Dividend Tax Rate Between India and China Under DTAA

Dividend Tax Rate Between India and China

The India-China Double Taxation Avoidance Agreement (DTAA), originally signed on 18 July 1994 and amended through a protocol on 26 November 2018, establishes preferential withholding tax rates on cross-border dividend payments between the two countries. Under Article 10 of the treaty, dividends paid by a company resident in one Contracting State to a beneficial owner resident in the other Contracting State are subject to a maximum withholding tax rate of 10% of the gross amount.

Unlike many other Indian DTAAs that provide tiered rates based on shareholding thresholds (such as the India-Singapore or India-USA treaties), the India-China DTAA applies a single flat rate of 10% on dividends regardless of the beneficial owner's shareholding percentage. This simplicity offers predictability and ease of compliance for investors and companies engaged in India-China cross-border operations.

This rate represents a significant reduction from India's domestic withholding rate of 20% (plus applicable surcharge and health & education cess, bringing the effective rate to approximately 20.8%), translating to potential tax savings of over 10% on every dividend payment from India to a Chinese resident.

Treaty Rate vs Domestic Rate: Detailed Comparison

The gap between the treaty rate and India's domestic rate makes the India-China DTAA particularly valuable for dividend repatriation planning. Here is a detailed comparison:

Under Section 115A of the Income Tax Act, 1961, dividends paid to non-residents are subject to tax at 20%. When surcharge (ranging from 2% to 5% depending on income levels) and 4% health & education cess are added, the effective domestic rate reaches approximately 20.8% to 21.84%. The DTAA rate of 10% applies as a flat rate with no surcharge or cess, resulting in direct tax savings of 10.8% to 11.84% on every dividend payment.

On the Chinese side, China levies a standard 10% withholding tax on dividends paid to non-residents under its domestic law. Since the DTAA rate matches China's domestic rate, the treaty primarily benefits Indian residents receiving dividends from Chinese companies by confirming the 10% ceiling and ensuring access to double taxation relief through the tax credit mechanism.

Who Qualifies for the Reduced Rate

While the 10% rate under the India-China DTAA appears straightforward, several conditions must be met before a taxpayer can access the reduced rate:

Beneficial Ownership Requirement

Article 10 requires the dividend recipient to be the beneficial owner of the dividends. The recipient must have genuine economic ownership and the right to use and enjoy the dividend income. Conduit entities, nominees, or agents interposed solely to access treaty benefits will not qualify. Following the 2018 Protocol, the treaty specifically addresses this through enhanced anti-abuse provisions aligned with the OECD BEPS framework.

Tax Residency Requirement

The recipient must be a tax resident of China (for dividends paid from India) or a tax resident of India (for dividends paid from China). Dual residents are subject to the tie-breaker rules under Article 4 of the treaty, which consider factors such as permanent home, centre of vital interests, habitual abode, and nationality.

Limitation on Benefits (LOB) — Article 27A

The 2018 Protocol introduced Article 27A (Entitlement to Benefits), which serves as a Principal Purpose Test (PPT). Under this provision, a treaty benefit will be denied if it is reasonable to conclude that obtaining that benefit was one of the principal purposes of any arrangement or transaction. This aligns the India-China treaty with Action 6 of the OECD BEPS project and significantly curtails treaty shopping through China-based structures.

India's General Anti-Avoidance Rules (GAAR)

India's domestic GAAR provisions, effective from 1 April 2017 under Chapter X-A of the Income Tax Act, provide an additional layer of scrutiny. If the Indian tax authorities determine that an arrangement is an "impermissible avoidance arrangement" lacking commercial substance, DTAA benefits including the reduced dividend rate may be denied regardless of the treaty provisions.

Dividend-Specific Treaty Provisions Under Article 10

Article 10 of the India-China DTAA contains several provisions governing dividend taxation:

Article 10(1): Right to Tax

Dividends paid by a company resident in one Contracting State to a resident of the other Contracting State may be taxed in the recipient's state of residence. This establishes the primary taxing right.

Article 10(2): Source State Limitation

The source state (India, if the dividend-paying company is Indian) may also tax the dividends, but the tax charged shall not exceed 10% of the gross amount of the dividends if the beneficial owner is a resident of the other Contracting State. Unlike the India-Singapore DTAA, there is no distinction based on percentage of capital held — the flat 10% rate applies universally.

