Dividend Tax Rate Between India and Indonesia Under DTAA

Quick answer: Under Article 10(2) of the India-Indonesia DTAA, signed 27 July 2012 and in force from 5 February 2016, dividends paid by an Indian company to an Indonesian beneficial owner are taxed at a flat 10% of the gross amount, regardless of shareholding percentage — half of India's 20% domestic withholding rate under section 207(1) (Table, Sl. No. 1) of the Income-tax Act, 2025 (section 115A of the Income-tax Act, 1961). The treaty is a Covered Tax Agreement under the Multilateral Instrument (MLI), so the Principal Purpose Test can deny the reduced rate to arrangements set up mainly to access it. Claiming the rate needs a Certificate of Domicile from Indonesia's Directorate General of Taxes (DJP) and Form 41 (formerly Form 10F).

Key takeaways:

• Flat 10% dividend rate under Article 10(2) — no shareholding tiers, no exempt category
• Domestic rate is 20%, so the treaty halves the withholding cost
• Treaty signed 27 July 2012, in force 5 February 2016, effective in India from 1 April 2017
• India-Indonesia DTAA is a Covered Tax Agreement — the MLI Principal Purpose Test applies
• Requires a Certificate of Domicile (COD) from Indonesia's DJP plus Form 41

Dividend Tax Rate Between India and Indonesia

The Double Taxation Avoidance Agreement (DTAA) between India and Indonesia, signed on 27 July 2012 in New Delhi and in force from 5 February 2016, sets the withholding tax framework for dividends flowing between Asia's two largest emerging economies. Under Article 10 of the treaty, the maximum withholding tax India can charge on dividends paid to an Indonesian beneficial owner is capped at 10% of the gross amount, compared to the domestic rate of 20% under section 207(1) (Table, Sl. No. 1) of the Income-tax Act, 2025 (section 115A of the Income-tax Act, 1961).

This 2012 treaty replaced an earlier agreement signed at Jakarta on 7 August 1987, which ceased to have effect once the current provisions became applicable — India applied them from fiscal years beginning on or after 1 April 2017, and Indonesia applied them to withholding taxes from 1 January 2017. The modern treaty brought the dividend, interest and royalty/FTS rates into a consistent 10% band and added a services permanent establishment clause, discussed further on our India-Indonesia DTAA complete guide.

India and Indonesia are major trading partners, with flows spanning palm oil and coal imports into India and Indian pharmaceutical, IT and manufacturing investment into Indonesia. For Indonesian companies holding equity in Indian subsidiaries, and Indian companies with Indonesian shareholders, the dividend rate under Article 10 is one of the most frequently used treaty provisions. Beacon Filing's tax advisory team helps structure and document these cross-border dividend flows correctly.

Treaty Rate vs Domestic Rate: Detailed Comparison

Domestic Rate (Without DTAA)

Absent treaty protection, dividends paid by an Indian company to a non-resident shareholder are taxed at 20% of the gross amount (plus applicable surcharge and health and education cess) under section 207(1) (Table, Sl. No. 1) of the Income-tax Act, 2025. This flat rate applies to all foreign shareholders regardless of residence, unless a more favourable DTAA rate is available and properly claimed.

DTAA Rate (With Treaty)

Article 10(2) of the India-Indonesia DTAA limits India's withholding tax to 10% of the gross amount of the dividends, provided the Indonesian recipient is the beneficial owner. Unlike treaties that apply a lower rate only above a minimum shareholding percentage, Article 10 applies the same flat 10% cap to every Indonesian shareholder, whether the holding is a small portfolio stake or a controlling interest.

Effective Tax Savings

For an Indonesian parent company receiving INR 4 crore in dividends from its Indian subsidiary: without the treaty, Indian TDS at 20% deducts INR 80 lakh, leaving INR 3.20 crore. With the treaty rate of 10% applied (subject to valid documentation), TDS is INR 40 lakh, leaving INR 3.60 crore — a saving of INR 40 lakh on this single distribution. The Indonesian parent can then claim a foreign tax credit in Indonesia for the Indian tax paid, so the income is not taxed twice.

Who Qualifies for the Reduced Rate

Beneficial Ownership Requirement

The reduced rate is available only to the beneficial owner of the dividend — the person entitled to use and enjoy the income in their own right, not a nominee or conduit obligated to pass it on. An Indonesian holding company inserted between an Indian subsidiary and a third-country parent, with no independent decision-making over the dividend, risks failing this test.

