DTAA Benefits for Chinese Companies Operating in India

Quick answer: The India-China DTAA (signed 18 July 1994, effective 21 November 1994, amended by the 2018 Protocol) applies a uniform 10% withholding rate on dividends, interest, royalties, and fees for technical services against an Indian domestic rate of 20.8% with cess alone, rising to 21.216% or 21.84% once the 2% or 5% foreign-company surcharge applies. Chinese companies avoid Indian tax on business profits unless they cross a PE threshold — 183 days for construction, installation and supervisory activity, and 183 days for services other than technical services — and interest paid to the government, a central bank or a named wholly government-owned financial institution is fully exempt under Article 11(3). Because China did not list the treaty as a Covered Tax Agreement, the MLI does not modify it; the 2018 Protocol instead inserted Article 27A (Entitlement to Benefits), a principal-purpose test, directly into the treaty.

Key takeaways:

• Uniform 10% withholding on dividends, interest, royalties and FTS versus a domestic 20.8% to 21.84%.
• Construction and services PE thresholds both sit at 183 days, but the services clause excludes technical services.
• Interest — not dividends — is exempt at 0% when derived by governments, central banks or named state-owned financial institutions.
• The MLI does not modify the treaty; the 2018 Protocol's Article 27A principal-purpose test governs treaty shopping.
• Indian 10% withholding tax is creditable against China's 25% enterprise income tax.

Key DTAA Benefits for Chinese Companies Operating in India

The India-China DTAA, signed on 18 July 1994 and effective since 21 November 1994, provides Chinese companies with a comprehensive framework to reduce their Indian tax burden. China is India's largest trading partner by goods volume and a significant source of FDI, with Chinese companies like Xiaomi, Oppo, Vivo, Haier, SAIC Motor, and BYD maintaining substantial operations in India. The treaty was significantly amended by the Protocol signed on 26 November 2018 (in force 5 June 2019, effective in India from FY 2020-21), which substituted the PE article and inserted Article 27A, an entitlement-to-benefits provision built on a principal-purpose test.

The India-China DTAA offers Chinese companies a uniform 10% withholding rate across all major income categories (dividends, interest, royalties, and FTS), PE protections built on 183-day thresholds, an exemption for government and central-bank interest, and a bilateral framework that facilitates technology transfer and cross-border investment.

Beacon Filing's tax advisory services help Chinese companies navigate the India-China DTAA from initial India entry strategy through ongoing FEMA-RBI compliance.

Tax Savings on Cross-Border Payments

The India-China DTAA provides a uniform 10% cap on withholding tax for all major cross-border payment categories, delivering consistent savings over India's domestic rates:

Cumulative Impact

Consider a Chinese manufacturing company with an Indian subsidiary that annually repatriates INR 6 crore in dividends, pays INR 4 crore in royalties for technology and brand licensing, and pays INR 2 crore in management service fees. On INR 12 crore of Indian-source income the 5% foreign-company surcharge applies, so the domestic effective rate is 21.84% against a treaty rate of 10% — an annual DTAA saving of about INR 1.42 crore — a significant improvement in the India investment's after-tax returns.

Government and Institutional Exemptions

Article 11(3) exempts interest derived by the Government, a political sub-division or local authority, the central bank (RBI or the People's Bank of China), or a financial institution wholly owned by either Government — and interest on loans those bodies guarantee or insure. The 2018 Protocol names the qualifying Chinese institutions: China Development Bank, Agricultural Development Bank of China, Export-Import Bank of China, National Council for Social Security Fund, Sinosure and China Investment Corporation. This matters for Chinese state-owned lenders financing Indian projects. Note the limit of the relief: the exemption is an interest exemption. Article 10 contains no equivalent carve-out, so dividends paid to a Chinese government body or SOE are capped at 10% like anyone else's.

