India-Italy DTAA: Dividend Tax Rate Under Article 11

Quick answer: Under the India-Italy DTAA, dividends to companies holding at least 10% of shares are capped at 15% under Article 11(2)(a), while all other recipients face a 25% rate under Article 11(2)(b) -- above India's ~20.8% effective domestic rate, so portfolio investors typically use the lower domestic rate under section 159(4) of the Income-tax Act, 2025 (section 90(2) of the Income-tax Act, 1961). The treaty was signed on 19 February 1993 and has been in force since 23 November 1995.

Key takeaways:

• 15% DTAA rate for 10%+ shareholders vs 25% for everyone else
• 25% general rate exceeds the ~20.8% domestic rate, so domestic wins for portfolio holders
• Treaty signed 19 February 1993, in force since 23 November 1995
• A valid TRC and electronically filed Form 41 (formerly Form 10F) are mandatory to claim treaty rates

Dividend Tax Rate Between India and Italy

The India-Italy Double Taxation Avoidance Agreement (DTAA), signed on 19 February 1993 and in force since 23 November 1995, establishes specific withholding tax rates on cross-border dividend payments between the two countries. Under Article 11 of the treaty, dividends paid by an Indian company to an Italian resident (or vice versa) are subject to withholding tax rates that depend on the level of shareholding held by the beneficial owner.

Unlike many of India's other DTAAs that offer rates of 10% or lower, the India-Italy treaty prescribes relatively higher rates: 15% for companies holding at least 10% of the shares, and 25% for all other recipients. While the 15% rate still provides savings compared to the domestic rate of 20% plus surcharge and cess (~20.8%), the 25% general rate actually exceeds the domestic withholding rate, making the domestic rate the more beneficial option for portfolio investors in many cases.

This treaty rate structure makes the India-Italy DTAA one of the less favourable agreements for dividend flows. Understanding the current rates and documentation requirements is essential for Indian companies paying dividends to Italian shareholders and Italian investors receiving Indian dividends.

Treaty Rate vs Domestic Rate: Detailed Comparison

Understanding the gap between the treaty rate and the domestic rate is critical for tax planning. Here is how the rates compare for dividends paid by an Indian company to an Italian resident:

Under section 207(1) (Table, Sl. Nos. 1–3) of the Income-tax Act, 2025 (section 115A of the Income-tax Act, 1961), read with section 393(2) of the Income-tax Act, 2025 (Table, Sl. No. 17; section 195 of the Income-tax Act, 1961), dividends paid to non-residents are taxed at 20%, deducted at source. When surcharge and 4% health & education cess are added, the effective domestic rate reaches approximately 20.8% to 21.84%. For companies with 10%+ shareholding, the DTAA rate of 15% provides a clear tax saving of approximately 5.8%. However, for general investors with below 10% holding, the DTAA rate of 25% is higher than the domestic rate, so section 159(4) of the Income-tax Act, 2025 allows the taxpayer to opt for the more beneficial domestic rate.

This dual-rate structure under Article 11 makes it essential for Italian investors and Italian companies operating in India to carefully evaluate whether the DTAA rate or the domestic rate is more advantageous based on their specific shareholding percentage.

Who Qualifies for the Reduced Rate

Not every Italian recipient automatically qualifies for the lower 15% DTAA rate. The treaty imposes specific conditions that must be satisfied:

Beneficial Ownership Requirement

Article 11 requires the recipient to be the beneficial owner of the dividends. The recipient must have the right to use and enjoy the dividend income, not merely act as a conduit, nominee, or agent. Italian holding companies that function purely as intermediaries without genuine commercial substance may be denied treaty benefits. The OECD Commentary on the dividends article provides guidance that a mere conduit or agent cannot be considered a beneficial owner.

10% Shareholding Threshold

The lower 15% rate under Article 11(2)(a) applies only when the beneficial owner is a company (not an individual or trust) that owns at least 10% of the shares of the Indian company paying the dividends. This is a lower threshold than the 25% shareholding required under the India-Singapore treaty, making it relatively easier for Italian corporate investors to access the preferential rate.

Tax Residency Certification

The Italian recipient must hold a valid Tax Residency Certificate (TRC) issued by the Italian tax authorities (Agenzia delle Entrate). Without a TRC, the Indian payer must deduct tax at the domestic rate of 20%.

GAAR and Anti-Avoidance

India's General Anti-Avoidance Rules (GAAR), effective from 1 April 2017 and now in sections 178 to 184 of the Income-tax Act, 2025 (Chapter X-A of the Income-tax Act, 1961), can override treaty benefits if an arrangement is determined to be an impermissible avoidance arrangement lacking commercial substance. Given that the India-Italy treaty has not yet been modified by the MLI, there is no treaty-level Principal Purpose Test (PPT), but domestic GAAR provisions still apply.