Tax Residency and the Certificate of Domicile

Under Article 4, the Indonesian recipient must be a tax resident of Indonesia — for companies, this generally means incorporation in Indonesia or having its place of management there. To claim the treaty rate, the recipient must obtain a Tax Residency Certificate — known in Indonesia as a Surat Keterangan Domisili (Certificate of Domicile, COD) — issued by the Directorate General of Taxes (DJP), as required under section 159(8) of the Income-tax Act, 2025 (section 90(4) of the Income-tax Act, 1961).

Anti-Abuse: the MLI Principal Purpose Test

India and Indonesia have both ratified the Multilateral Instrument (MLI): India deposited its instrument of ratification on 25 June 2019 (MLI in force for India from 1 October 2019), and Indonesia deposited its instrument on 28 April 2020 following ratification under Presidential Regulation 77/2019 (MLI in force for Indonesia from 1 August 2020). Indonesia has matched India's notification, so the India-Indonesia DTAA is a Covered Tax Agreement, and the MLI's Principal Purpose Test applies: a benefit such as the 10% dividend rate can be denied where obtaining it was one of the principal purposes of an arrangement, unless granting the benefit would still be consistent with the object and purpose of the treaty. For dividend flows, this sits alongside Article 10(2)'s own beneficial-ownership requirement — there is no separate Limitation of Benefits article in the treaty or its Protocol.

No Permanent Establishment Connection

Article 10(4) removes the 10% cap where the beneficial owner carries on business in India through a permanent establishment and the shareholding generating the dividend is effectively connected with that PE. In that case, the dividend is taxed instead as business profits under Article 7, generally at the 35% foreign-company rate applicable from FY 2024-25 (Finance (No. 2) Act 2024).

Dividend-Specific Treaty Provisions Under Article 10

Definition of Dividends (Article 10(3))

The treaty defines dividends broadly as income from shares or other rights, not being debt-claims, participating in profits, as well as income from other corporate rights subjected to the same taxation treatment as share income under the law of the state in which the distributing company is resident.

Article 10(1): Residence State Taxation

Dividends paid by a company resident in one state to a resident of the other state may be taxed in that other (residence) state — establishing the residence country's primary right to tax.

Article 10(2): The 10% Cap

Where the beneficial owner is a resident of the other Contracting State, the source-state tax "shall not exceed 10% (ten per cent) of the gross amount of the dividends" — a single flat ceiling with no shareholding-based tiers.

Article 10(4): PE Exception

Where the shareholding is effectively connected with a permanent establishment in the source state, Article 10 gives way to Article 7 (business profits).

Article 10(5): Extra-Territorial Taxation

The state in which the paying company is not resident may not tax the dividends merely because the company derives profits from that state — the source of dividend income is fixed at the residence of the distributing company, not wherever it does business.

Documentation Required to Claim the Reduced Rate

Certificate of Domicile (Tax Residency Certificate)

The Indonesian shareholder must obtain a Certificate of Domicile (Surat Keterangan Domisili) from the DJP confirming Indonesian tax residency for the relevant year, as required under section 159(8) of the Income-tax Act, 2025 (section 90(4) of the Income-tax Act, 1961).

Form 41 (formerly Form 10F)

If the COD does not carry every prescribed particular — name, status, nationality, Indonesian Tax Identification Number (NPWP), and period of residential status — the shareholder must also file Form 41 electronically on the Indian income-tax e-filing portal. PAN is not mandatory for this filing; a dedicated non-PAN registration route is available.

Self-Declaration

A self-declaration confirming beneficial ownership of the dividend and the absence of an Indian PE to which the shareholding is attributable is standard practice, and should also address the commercial substance of the holding given the MLI's Principal Purpose Test.

Withholding Procedure for Indian Payers

Section 393(2): TDS Obligation

Under section 393(2) of the Income-tax Act, 2025 (Table, Sl. No. 17; section 195 of the Income-tax Act, 1961), the Indian company must deduct tax at source at the time of payment or credit, whichever is earlier — 10% if the COD and Form 41 are on file, or 20% if not.

Forms 145 and 146 (formerly Forms 15CA and 15CB)

Before remitting the dividend, the Indian company must file Form 145 electronically. For remittances exceeding INR 5 lakh in a financial year, a Chartered Accountant must additionally certify Form 146, confirming the applicable treaty article, rate, and correctness of the TDS deducted.

Section 395(1): Lower Withholding Certificate

If the actual tax liability is expected to be lower than 10%, the Indonesian shareholder can apply to the Assessing Officer for a certificate under section 395(1) of the Income-tax Act, 2025 (section 197 of the Income-tax Act, 1961) authorising a lower or nil rate.