PE Protection — When You Don't Trigger Indian Tax

The India-China DTAA provides clear permanent establishment (PE) definitions under Article 5, substantially updated by the 2018 Protocol:

Key PE Thresholds

• Services PE: furnishing services other than technical services as defined in Article 12, through employees or other personnel for the same or a connected project, creates a PE only once the activity exceeds 183 days in any 12-month period. The carve-out matters: technical, managerial and consultancy fees are dealt with under Article 12 and are not converted into a services PE by a long Indian presence.
• Construction PE: building sites, construction, assembly and installation projects must last more than 183 days before a PE is triggered. The 2018 Protocol added an anti-splitting rule: connected activities carried on at the same site by closely related enterprises during different periods, each exceeding 30 days, are aggregated against the 183 days.
• Supervisory activities: supervisory activities connected to construction, assembly or installation projects lasting more than 183 days also constitute a PE.
• Natural resources: an installation or structure used for the exploration or exploitation of natural resources is a PE if so used for more than 183 days.
• Independent agents: Using independent Indian agents who act in the ordinary course of their business does not create a PE.

Structure matters as much as day-counts: a liaison office avoids PE status entirely when properly operated, since it is restricted to representing the parent and cannot undertake commercial activity, unlike the branch and project office routes discussed below.

2018 Protocol — PE Definition Updates

The 2018 Protocol significantly updated the PE definition to align with BEPS standards. Chinese companies must now pay closer attention to the expanded dependent-agent test, which follows the BEPS Action 7 commissionnaire wording: a person who habitually concludes contracts, or habitually plays the principal role leading to the conclusion of contracts routinely concluded without material modification by the enterprise, can create a PE without holding any formal authority to sign. The specific-activity exemptions in Article 5(4) are also now subject to the activity being genuinely preparatory or auxiliary. This is particularly relevant for Chinese companies using Indian distributors or sales representatives.

Capital Gains Advantages

Under Article 13 of the India-China DTAA, capital gains treatment varies by asset type:

• Immovable property: Capital gains from alienation of immovable property are taxable in the country where the property is situated
• Shares in property-rich companies: gains from shares of a company whose property consists directly or indirectly principally of immovable property are taxable where the property is situated (Article 13(4)); the treaty does not define "principally", which is generally read as more than 50%
• Business movable property: Gains from alienation of movable property forming part of a PE's business property are taxable in the PE country
• Ships and aircraft: Gains from alienation of ships or aircraft operated in international traffic are taxable only in the alienator's country of residence
• Other capital gains: Gains from alienation of other property are taxable in the originating contracting state

Credit Method Relief

Chinese companies paying Indian capital gains tax can claim a credit against their Chinese enterprise income tax liability. China's enterprise income tax rate of 25% provides sufficient room to absorb Indian capital gains taxes in most scenarios, ensuring no double taxation on investment exits.

Avoiding Double Taxation — Credit Method vs Exemption

The India-China DTAA uses the credit method to eliminate double taxation:

How the Credit Method Works

China taxes its resident enterprises on worldwide income at a standard rate of 25%. When a Chinese company earns income in India (dividends, interest, royalties, or business profits), India withholds tax at the treaty rate of 10%. The Chinese company then claims a tax credit on its Chinese enterprise income tax return, reducing its Chinese tax liability by the amount of Indian tax paid.

Practical Implications

• Standard scenario: With the Indian DTAA rate at 10% and China's rate at 25%, the Chinese company pays the 15% difference in China. The combined rate equals 25%, with no double taxation.
• High-tech enterprises: Chinese companies qualifying as High and New Technology Enterprises (HNTEs) enjoy a reduced 15% rate in China. With the Indian treaty rate at 10%, the Chinese tax on Indian-source income is only 5% — but no excess credit issues arise.
• Credit limitations: China's foreign tax credit is limited to the amount of Chinese tax attributable to the foreign income. Credits exceeding this limit can be carried forward for up to 5 years.

Treaty Shopping Rules and Limitations (GAAR, PPT, Beneficial Ownership)

Chinese companies must navigate several anti-avoidance provisions:

2018 Protocol — Article 27A (Entitlement to Benefits)

The 2018 Protocol inserted Article 27A. It is a principal-purpose test, not a detailed limitation-on-benefits article with objective ownership and activity tests: a benefit is denied where, having regard to all relevant facts and circumstances, it is reasonable to conclude that obtaining it was one of the principal purposes of an arrangement or transaction, unless granting it would accord with the object and purpose of the relevant provisions. In practice a Chinese entity should be able to show genuine residence and substantive operations. CBDT Circular 01/2025 sets out how India applies the PPT, prospectively from its entry into effect.