Dividend-Specific Treaty Provisions Under Article 11

Article 11 of the India-Italy DTAA contains several provisions that specifically govern dividend taxation:

Article 11(1): Right to Tax

Dividends paid by a company resident in one Contracting State (e.g., India) to a resident of the other Contracting State (e.g., Italy) may be taxed in the recipient's state of residence. Italy, as the residence state, has the primary right to tax the dividends as part of the Italian recipient's worldwide income.

Article 11(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: (a) 15% of the gross amount if the beneficial owner is a company which owns at least 10% of the shares of the paying company; or (b) 25% of the gross amount in all other cases. However, under section 159(4) of the Income-tax Act, 2025, the taxpayer may apply the lower domestic rate where it is more beneficial.

Article 11(4): Definition of Dividends

The term "dividends" includes income from shares, jouissance shares, mining shares, founders' shares, or other rights participating in profits that are not debt-claims. It also covers income from other corporate distributions treated as income from shares under the domestic law of the source state, including deemed dividends under section 2(40) of the Income-tax Act, 2025 (section 2(22) of the Income-tax Act, 1961).

Article 11(5): PE Exception

If the beneficial owner carries on business through a permanent establishment (PE) in the source state, and the shareholding giving rise to dividends is effectively connected with that PE, the dividends are taxed as business profits under Article 7 rather than under the preferential Article 11 rates.

Documentation Required for Claiming the Reduced Rate

Indian companies paying dividends to Italian residents must ensure complete documentation before applying the treaty rate. The following documents are mandatory:

Tax Residency Certificate (TRC)

The Italian shareholder must obtain a TRC from the Agenzia delle Entrate (Italian Revenue Agency) confirming tax residency in Italy for the relevant financial year. The TRC must contain the shareholder's name, tax identification number (codice fiscale), status (individual/company), period of residency, and address in Italy.

Form 41

Under section 159 of the Income-tax Act, 2025 (section 90(5) of the Income-tax Act, 1961) and the rules made under it, the non-resident must furnish Form 41 to the Indian payer. Form 41 is a self-declaration providing information not already available in the TRC, including the assessee's status, PAN in India (if available), period of residential status, and purpose of obtaining the certificate.

Self-Declaration / No-PE Certificate

A self-declaration confirming that the recipient does not have a PE in India through which the dividends are effectively connected, and that the recipient is the beneficial owner of the income. This declaration supports the application of Article 11 rates rather than Article 7 (business profits).

PAN (Strongly Recommended)

The 20% higher-rate withholding for a payee without a PAN survives at section 397(2)(b)(i)(C) of the Income-tax Act, 2025 (section 206AA of the Income-tax Act, 1961), but the relief that non-residents previously took under Rule 37BC of the Income-tax Rules, 1962 is now available only on conditions "as may be prescribed". Until those rules are notified, do not assume a TRC and tax identification number alone will keep the higher rate away: obtaining a PAN is the reliable route, and it also simplifies withholding compliance and any future TDS refund claim.

Withholding Procedure for Indian Payers

When an Indian company pays dividends to an Italian resident, the following compliance steps apply under section 393(2) of the Income-tax Act, 2025:

Step 1: Collect and Verify Documentation

Before applying the treaty rate, the Indian payer must collect and verify the TRC, Form 41, and beneficial ownership self-declaration from the Italian recipient. The payer should also determine the recipient's shareholding percentage to identify whether the 15% or 25% rate applies.

Step 2: Determine Applicable Rate

Compare the DTAA rate with the domestic rate. For 10%+ holdings, apply 15% (DTAA is lower). For below 10% holdings, apply the domestic rate of approximately 20.8% (domestic is lower than the 25% DTAA rate). Under section 159(4) of the Income-tax Act, 2025, the beneficial rate prevails.

Step 3: Deduct TDS

Deduct TDS at the applicable rate on the gross amount of dividends. When applying DTAA rates, no surcharge or cess is levied. When applying domestic rates, surcharge and cess are added.

Step 4: File Forms 145 and 146 (formerly Forms 15CA and 15CB)

For remittances above INR 5 lakh, the Indian payer must file Form 145 online and obtain a Chartered Accountant's certificate in Form 146 certifying the nature of the payment, applicable DTAA article, and the rate of TDS applied. Form 146 must be uploaded before filing Form 145.

Step 5: Deposit TDS and File Return

Deposit the deducted TDS within prescribed due dates. File the quarterly TDS return in Form 144 (formerly Form 27Q), reporting payment details, DTAA article applied, and TDS deducted. For comprehensive guidance on cross-border payment compliance, see our tax advisory services.

