Dividend Tax Rate Between India and South Korea Under DTAA

Dividend Tax Rate Between India and South Korea

The India-South Korea Double Taxation Avoidance Agreement (DTAA) was comprehensively revised and re-signed on 18 May 2015, replacing the earlier 1985 treaty. The revised agreement entered into force on 12 September 2016 and applies in India to income derived in fiscal years beginning on or after 1 April 2017. Under Article 11 of the revised 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 15% of the gross amount.

The revised treaty simplified the dividend provisions significantly. Under the old 1985 treaty, dividends were generally taxable at 20%, with a reduced 15% rate available only when specific conditions were met. The 2015 revision removed the complex conditions and established a single flat 15% rate for all dividends, regardless of the shareholding percentage held by the beneficial owner.

This rate represents a saving of approximately 5.8% compared to India's domestic withholding rate of 20% (plus applicable surcharge and health & education cess, yielding an effective domestic rate of approximately 20.8%). For significant dividend flows between India and South Korea, this saving can amount to considerable sums.

Treaty Rate vs Domestic Rate: Detailed Comparison

The revised India-South Korea DTAA provides meaningful tax savings on dividend payments compared to both countries' domestic rates:

Under Section 115A of the Income Tax Act, 1961, dividends paid to non-residents are subject to tax at 20%. When surcharge (2% to 5% depending on income levels) and 4% health & education cess are added, the effective rate reaches approximately 20.8% to 21.84%. The DTAA rate of 15% applies as a flat rate with no surcharge or cess, resulting in direct savings of 5.8% to 6.84%.

On the South Korean side, South Korea levies a withholding tax of 20% on dividends paid to non-residents under its domestic law (or 22% including local income tax). The 15% DTAA rate therefore provides a 5-7% benefit for Indian residents receiving dividends from Korean companies as well.

For companies evaluating India entry structures, see our FDI advisory services for guidance on optimising cross-border dividend flows.

Who Qualifies for the Reduced Rate

The 15% treaty rate is not automatic. Several conditions must be satisfied:

Beneficial Ownership Requirement

Article 11 requires the recipient to be the beneficial owner of the dividends. The recipient must have genuine economic ownership — the right to use and enjoy the dividend income without being obligated to pass it on to another person. Intermediary entities interposed solely to access treaty benefits will be denied the reduced rate.

Tax Residency Requirement

The recipient must be a tax resident of South Korea (for dividends paid from India) or a tax resident of India (for dividends paid from South Korea). A valid Tax Residency Certificate (TRC) issued by the relevant tax authority is mandatory.

Principal Purpose Test (PPT)

The revised treaty, aligned with OECD BEPS standards, incorporates anti-abuse provisions. If one of the principal purposes of an arrangement resulting in the dividend payment is to obtain the treaty benefit, the 15% rate may be denied. India's domestic GAAR provisions (effective from 1 April 2017) provide an additional layer of anti-avoidance scrutiny.

No PE Connection

The shareholding generating the dividends must not be effectively connected with a permanent establishment (PE) of the beneficial owner in the source state. If such a connection exists, the dividends are taxable as business profits under Article 7 at regular corporate rates rather than the reduced Article 11 rate.

Dividend-Specific Treaty Provisions Under Article 11

The revised India-South Korea DTAA uses Article 11 for dividends (unlike many treaties that use Article 10). Key provisions include:

Article 11(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 for the residence state.

Article 11(2): Source State Limitation

The source state may also tax dividends, but the tax shall not exceed 15% of the gross amount of the dividends if the beneficial owner is a resident of the other Contracting State. This is a simplification from the old treaty, which had a complex structure with a 20% general rate and a conditional 15% reduced rate.

Article 11(3): Definition of Dividends

The term "dividends" includes income from shares, jouissance shares, mining shares, founders' shares, or other rights participating in profits. It also covers other income treated as dividends under the domestic law of the source state. This broad definition ensures coverage of deemed dividends under Section 2(22) of India's Income Tax Act, bonus shares, and distributions from corporate restructurings.

Article 11(4): PE Exception

If the beneficial owner carries on business through a PE in the source state and the shareholding is effectively connected with that PE, the dividends are taxed as business profits under Article 7 rather than under the preferential Article 11 rate.

Key Change from Old Treaty

The old 1985 treaty allowed a 15% rate only when the beneficial owner was a company holding at least 20% of the voting shares in the paying company. The revised 2015 treaty removed this threshold entirely, applying 15% universally to all beneficial owners, whether companies or individuals, regardless of shareholding levels.

Documentation Required for Claiming the Reduced Rate

Indian companies paying dividends to South Korean residents must ensure complete documentation before applying the treaty rate:

Tax Residency Certificate (TRC)

The South Korean recipient must obtain a TRC from the National Tax Service of South Korea confirming tax residency for the relevant financial year. The TRC must include the taxpayer's name, status (individual or company), 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 supplements the TRC with additional information including PAN (if held), period of residential status, and purpose of the certificate.

Self-Declaration and No-PE Certificate

A self-declaration confirming that the recipient is the beneficial owner of the dividends and does not have a PE in India through which the dividends are effectively connected. This supports the application of Article 11 rates.

Shareholding Evidence

While the revised treaty does not require a minimum shareholding for the 15% rate, documentation evidencing the shareholding percentage may still be requested by the Indian payer's auditor for Form 15CB certification.

Withholding Procedure for Indian Payers

The compliance process for dividend payments to South Korean residents under Section 195 of the Income Tax Act:

Step 1: Collect Documentation

Obtain and verify the TRC, Form 10F, beneficial ownership declaration, and no-PE certificate from the South Korean recipient before the dividend payment date.