MLI Status — Treaty Not Covered

Both India (ratified 25 June 2019) and China (ratified 25 May 2022, in force for China 1 September 2022) are MLI parties. However, the India-China DTAA is not modified by the MLI: China did not list the treaty as a Covered Tax Agreement, and India, which had listed it provisionally, removed it from its own final list at ratification. The MLI therefore makes no change to this treaty. That does not leave the treaty without a principal-purpose test — the 2018 Protocol wrote one straight into the text as Article 27A, so the practical anti-abuse outcome is the same as an MLI-imported PPT.

India's Domestic GAAR

India's General Anti-Avoidance Rule (GAAR) under sections 178 to 184 of the Income-tax Act, 2025 (sections 95 to 102 of the Income-tax Act, 1961) operates independently. GAAR can override treaty benefits for "impermissible avoidance arrangements" regardless of Article 27A. Chinese companies must ensure their India structures have genuine commercial substance.

Beneficial Ownership Requirement

The reduced withholding tax rates apply only if the Chinese recipient is the "beneficial owner" of the income. Given that many Chinese companies investing in India are SOEs with complex ownership structures, establishing beneficial ownership through proper documentation is critical.

Structuring Your India Entry to Maximise Treaty Benefits

Chinese companies entering India can choose from several entity structures, each with different DTAA implications:

Wholly Owned Subsidiary (WOS)

The most common structure for large Chinese manufacturers and technology companies. Dividends from the Indian subsidiary to the Chinese parent are subject to 10% withholding. The Chinese parent claims a credit on its enterprise income tax return. Companies like Xiaomi, Haier, and BYD use this structure for their Indian manufacturing operations.

Branch Office

A Chinese company can establish a branch office in India, but an applicant from a land-border country needs prior approval of the RBI in consultation with the Government, which makes this route slow and uncommon in practice — see the full process for opening a Branch Office in India from China. The branch constitutes a PE, and business profits attributable to the branch are taxable in India.

Joint Venture

Joint ventures with Indian partners are frequently used by Chinese companies in sectors requiring local expertise or regulatory approvals, such as automotive (SAIC-MG Motor), telecommunications, and renewable energy. The DTAA governs the taxation of dividend distributions, technology licensing fees, and management charges from the JV to the Chinese partner.

Project Office

For Chinese companies executing specific infrastructure or construction projects in India (such as power plants or railway projects), a project office can be established, subject to the same prior-approval requirement that applies to a branch. A project office will normally be a fixed place of business and therefore a PE in its own right; the 183-day construction and services thresholds matter for work carried on without such an office.

Regulatory Considerations

Chinese companies face additional regulatory scrutiny under India's FDI policy, which requires government approval for investments from countries sharing a land border with India (Press Note 3 of 2020). Press Note 2 (2026 Series) dated 15 March 2026, effective on notification of the FEMA Non-Debt Instruments amendment in early May 2026, does not lift that requirement: an entity or citizen of a land-border country may still invest only with prior Government approval, at any stake size. What it narrows is the look-through test, so that an investor entity incorporated outside those countries falls under the approval requirement only where land-border citizens or entities exceed the PMLA Rule 9(3) beneficial-ownership thresholds (more than 10% for a company), or hold control over the investor, or exercise ultimate effective control over the Indian investee. The approval requirement does not affect DTAA benefits but adds to the timeline and compliance burden. Beacon Filing's FEMA-RBI compliance services help navigate these requirements.

Common Mistakes Chinese Companies Make

1. Not Obtaining TRC Before Payment Date

The Tax Residency Certificate must be obtained from Chinese tax authorities before the payment is made. Indian payers applying the reduced 10% rate without a valid TRC from the Chinese payee risk being treated as in default under section 398 of the Income-tax Act, 2025 (section 201 of the Income-tax Act, 1961). Given the complexity of obtaining Chinese TRCs, companies should apply well in advance.