Common Disputes and Judicial Precedents

Several legal and interpretive issues arise in the context of dividend taxation under the India-Italy DTAA:

Beneficial Ownership Challenges

Indian tax authorities have scrutinised Italian holding structures to determine whether the Italian entity is the true beneficial owner or merely a conduit. The Authority for Advance Rulings (AAR) and Income Tax Appellate Tribunal (ITAT) examine factors such as commercial substance, decision-making authority, economic risk exposure, and the entity's ability to dispose of the dividend income independently. Italian special purpose vehicles (SPVs) with minimal operations may face denial of treaty benefits.

25% Rate vs Domestic Rate Disputes

Disputes have arisen where Indian companies applied the 25% DTAA rate to portfolio investors instead of the lower domestic rate. The settled position under section 159(4) of the Income-tax Act, 2025 is that the taxpayer may choose the more beneficial rate. Indian companies should apply the domestic rate (~20.8%) for below-10% shareholders, as it is more favourable than the 25% treaty rate.

Deemed Dividends

Questions arise on whether deemed dividends under section 2(40)(e) of the Income-tax Act, 2025 (loans and advances by closely held companies to shareholders) qualify for treaty rates. The broad definition under Article 11(4) generally covers deemed dividends as income from shares, though this remains a matter of interpretation in specific cases.

Practical Examples and Calculations

Example 1: Italian Parent Company (10%+ Holding)

An Italian company holds 40% equity in an Indian subsidiary. The Indian subsidiary declares a dividend of INR 1,00,00,000.

• Without DTAA: TDS at 20% + health & education cess (4%) = effective 20.8% = INR 20,80,000 withheld (surcharge applies where income exceeds INR 1 crore)
• With DTAA (Article 11(2)(a)): TDS at 15% (no surcharge/cess) = INR 15,00,000 withheld
• Tax saving: INR 5,80,000 per INR 1 crore dividend

Example 2: Italian Portfolio Investor (Below 10% Holding)

An Italian individual holds 3% shares in an Indian listed company. Dividend received: INR 50,00,000.

• DTAA rate: 25% = INR 12,50,000
• Domestic rate: ~20.8% = INR 10,40,000
• Rate applied (section 159(4) of the Income-tax Act, 2025): Domestic rate of ~20.8% (more beneficial) = INR 10,40,000

Example 3: Dividend from Italy to India

An Indian company receives dividends from its Italian subsidiary. Italy imposes a withholding tax of 26% on dividends paid to non-residents under domestic law (or a reduced rate under the DTAA). The Indian company includes the dividend in its taxable income in India and claims a foreign tax credit under section 159 or section 160 of the Income-tax Act, 2025 (sections 90 and 91 of the Income-tax Act, 1961) for the Italian tax paid, subject to the prescribed foreign tax credit limits.

Frequently Asked Questions

What is the India-Italy DTAA dividend tax rate?

Under Article 11 of the India-Italy DTAA, the withholding tax rate is 15% if the Italian beneficial owner is a company holding at least 10% of the shares, and 25% in all other cases. For portfolio investors with below 10% holding, the domestic rate of approximately 20.8% is more beneficial and should be applied under section 159(4) of the Income-tax Act, 2025.

What documents does an Italian company need to claim the 15% India-Italy DTAA rate?

The Italian company must provide: (1) a valid Tax Residency Certificate from the Agenzia delle Entrate, (2) Form 41 self-declaration, (3) a beneficial ownership and no-PE declaration, and (4) proof of 10%+ shareholding in the Indian company. The Indian payer must verify these before applying the reduced rate.

Does Italy tax dividends received from India?

Yes. Italy taxes dividends received from India as part of the Italian recipient's worldwide income. Italy provides a foreign tax credit for the Indian withholding tax paid under its domestic law and the DTAA, ensuring relief from double taxation. The Italian corporate tax rate (IRES) is 24%, and an additional regional tax (IRAP) of 3.9% may also apply.

Can an Italian individual claim the 15% rate on Indian dividends?

No. The 15% rate under Article 11(2)(a) is available only to companies owning at least 10% of the shares. Individual shareholders fall under the general rate of 25%, though they can opt for the more beneficial domestic rate of approximately 20.8% under section 159(4) of the Income-tax Act, 2025.

Does the DTAA between India and Italy apply automatically to dividend payments?

No. The Indian payer must collect the TRC, Form 41, and self-declaration from the Italian recipient before applying the treaty rate. If these documents are not provided, the payer must deduct TDS at the domestic rate. The Italian recipient can then claim a refund by filing an Indian income tax return.

How does the DTAA between India and Italy interact with GAAR on dividend taxation?

Since the India-Italy treaty has not yet been modified by the MLI, there is no treaty-level Principal Purpose Test. However, India's domestic GAAR provisions in sections 178 to 184 of the Income-tax Act, 2025 can override treaty benefits if the arrangement is found to be an impermissible avoidance arrangement lacking genuine commercial substance.