India-Israel DTAA & Defence FDI

India-Israel: From Diplomatic Recognition to Special Strategic Partnership

India-Israel bilateral trade has grown from USD 200 million at the time of full diplomatic recognition in 1992 to around USD 3.75 billion in FY 2024-25. In February 2026, during the Indian Prime Minister's state visit to Israel, bilateral ties were elevated to a Special Strategic Partnership, with over a dozen agreements signed covering defence technology, AI, cybersecurity, and agriculture.

The defence relationship is the backbone of this partnership. Israel is one of India's largest arms suppliers — third over 2020-24, after Russia and France, per SIPRI data — and India is Israel's largest arms buyer globally. Cumulative FDI equity inflows from Israel into India stood at around USD 334 million (April 2000 to March 2025, DPIIT figures) — a number that understates real Israeli exposure, since a large share of Israeli investment reaches India routed through the United States, Europe, and Singapore.

For businesses operating in the India-Israel corridor, understanding the DTAA framework and defence FDI regulations is essential for structuring investments, managing withholding tax, and maximising treaty benefits.

India-Israel DTAA: Treaty Provisions and Tax Rates

Treaty Background

The Convention between India and Israel for the avoidance of double taxation and for the prevention of fiscal evasion with respect to taxes on income and on capital was signed on 29 January 1996 and entered into force on 15 May 1996. A Protocol amending the Convention was signed in Jerusalem on 14 October 2015 and entered into force on 19 December 2016.

Both countries are signatories to the Multilateral Instrument (MLI): Israel signed on 7 June 2017 (in force from 1 January 2019) and India signed on 7 June 2017 (in force from 1 October 2019). The MLI modifies certain treaty provisions, particularly around treaty abuse and permanent establishment.

Withholding Tax Rates Under the DTAA

The India-Israel DTAA provides the following withholding tax rates:

The domestic rates shown are the concessional non-resident rates under the Income-tax Act and exclude surcharge and cess, while the treaty caps are all-inclusive — so the real saving is somewhat larger than the headline gap. Note that the 20% domestic rate on interest applies to foreign-currency borrowings; rupee-denominated interest paid to a foreign company is taxed at 35%. Interest on Indian government securities, and on loans made, guaranteed, or insured by the Reserve Bank of India or the Bank of Israel, is exempt from Indian tax altogether under Article 11(3).

Unlike some treaties (such as India-France or India-Singapore), the India-Israel DTAA applies a uniform 10% dividend rate regardless of the shareholding percentage. This simplifies planning but provides less benefit for majority-owned subsidiaries compared to treaties with tiered dividend rates.

Key Treaty Articles for Defence Companies

Article 5 (Permanent Establishment): A building site, a construction or assembly project, or supervisory activities connected therewith, constitutes a PE only if it lasts more than 6 months. The treaty has no services-PE clause, so service visits alone do not create a PE by day-count. Defence contracts involving technology transfer, equipment installation, or training programmes must be structured carefully to avoid creating an unintended PE in India.

Article 7 (Business Profits): Business profits are taxable only in the state of residence unless the enterprise carries on business through a PE in the other state. Israeli defence companies providing equipment to India without a PE pay no Indian corporate tax on the sale proceeds.

Article 12 (Royalties): Royalties are capped at 10% at source.

Article 13 (Fees for Technical Services): Unlike treaties where FTS sits inside the royalty article, the India-Israel DTAA carries FTS in a separate Article 13, also capped at 10% at source. Technology transfer fees, training fees, and technical service charges common in defence contracts benefit from this cap.

Article 14 (Capital Gains): Because FTS occupies Article 13, capital gains sit in Article 14 — an article-numbering trap for anyone working from OECD-model boilerplate. Gains on shares deriving more than 50% of their value from immovable property in India may be taxed in India (Article 14(4)), and — unusually — Article 14(5) preserves source-state taxation for gains on all other shares as well. An Israeli seller of Indian company shares therefore remains taxable in India on the gain, with credit relief in Israel under Article 24.

Limitation of Benefits (LOB)

The 2015 Protocol inserted a Limitation of Benefits article (Article 27A) as an anti-abuse provision, and because the treaty is a Covered Tax Agreement under the MLI, the principal purpose test also applies: benefits can be denied where obtaining them was one of the principal purposes of an arrangement. Companies must demonstrate genuine commercial substance in Israel to claim treaty benefits on Indian-sourced income. Note that the 1996 Protocol's most-favoured-nation clauses were deleted with effect from 14 February 2017 — no lower third-country treaty rate can be imported into this treaty.