Step 2: Deduct TDS at Treaty Rate

Deduct TDS at 15% on the gross amount of dividends. No surcharge or cess applies when using the DTAA rate. If documentation is incomplete, deduct at the full domestic rate of 20% plus surcharge and cess.

Step 3: File Form 15CA/15CB

For remittances exceeding INR 5 lakh, file Form 15CA online after obtaining a CA's certificate in Form 15CB. The CA must certify the applicable DTAA article, rate of TDS, and treaty eligibility.

Step 4: Deposit TDS and File Returns

Deposit TDS within the prescribed due dates and file quarterly returns in Form 27Q. For comprehensive guidance, consult our tax advisory services and cross-border payments service.

Common Disputes and Judicial Precedents

Several areas of dispute have emerged in the application of dividend provisions under the India-South Korea DTAA:

Transition from Old Treaty to Revised Treaty

The revised treaty applies from FY 2017-18 onwards. Disputes have arisen regarding dividends declared in the transition period — specifically, whether dividends declared before 1 April 2017 but paid after that date fall under the old or revised treaty. The general position is that the date of payment determines which treaty applies.

Capital Gains vs Dividends on Share Buybacks

Following the 2018 amendment to Section 115QA of the Income Tax Act, income distributed by companies on buyback of shares is taxed as distribution income at 23.296%. Questions have arisen regarding whether such buyback distributions qualify as "dividends" under Article 11 of the DTAA, potentially attracting the lower 15% treaty rate. This remains an evolving area of interpretation.

Beneficial Ownership in Korean Chaebol Structures

South Korean conglomerate (chaebol) structures involve complex cross-holdings. Indian tax authorities have examined whether the immediate Korean recipient of dividends is the true beneficial owner or merely a conduit within a larger group structure. The commercial substance and independent decision-making authority of the recipient entity are key factors in this analysis.

Source-Based Capital Gains Taxation

The revised treaty introduced source-based capital gains taxation for shares exceeding 5% of paid-up capital. This has implications for dividend planning, as Korean investors may consider dividend distributions versus share disposals based on the relative tax treatment under the revised treaty.

Practical Examples and Calculations

Example 1: Korean Company Receiving Indian Dividends

A South Korean corporation holds 40% equity in an Indian subsidiary. The Indian subsidiary declares a dividend of INR 5,00,00,000 (INR 5 crore).

• Without DTAA: TDS at 20% + surcharge (2%) + cess (4%) = ~20.8% = INR 1,04,00,000 withheld
• With DTAA (Article 11(2)): TDS at 15% (no surcharge/cess) = INR 75,00,000 withheld
• Tax saving: INR 29,00,000 per INR 5 crore dividend

Example 2: Korean Individual Investor

A South Korean individual holds 2% shares in an Indian listed company. Dividend received: INR 10,00,000.

• Without DTAA: TDS at ~20.8% = INR 2,08,000
• With DTAA: TDS at 15% = INR 1,50,000
• Tax saving: INR 58,000 per INR 10 lakh dividend

Under the revised treaty, both the corporate and individual investor benefit from the same 15% rate — no shareholding threshold applies.

Example 3: Indian Company Receiving Dividends from South Korea

An Indian company receives dividends from its Korean subsidiary. South Korea withholds 15% under the DTAA (compared to its domestic rate of 20-22%). 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 Korean tax withheld. India allows credit for the lower of the Korean 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 South Korea?

Under Article 11(2) of the revised India-South Korea DTAA (effective from FY 2017-18), the maximum withholding tax rate on dividends is 15% of the gross amount when the beneficial owner is a resident of the other Contracting State. This flat rate applies regardless of the shareholding percentage.

Was the dividend rate higher under the old India-South Korea treaty?

Yes. Under the old 1985 treaty, the general dividend rate was 20%, with a reduced 15% rate available only for companies holding at least 20% of voting shares. The revised 2015 treaty simplified this to a single flat 15% rate for all beneficial owners, including individuals and companies with any level of shareholding.

What documents are required to claim the 15% DTAA rate?

The South Korean recipient must provide: (1) a valid Tax Residency Certificate from the National Tax Service of Korea, (2) Form 10F self-declaration, (3) a beneficial ownership and no-PE declaration. The Indian payer must verify these before applying the reduced rate and must file Form 15CA/15CB for remittances exceeding INR 5 lakh.

Does the 15% rate apply to both companies and individuals?

Yes. Unlike the old treaty that had a shareholding threshold for the lower rate, the revised treaty applies the flat 15% rate to all beneficial owners — companies, individuals, and other entities — without any shareholding conditions.

How does the revised treaty affect capital gains on shares?

The revised treaty introduced source-based capital gains taxation for shares exceeding 5% of paid-up capital. This means Korea-resident investors selling more than 5% of shares in an Indian company will be subject to Indian capital gains tax, which may influence the choice between dividend distribution and share disposal for profit extraction.

What if the Korean entity has a PE in India?

If the Korean beneficial owner has a permanent establishment in India and the shareholding generating dividends is effectively connected with that PE, the dividends are taxed as business profits under Article 7 at regular corporate rates (35% for foreign companies) rather than the 15% dividend rate under Article 11.

Can the Indian company apply the DTAA rate without documentation?

No. The Indian payer must collect and verify the TRC, Form 10F, and self-declaration from the Korean recipient before applying the 15% treaty rate. If these documents are not available, TDS must be deducted at the full domestic rate of 20% plus surcharge and cess. The Korean recipient can then claim a refund by filing an Indian income tax return.