2. Ignoring Press Note 3 Compliance

While Press Note 3 of 2020 (requiring government approval for Chinese FDI) does not affect DTAA benefits, non-compliance with the FDI approval process can result in penalties that indirectly affect the ability to claim treaty benefits on subsequent payments.

3. Failing the Article 27A Principal-Purpose Test

Article 27A targets structures without genuine economic substance. Chinese SPVs or holding companies set up primarily to hold Indian investments — particularly those owned by non-Chinese residents — may fail the principal-purpose test and be denied treaty benefits.

4. Exceeding PE Thresholds for Construction Projects

Chinese infrastructure companies undertaking projects in India (such as power plant construction or railway engineering) frequently exceed the 183-day threshold. Careful project planning and contract structuring can help manage PE exposure, but companies must track cumulative days across all related projects.

5. Not Filing Forms 145 and 146 (formerly Forms 15CA and 15CB) Correctly

Indian entities making payments to Chinese companies must file Form 145 and obtain Form 146 from a Chartered Accountant for payments exceeding INR 5 lakh. Errors in citing the correct DTAA article or treaty rate can result in processing delays and penalties.

Frequently Asked Questions

What are the main tax benefits of the India-China DTAA for Chinese companies?

The DTAA provides a uniform 10% withholding tax rate on dividends, interest, royalties, and FTS — compared to a domestic rate of 20.8% with cess alone, rising to 21.216% or 21.84% once the 2% or 5% foreign-company surcharge applies. It also offers PE protections (183-day construction and services thresholds, with technical services carved out of the services PE clause), an Article 11(3) exemption for interest derived by governments, central banks and named state-owned financial institutions, and a stable bilateral framework updated through the 2018 Protocol.

How much can a Chinese company save annually under the DTAA?

On INR 10 crore of combined dividends, royalties, interest and FTS, the 2% foreign-company surcharge applies, so the domestic effective rate is 21.216% against a treaty rate of 10% — a saving of about INR 1.12 crore a year. The gap widens to 11.84 percentage points once Indian-source income passes INR 10 crore and the 5% surcharge applies.

Does the MLI apply to the India-China DTAA?

No. Both India and China have ratified the MLI (India in 2019, China in 2022), but the India-China DTAA is not a Covered Tax Agreement because China did not list it, so the MLI does not modify the treaty. The 2018 Protocol instead wrote a principal-purpose test directly into the text as Article 27A (Entitlement to Benefits).

What changes did the 2018 Protocol introduce?

The Protocol (in force 5 June 2019, effective in India from FY 2020-21) substituted the PE article to align with BEPS Action 7, inserted Article 27A (Entitlement to Benefits) — a principal-purpose test — to prevent treaty shopping, updated information exchange to the international standard, rewrote the interest exemption in Article 11(3) with named state-owned institutions, and set the construction and services PE thresholds at 183 days.

Can a Chinese company set up a subsidiary in India without paying double tax?

Yes. Dividends from the Indian subsidiary are taxed at 10% in India, and the Chinese parent claims a credit on its enterprise income tax return. The combined rate equals China's 25% rate with no double taxation. However, Chinese companies must obtain government approval under Press Note 3 of 2020.

Do Chinese SOEs get additional benefits under the DTAA?

Only on interest. Article 11(3) exempts interest derived by the Government, a political sub-division or local authority, the central bank (PBoC or RBI), or a wholly government-owned financial institution — the 2018 Protocol names China Development Bank, Agricultural Development Bank of China, Export-Import Bank of China, the National Council for Social Security Fund, Sinosure and China Investment Corporation — as well as interest on loans those bodies guarantee or insure. There is no equivalent exemption for dividends: Article 10 caps dividends at 10% whoever the beneficial owner is.

What documentation do Chinese companies need to claim treaty benefits?

A valid Tax Residency Certificate from Chinese tax authorities, Form 41 (formerly Form 10F) filed on India's e-filing portal, a self-declaration of beneficial ownership and no-PE status, compliance with Forms 145 and 146 requirements, and government approval under Press Note 3 (for new investments).