How to Claim DTAA Benefits

To claim the reduced withholding tax rates, Israeli companies must:

1. Obtain a Tax Residency Certificate (TRC) from the Israel Tax Authority
2. Provide the TRC to the Indian payer before the payment date
3. File Form 41 (formerly Form 10F) (declaration by the non-resident) with the Indian income tax department
4. The Indian payer must file Forms 145 and 146 (formerly Forms 15CA and 15CB) — Form 145 for each remittance, plus the Form 146 CA certificate confirming the applicable DTAA rate where the taxable remittance exceeds INR 5 lakh

For a step-by-step guide, see our article on how to claim DTAA benefits in India and e-filing Form 41 online.

Defence FDI: Regulatory Framework and Entry Routes

FDI Caps for Defence

India's FDI policy for the defence sector permits:

• Up to 74% FDI under the automatic route for new industrial licence applications
• Up to 100% FDI under the government approval route on a case-by-case basis, where modern technology access is involved
• Up to 49% for fresh foreign investment in companies with an existing defence licence or FDI approval, via a declaration to the Ministry of Defence within 30 days of the change in shareholding

Security clearance from the Ministry of Home Affairs is mandatory for all defence FDI, and the Ministry of Defence retains further scrutiny rights on national security grounds.

Press Note 3 Considerations

Israel does not share a land border with India, so Press Note 3 (which imposes additional restrictions on FDI from countries sharing a land border with India) does not apply to Israeli investments. This gives Israeli defence companies a regulatory advantage over competitors from certain neighbouring countries. For how Israeli defence companies have navigated this, see our article on Israeli defense tech and Press Note 3.

Entity Structure for Defence JVs

The typical structure for an Israeli defence company entering India involves:

1. Indian Pvt Ltd company as the JV entity, with the Israeli company holding up to 49-74% and an Indian partner holding the balance
2. Shareholder agreement governing management rights, technology transfer obligations, and profit-sharing
3. Technology licence agreement between the Israeli parent and the Indian JV, with royalty payments subject to the 10% DTAA cap
4. Transfer pricing documentation for all intercompany transactions

The Indian partner is typically a major defence conglomerate (Tata, Adani, Bharat Forge, HAL) that brings local manufacturing capability, government relationships, and compliance infrastructure.

India-Israel Defence Joint Ventures: Case Studies

Adani-Elbit Advanced Systems India (UAVs)

Adani Enterprises and Elbit Systems (Israel's largest defence company) formed a joint venture, Adani Elbit Advanced Systems India Limited, in 2018. Key features:

• Adani: 51%, Elbit: 49% (compliant with the then-applicable 49% FDI cap)
• India's first private UAV manufacturing facility, located in Hyderabad
• Manufactures the Hermes 900 UAV, the first production of this system outside Israel
• Reportedly delivered more than 20 Hermes 900 UAVs, built with Hyderabad-made carbon-composite aero-structures, to Israel (Shephard Media, February 2024)

Adani-IWI Small Arms Manufacturing

Adani holds the majority stake in PLR Systems, a joint venture with Israel Weapon Industries (IWI) that manufactures small arms in Gwalior, Madhya Pradesh:

• Adani: 51%, IWI: 49%
• Products: TAVOR Assault Rifle, X95 Assault Rifle, GALIL Sniper Rifle, NEGEV Light Machine Gun, UZI Sub Machine Gun
• Designed for Indian Armed Forces procurement under the Make in India framework

IAI-HAL Strategic Collaboration

Israel Aerospace Industries (IAI) signed strategic collaboration memoranda with Hindustan Aeronautics Limited (HAL) and Dynamatic Technologies:

• Joint work on UAVs manufactured in India
• IAI-HAL JV to convert used Boeing-767 aircraft into mid-air refuellers for the Indian Air Force
• Collaboration on advanced sensors and electronic warfare systems

Broader Ecosystem Partnerships

Israeli defence companies IAI, Elbit Systems, and Rafael Advanced Defense Systems have partnered with Indian firms including the Kalyani Group (Bharat Forge), Astra Microwave, and Tata Advanced Systems to manufacture:

• Advanced sub-systems for land and naval platforms
• Homeland security and border surveillance systems
• Precision-guided munitions and missile sub-systems
• Electronic warfare technologies

For a deeper analysis of Israeli M&A activity in Indian defence, see our article on Israeli companies in India defence tech M&A.

Tax Planning for India-Israel Defence Structures

Dividend Repatriation

An Israeli parent holding 49% of an Indian defence JV receives dividends subject to 10% withholding under the DTAA (versus 20% domestic rate). On an annual dividend of INR 10 crore, the DTAA saves INR 1 crore in withholding tax.

The Indian JV must deduct tax at source under section 393(2) of the Income-tax Act, 2025 (Table, Sl. No. 17; section 195 of the Income-tax Act, 1961) and file Form 145/Form 146. The Israeli parent claims credit for the Indian tax against its Israeli tax liability.