Compliance Notes and Common Issues

Beneficial Ownership Scrutiny

Indian tax authorities increasingly test beneficial ownership where dividends flow through an Indonesian entity to an ultimate parent in a third jurisdiction with a less favourable, or no, DTAA with India. A conduit with no employees, no independent board decisions and no economic risk over the dividend is unlikely to survive scrutiny.

No MFN Clause

Unlike some Indian treaties, the India-Indonesia DTAA and its Protocol contain no most-favoured-nation clause, so a lower dividend rate negotiated in a later Indian treaty with a third country cannot be imported into this treaty.

GAAR as a Backstop

Even where the MLI's Principal Purpose Test is not invoked, India's domestic General Anti-Avoidance Rule, applicable from April 2017 and given statutory precedence over the treaty-more-beneficial rule by section 159(6) of the Income-tax Act, 2025 (section 90(2A) of the Income-tax Act, 1961), can independently deny treaty benefits — including the Article 10(2) rate — to an arrangement whose main purpose is obtaining the tax benefit and which lacks commercial substance.

Practical Examples and Calculations

Example 1: Wholly-Owned Indian Subsidiary

PT Java Manufaktur, an Indonesian company, holds 100% of Bharat Components Pvt Ltd. Bharat Components declares a dividend of INR 3 crore.

• Without DTAA: TDS at 20% = INR 60 lakh; PT Java Manufaktur receives INR 2.40 crore.
• With DTAA: TDS at 10% = INR 30 lakh; PT Java Manufaktur receives INR 2.70 crore.
• Saving: INR 30 lakh, claimed as a foreign tax credit in Indonesia.

Example 2: Minority Portfolio Shareholder

An Indonesian pension fund holds a 2% stake in a listed Indian company and receives INR 50 lakh in dividends. Because Article 10(2) applies a flat rate with no shareholding threshold, the same 10% cap applies as for a controlling shareholder — TDS of INR 5 lakh instead of INR 10 lakh.

Example 3: Dividend Connected to an Indian PE

An Indonesian bank operates a branch (PE) in Mumbai and separately holds shares in an unrelated Indian company, unconnected to the branch's business. The unrelated shareholding qualifies for the 10% Article 10(2) rate; had the shares instead been held as part of the branch's trading book, the dividend would be taxed as business profits under Article 7 at the applicable corporate rate.

Frequently Asked Questions

What is the dividend tax rate under the India-Indonesia DTAA?

Under Article 10(2) of the India-Indonesia DTAA, dividends paid by an Indian company to an Indonesian beneficial owner are taxed at a maximum of 10% of the gross amount, regardless of shareholding percentage. This compares to India's domestic withholding rate of 20% under section 207(1) (Table, Sl. No. 1) of the Income-tax Act, 2025 (section 115A of the Income-tax Act, 1961) — a 50% reduction.

Do I need a Certificate of Domicile to claim the reduced rate?

Yes. The Indonesian shareholder must obtain a Certificate of Domicile (Surat Keterangan Domisili) from Indonesia's Directorate General of Taxes confirming tax residency. If it lacks prescribed details such as the NPWP tax identification number, Form 41 (formerly Form 10F) must also be filed electronically with the Indian tax authorities before the reduced rate can be applied.

Does the 10% rate depend on the shareholding percentage?

No. Article 10(2) applies a single flat 10% rate to all Indonesian shareholders, whether they hold a small portfolio stake or a controlling interest. Unlike Indian treaties with tiered dividend rates based on ownership thresholds, the India-Indonesia DTAA treats every qualifying shareholder identically.

Does the MLI's Principal Purpose Test apply to Indonesian dividend claims?

Yes. India and Indonesia have both ratified the Multilateral Instrument, and the India-Indonesia DTAA is a Covered Tax Agreement. The Principal Purpose Test under MLI Article 7 can deny the 10% rate to arrangements whose main purpose was obtaining that benefit, layered on top of the treaty's own beneficial-ownership requirement.

What happens if the Indonesian shareholder has a PE in India?

If the shares generating the dividend are effectively connected with a permanent establishment the Indonesian company maintains in India, Article 10(4) disapplies the 10% cap. The dividend is instead taxed as business profits under Article 7, generally at the 35% foreign-company corporate tax rate.

Is there a most-favoured-nation clause that could reduce the dividend rate further?

No. The India-Indonesia DTAA and its Protocol contain no MFN clause, so a more favourable dividend rate agreed in a later Indian treaty with a third country cannot automatically be imported into this treaty. The flat 10% rate under Article 10(2) is the operative ceiling.