Article 10(3): Definition of Dividends

The term "dividends" includes income from shares, jouissance shares, mining shares, founders' shares, or other rights participating in profits (not being debt-claims). It also covers income from other corporate rights treated as income from shares under the domestic law of the source state. This ensures that deemed dividends under Section 2(22) of India's Income Tax Act and bonus shares fall within the treaty's scope.

Article 10(4): PE Exception

If the beneficial owner carries on business through a permanent establishment (PE) in the source state, and the shareholding generating the dividends is effectively connected with that PE, the dividends are taxed as business profits under Article 7 rather than under the preferential Article 10 rates. This prevents PE-connected income from benefiting from the lower withholding rate.

2018 Protocol Amendments

The Protocol signed on 26 November 2018, which entered into force on 5 June 2019, brought significant changes including updates to the preamble reflecting BEPS minimum standards, introduction of the PPT under Article 27A, and amendments to the definition of permanent establishment under Article 5.

Documentation Required for Claiming the Reduced Rate

Indian companies paying dividends to Chinese residents must ensure proper documentation before applying the treaty rate:

Tax Residency Certificate (TRC)

The Chinese recipient must obtain a Tax Residency Certificate (TRC) from the State Taxation Administration of China confirming tax residency in China for the relevant financial year. The TRC must contain the taxpayer's name, status, nationality, tax identification number, period of residency, and address.

Form 10F

Under Section 90(5) of the Income Tax Act read with Rule 21AB, the non-resident must furnish Form 10F to the Indian payer. Form 10F is a self-declaration providing information not already available in the TRC, including the assessee's status, permanent account number (PAN) in India (if available), and purpose of the certificate.

Self-Declaration and No-PE Certificate

A self-declaration confirming that the recipient is the beneficial owner of the dividend income and does not have a PE in India through which the dividends are effectively connected. This supports applying Article 10 rates rather than Article 7 (business profits).

PAN (Recommended but Not Mandatory)

While obtaining a PAN in India is not strictly mandatory for claiming DTAA benefits, having a PAN simplifies withholding compliance and any future TDS refund claims.

Withholding Procedure for Indian Payers

When an Indian company pays dividends to a Chinese resident, the following compliance steps apply under Section 195 of the Income Tax Act:

Step 1: Collect and Verify Documentation

Before applying the treaty rate, collect the TRC, Form 10F, beneficial ownership declaration, and no-PE self-declaration from the Chinese recipient. Verify the validity and completeness of each document.

Step 2: Deduct TDS at the Treaty Rate

Deduct TDS at 10% on the gross amount of dividends. No surcharge or cess is levied when applying the DTAA rate. If the documentation is incomplete or unavailable, deduct TDS at the full domestic rate of 20% plus surcharge and cess.

Step 3: File Form 15CA and Form 15CB

For remittances exceeding INR 5 lakh, the Indian payer must file Form 15CA online and obtain a Chartered Accountant's certificate in Form 15CB. Form 15CB must be uploaded before filing Form 15CA and must certify the nature of payment, applicable DTAA article, and TDS rate applied.

Step 4: Deposit TDS and File Quarterly Returns

Deposit the deducted TDS with the government within the prescribed due dates. File the quarterly TDS return in Form 27Q, reporting payment details, the DTAA article applied, and TDS deducted. For end-to-end guidance, refer to our tax advisory services and cross-border payments service.

Common Disputes and Judicial Precedents

Several areas of dispute have emerged in the interpretation of dividend taxation under the India-China DTAA:

Beneficial Ownership Challenges

Indian tax authorities have scrutinised arrangements where Chinese holding companies lacked commercial substance. The concept of beneficial ownership has been tested in cases involving multi-layered structures where intermediary entities were interposed between the ultimate Chinese beneficial owner and the Indian dividend-paying company. Tribunals have examined factors such as independent decision-making authority, economic risk exposure, and the ability to use and enjoy the dividend income.

Treaty Shopping Through Hong Kong

Prior to the introduction of the PPT under the 2018 Protocol, some taxpayers routed investments through Hong Kong to access the India-Hong Kong DTAA (which also provides a 5% rate for substantial holdings). The 2018 Protocol's LOB provisions and India's GAAR significantly curtail such treaty shopping. For a comparison, see our India-Hong Kong DTAA guide.

Deemed Dividends Under Section 2(22)(e)

Disputes have arisen regarding whether deemed dividends (loans and advances by closely held companies to shareholders) qualify for the reduced treaty rate. The ITAT has generally held that such deemed dividends fall within the scope of Article 10 as they constitute income treated as dividends under Indian domestic law.