Technology Licensing Fees

Israeli defence companies commonly license technology to Indian JVs. Royalty payments are subject to:

• DTAA rate: 10% withholding at source in India
• Transfer pricing: The royalty rate must be at arm's length, supported by benchmarking in the annual transfer pricing documentation
• RBI approval: Technology transfer fees may require RBI reporting under FEMA regulations

Permanent Establishment Risk Management

Israeli defence companies deploying engineers or technical teams in India for equipment installation, training, or maintenance must manage PE risk under the DTAA. The 6-month clock in Article 5(3) applies to building sites, construction or assembly projects, and connected supervisory activities — and since the treaty has no services-PE clause, service visits do not create a PE by day-count alone. Strategies to manage PE risk:

• Avoid maintaining a fixed place of business in India — office or workshop space at the customer's disposal can create a PE even outside a construction project
• Track each construction, assembly, or supervisory engagement against the 6-month threshold per project — the clock runs on the project, not on individual employees
• Ensure India-based personnel do not habitually conclude contracts on behalf of the Israeli company, which would create a dependent-agent PE

For companies with significant Indian presence, consider establishing a formal Indian entity rather than risking inadvertent PE creation. See our guide on DTAA complete guide for foreign companies.

Capital Gains on Exit

If an Israeli partner exits the Indian JV by selling shares, the capital gains treatment depends on:

• Holding period: Unlisted shares held over 24 months qualify as long-term capital gains, taxed at 12.5% (plus applicable surcharge and cess)
• DTAA Article 14: Article 14(5) preserves India's right to tax gains on any shares of an Indian company — not just land-rich companies — so the treaty does not shelter exit gains; the Israeli seller claims credit for the Indian tax in Israel under Article 24
• Anti-abuse rules: The treaty's Limitation of Benefits article (Article 27A) and the MLI principal purpose test both apply, so exit structures need genuine commercial substance

For detailed capital gains planning under DTAAs, see our guide on DTAA capital gains tax planning.

Compliance Infrastructure for India-Israel Defence JVs

Annual Compliance Requirements

An Indian defence JV with Israeli equity must maintain a comprehensive compliance calendar covering multiple regulators. Key filings include: FC-GPR with the RBI within 30 days of share allotment, FLA return to the RBI by 15 July each year, annual return (Form MGT-7) and financial statements (Form AOC-4) with the MCA, corporate tax return by 30 November (when transfer pricing audit applies), monthly and annual GST returns, and quarterly advance tax payments.

Defence-Specific Reporting

Beyond standard corporate compliance, defence JVs must maintain offset reporting to the Ministry of Defence, annual security audit submissions to MHA, and technology transfer documentation for DPIIT. The defence licence itself must be renewed periodically, and any change in shareholding pattern, management, or scope of manufacturing requires prior government approval.

Given the multi-regulator compliance burden, most Israel-India defence JVs engage dedicated compliance management teams or outsource to professional firms that specialise in defence sector regulatory affairs. The cost of non-compliance in the defence sector goes beyond financial penalties: licence revocation can shut down operations entirely.

2026 Developments: What Changed After the Special Strategic Partnership

The February 2026 elevation to Special Strategic Partnership brought several new developments:

• MoU on defence cooperation: Covers joint production, training, R&D including AI and cybersecurity, with a roadmap for co-development and co-production
• Israel exploring India as global manufacturing base: Israeli defence companies are increasingly viewing India as a production hub, particularly given EU regulatory tightening on arms exports
• Expanded FDI pipeline: Defence deals are expected to accelerate significantly in 2026, with focus on missile sub-systems, advanced sensors, precision-guided munitions, and electronic warfare
• India expanding airpower with Israeli technology: The Tejas light combat aircraft incorporates Israeli avionics including radar and electronic warfare components

The direction is clear: Israel is shifting from being a supplier to India to being a manufacturing partner in India, which changes the FDI and tax structuring requirements fundamentally. Companies need to move from arms-length supply contracts to equity-based JV structures with the associated DTAA, FEMA, and transfer pricing compliance infrastructure.

Key Takeaways

• The India-Israel DTAA provides a uniform 10% withholding rate on dividends, interest, royalties, and FTS, saving 10 percentage points versus domestic rates
• Defence FDI is permitted up to 74% via the automatic route and 100% via the government route, with mandatory security clearance from MHA
• The typical JV structure is 51% Indian / 49% Israeli, though the 74% automatic route now allows Israeli majority ownership in new ventures
• Existing JVs (Adani-Elbit, Adani-IWI, IAI-HAL) demonstrate the co-production model that defines the next phase of defence cooperation
• PE risk management is critical for Israeli companies deploying technical teams in India; the treaty threshold is 6 months for construction and assembly projects