklist

1. Confirm where control and management is actually exercised. Hold board meetings in GMC with real decision-making, and keep minutes there.
2. Before relying on any treaty, verify that an order under s. 49 declares an arrangement with the relevant country and read the arrangement's terms.
3. For each foreign income stream, record the foreign tax paid, the nature of the income and any underlying tax on dividends (with the shareholding percentage).
4. Compute the per-stream cap under s. 50(3) and the overall cap under s. 50(4); consider a pooling election under s. 50C where rates differ across streams.
5. File credit claims within 4 years after the end of the year of assessment (s. 50(9)).
6. Diarise foreign audits: an adjustment that reduces foreign tax must be notified to the Comptroller within one year (s. 50(11)).
7. For non-treaty income, claim unilateral credits under s. 50A for the listed categories of foreign income.
8. Assume information exchange: keep files that would withstand a competent authority request under Part 20A.

Frequently asked questions

Is a company incorporated in GMC automatically tax resident in GMC?

No. Residence for a company depends on where "the control and management of [its] business is exercised" (s. 2). A GMC-incorporated company managed from abroad may not be resident, and a foreign-incorporated company managed from GMC may be. Because every credit in Part 14 requires residence (s. 50(2)), this is the first question to settle.

Which countries have tax treaties with GMC?

The Act does not list them. An arrangement has effect only when the designated officer declares it by order under s. 49(1). The position for each country should be verified at the time a treaty benefit is claimed, and Basnet Law can confirm the current position.

Can a GMC company get a credit for foreign tax if there is no treaty?

Yes. Section 50A provides unilateral credits for listed categories of foreign income, including services rendered abroad, foreign dividends, branch profits and foreign rent, computed under the same rules and caps as s. 50.

Does foreign tax above 15% get credited?

Only up to the GMC tax on the same income at the claimant's average effective rate (s. 50(3)). Excess foreign tax on one stream can partly offset GMC tax on other foreign streams through a pooling election under s. 50C, subject to its conditions.

Do individuals need foreign tax credits in GMC?

Individuals who are not citizens of Bhutan are taxed at 0% on chargeable income derived on or before 31 December 2030 (s. 43(1)(ba)). With no GMC tax to credit against, the credit rules are mainly relevant to companies, trustees and Bhutanese citizens resident in GMC.

Key takeaways

• Residence (control and management in GMC) is the gateway to every form of double taxation relief.
• Treaty relief depends on an order under s. 49; verify it for each country rather than assuming it.
• Section 50 credits are capped per stream and overall, must be claimed within 4 years, and carry a notification duty when foreign tax is later reduced.
• Unilateral credits under s. 50A cover listed categories of foreign income where no arrangement exists.
• Pooling under s. 50C, and the exchange of information machinery in Parts 20A and 20B, complete the picture.

This article is general information about the law of the Gelephu Mindfulness City Special Administrative Region as at the date above. It is not legal advice and does not create a lawyer–client relationship.

You may contact Basnet Law at basnet@basnetgmc.com or office@basnetgmc.com for any legal queries related to GMC.

References

• Income Tax Act 2025 (Law No. 6 of 2025), ss. 1(3), 2 ("resident in GMC", "excluded top-up tax", "qualified domestic minimum top-up tax"), 2AA, 3, 6, 43(1)(a) and (ba), 49, 50, 50A, 50B, 50BA, 50C, 65–65D, 105A, 105B, 105BA, 105D, 105E, 105F, 105G, 105GA, 105HA, 105I, 105J, 105K, 105L, 105M, 105N, 105P, Eighth Schedule
• Companies Act 2025 (Law No. 1 of 2025), s. 145(1) and (1A)