Applicability of the 2018 Protocol

The Protocol entered into force on 5 June 2019 and applies to income arising in fiscal years beginning on or after 1 April of the calendar year following entry into force. Questions have arisen regarding transitional arrangements and whether the PPT applies retroactively. The general view is that the Protocol applies prospectively from FY 2020-21.

Practical Examples and Calculations

Example 1: Chinese Parent Company Receiving Indian Dividends

A Chinese company holds 70% equity in an Indian subsidiary. The Indian subsidiary declares a dividend of INR 2,00,00,000 (INR 2 crore).

• Without DTAA: TDS at 20% + surcharge (2%) + cess (4%) = effective ~20.8% = INR 41,60,000 withheld
• With DTAA (Article 10(2)): TDS at 10% (no surcharge/cess) = INR 20,00,000 withheld
• Tax saving: INR 21,60,000 per INR 2 crore dividend

Example 2: Chinese Individual Investor

A Chinese-resident individual holds 3% shares in an Indian listed company. Dividend received: INR 25,00,000.

• Without DTAA: TDS at 20% + surcharge + cess = ~20.8% = INR 5,20,000
• With DTAA: TDS at 10% = INR 2,50,000
• Tax saving: INR 2,70,000 per INR 25 lakh dividend

Note that unlike the India-Singapore DTAA, the flat 10% rate applies to individuals and companies alike, regardless of the shareholding percentage.

Example 3: Indian Company Receiving Dividends from China

An Indian company receives dividends from its Chinese subsidiary. China withholds 10% on the dividend at source under both its domestic law and the DTAA. The Indian company includes the dividend in its taxable income in India and claims a foreign tax credit (FTC) under Section 90 of the Income Tax Act for the Chinese tax paid. India allows credit for the lower of the Chinese tax paid or the Indian tax attributable to that income, effectively eliminating double taxation.

Frequently Asked Questions

What is the DTAA tax rate on dividends between India and China?

Under Article 10(2) of the India-China DTAA, the maximum withholding tax rate on dividends is 10% of the gross amount, applicable when the beneficial owner is a resident of the other Contracting State. This is a flat rate that applies regardless of the percentage of shareholding, unlike some other treaties that have tiered rates.

Is there a lower rate for substantial shareholdings under the India-China DTAA?

No. The India-China DTAA provides a single flat rate of 10% for all dividends regardless of the shareholding percentage. This is different from treaties like the India-Singapore DTAA, which offers 10% for 25%+ holdings and 15% for others. The uniform 10% rate simplifies compliance for India-China investments.

What documents are needed to claim the 10% DTAA rate on dividends?

The Chinese recipient must provide: (1) a valid Tax Residency Certificate from China's State Taxation Administration, (2) Form 10F self-declaration, (3) a beneficial ownership and no-PE declaration. The Indian payer must verify these documents before applying the reduced rate.

How does the 2018 Protocol affect dividend taxation?

The 2018 Protocol, effective from 5 June 2019, did not change the 10% dividend rate itself but introduced Article 27A containing a Principal Purpose Test (PPT). If obtaining the treaty benefit was one of the principal purposes of an arrangement, the benefit may be denied. The Protocol also updated the PE definition and preamble in line with BEPS standards.

Can dividends from government-owned companies benefit from the reduced rate?

Yes. Dividends paid by government-owned companies are covered under Article 10 like any other company dividends, subject to the 10% rate. However, interest paid to the government or government-owned financial institutions receives a separate exemption under Article 11(3), which does not extend to dividends.

What if the Chinese entity is found to be a conduit?

If Indian tax authorities determine that the Chinese entity lacks beneficial ownership or that the arrangement's principal purpose was to obtain treaty benefits, the 10% rate will be denied under the PPT provisions of Article 27A introduced by the 2018 Protocol. The dividend will then be taxed at the full domestic rate of 20% plus surcharge and cess. India's GAAR provisions may also apply separately.

How does China tax dividends received from India?

China includes foreign-sourced dividends in the taxable income of the Chinese resident recipient. China provides a foreign tax credit for Indian withholding tax paid under the DTAA, eliminating double taxation. The Chinese enterprise income tax rate is generally 25%, so after crediting the 10% Indian withholding tax, the Chinese recipient would owe an additional 15% on the dividend income in China.