DTAA Withholding Tax in India — Rates, TRC, and How to Claim Treaty Benefits

Why withholding tax on payments to the parent company matters

Every payment from an Indian subsidiary to its foreign parent — whether dividend, royalty, interest, or management fees — is subject to Indian withholding tax under Section 195. Without a DTAA claim, domestic rates can be steep at around 20% plus surcharge and cess.

India has DTAAs with 90+ countries. These treaties typically reduce the withholding tax rate to 10-15%. On a USD 1 million dividend, the DTAA saving can be USD 90,000-140,000 in a single transaction.

The Tax Residency Certificate — without this, DTAA benefits are denied

To claim lower DTAA rates, the foreign recipient company must furnish a Tax Residency Certificate to the Indian subsidiary before the payment is made. The TRC is issued by the tax authority of the foreign company's home country.

The TRC must be obtained for each financial year, before the payment date, not after. If no TRC is available at the time of payment, full domestic rates must be withheld even if the company is entitled to treaty benefits.

Form 10F — the mandatory self-declaration

In addition to TRC, the foreign company must also provide Form 10F — a self-declaration form filed on the Indian income tax portal. As of 2023, Form 10F must be filed electronically and the foreign company must obtain a PAN in India for this purpose.

This is a step many foreign companies overlook, resulting in loss of DTAA benefits.

Withholding tax rates under key DTAAs

Always verify with the current treaty text as rates depend on ownership percentage and nature of payment.

Permanent Establishment risk — when treaty benefits can backfire

Claiming DTAA benefits requires the foreign parent to engage actively with its Indian subsidiary. This engagement can create a Permanent Establishment of the foreign company in India. If a PE is constituted, the foreign company becomes taxable in India on profits attributable to the PE at the higher foreign company rate of 40%.

PE risk assessment must be done before setting up any intercompany service arrangement.

The Principal Purpose Test — BEPS and treaty shopping risk

Under India's tax treaties amended post-BEPS, Indian tax authorities can deny DTAA benefits if one of the principal purposes of the arrangement was to obtain those benefits. The parent entity must have genuine economic substance in the treaty country.

For companies routing payments through intermediate holding companies in low-tax jurisdictions, the PPT creates significant risk.

Getting withholding tax right requires TRC coordination, Form 10F filing, PE risk assessment, and intercompany pricing that can withstand scrutiny. Our Ex-KPMG international tax team handles this for 50+ foreign companies annually.