FTS Tax Rate Between India and Israel Under DTAA

Quick answer: Under Article 13(2) of the India-Israel DTAA, signed 29 January 1996 and amended in 2015, fees for technical services are capped at 10% of the gross amount, versus India's domestic rate of 20% (about 21.84% with surcharge and cess) -- a saving of roughly 11 to 12 percentage points. Unlike treaties with no FTS clause, such as India-Saudi Arabia or India-UAE, India can tax Israeli FTS at 10% even without a permanent establishment in India.

Key takeaways:

• FTS treaty rate is capped at 10% under Article 13(2), an 11-12 point saving vs a domestic rate of 20%.
• India can tax FTS at 10% even without an Israeli PE, unlike no-FTS-clause treaties.
• The 2015 Protocol added a Limitation on Benefits article and removed the treaty's MFN clause.
• FTS connected with a PE in India is instead taxed as business profits under Article 7.
• Domestic FTS rate doubled from 10% to 20% under the Finance Act 2023, effective 1 April 2023.

Fees for Technical Services Tax Rate Between India and Israel

The Double Taxation Avoidance Agreement (DTAA) between India and Israel, signed on 29 January 1996 and amended by a Protocol on 14 October 2015, includes a dedicated provision for Fees for Technical Services (FTS) within Article 13 of the treaty. Under Article 13(2), FTS arising in one Contracting State and paid to a beneficial owner resident in the other State are subject to a maximum withholding tax rate of 10% of the gross amount. This is significantly lower than India's current domestic withholding rate of 20% (plus applicable surcharge and health and education cess) under Section 115A of the Income Tax Act, 1961.

The India-Israel DTAA is one of the Indian treaties that includes a specific FTS clause, unlike several other Indian DTAAs (such as those with Saudi Arabia, UAE, and Thailand) that do not contain an FTS article. This distinction has important practical consequences: where a treaty includes an FTS clause, India can tax technical service fees at the specified treaty rate even without the service provider having a Permanent Establishment (PE) in India. Where no FTS clause exists, such payments are taxable only as business profits under Article 7, requiring a PE for Indian taxation.

Given the deep technology cooperation between India and Israel — particularly in sectors like cybersecurity, defence, agriculture, water technology, and IT services — the FTS rate under this DTAA is critically important for cross-border service arrangements between the two countries.

Treaty Rate vs Domestic Rate: Detailed Comparison

The gap between the DTAA rate and India's domestic rate creates substantial savings for Israeli service providers:

Under Indian domestic law, fees for technical services paid to a non-resident are taxable at 20% under Section 115A of the Income Tax Act (increased from 10% to 20% by the Finance Act 2023, effective 1 April 2023). When surcharge and health and education cess are added, the effective domestic rate reaches approximately 21.84%. The DTAA rate of 10% therefore delivers a saving of approximately 11-12 percentage points.

This saving has become far more significant since the Finance Act 2023 amendment. Before 1 April 2023, the domestic FTS rate was 10% — identical to the DTAA rate, offering no incremental benefit. The doubling of the domestic rate has made DTAA treaty relief essential for Israeli companies providing technical, managerial, or consultancy services to Indian clients.

Who Qualifies for the Reduced Rate

To avail the reduced 10% FTS rate under the India-Israel DTAA, the recipient must satisfy several conditions:

Beneficial Ownership Requirement

The Israeli entity receiving FTS payments must be the beneficial owner of the income. The recipient must have the genuine right to use and enjoy the fee income without any contractual or legal obligation to pass it to another person. Conduit arrangements where an Israeli entity merely receives and forwards the payment do not qualify.

Tax Residency in Israel

The recipient must be a tax resident of Israel as defined under Article 4 of the treaty. A valid Tax Residency Certificate (TRC) issued by the Israeli Tax Authority is mandatory under Section 90(4) of the Indian Income Tax Act.

Limitation on Benefits (LOB) and Principal Purpose Test (PPT)

The 2015 Protocol introduced a Limitation on Benefits article. Treaty benefits are not available to an Israeli resident if the principal purpose of setting up the entity in Israel was to obtain treaty benefits. The MLI's Principal Purpose Test provides an additional anti-abuse safeguard, allowing Indian authorities to deny the 10% rate if obtaining the reduced rate was one of the principal purposes of an arrangement. India's GAAR provisions add a further layer of protection.

Permanent Establishment Exception

If the Israeli service provider carries on business in India through a PE and the services generating the FTS income are effectively connected with such PE, the income is taxed as business profits under Article 7 rather than at the 10% FTS rate under Article 13.

FTS-Specific Treaty Provisions

The India-Israel DTAA deals with royalties in Article 12 and with FTS in a separate Article 13, applying the same 10% cap to both. The key FTS-specific provisions include:

Definition of Fees for Technical Services

The term "fees for technical services" under the India-Israel DTAA means payments of any kind received as consideration for services of a managerial, technical, or consultancy nature, including the provision of services by technical or other personnel. This definition covers:

• Managerial services: Management consultancy, advisory services on business strategy, organizational restructuring, and project management
• Technical services: Engineering consultancy, IT implementation services, cybersecurity audits, agricultural technical assistance, and defence technology support
• Consultancy services: Professional advisory services, feasibility studies, due diligence support, and expert consulting

Exclusions from FTS

The India-Israel DTAA excludes certain categories from the FTS definition, including services ancillary to a sale of property or to the rental of ships, aircraft, containers or related equipment in international traffic, services rendered by employees (covered by Article 16), teaching in or by an educational institution, services for the personal use of the payer, and professional services as defined in Article 15. These exclusions ensure that the FTS article applies specifically to cross-border professional and technical service arrangements.

Source Rule

FTS income is deemed to arise in a Contracting State when the services are rendered in that State and the payer is that State, a political sub-division, a local authority, or a resident of that State. Alternatively, if the payer has a PE or fixed base in connection with which the FTS liability was incurred, the FTS is deemed to arise where the PE or fixed base is situated.

The "Make Available" Concept

A critical interpretive issue in FTS taxation is whether the India-Israel DTAA contains a "make available" requirement. Several Indian DTAAs (such as those with the USA, UK, and Singapore) limit FTS to services that "make available" technical knowledge, experience, skill, know-how, or processes that enable the recipient to independently apply the technology. In the India-Israel DTAA, the original protocol contained an MFN clause that could import the "make available" restriction from other treaties. However, the 2015 Protocol removed the MFN clause. The current position is that services need to be of a managerial, technical, or consultancy nature to qualify as FTS, without a strict "make available" requirement in the treaty text itself.

Documentation Required

To claim the reduced 10% withholding rate on FTS, Israeli service providers must furnish the following documents to the Indian payer:

Tax Residency Certificate (TRC)

A valid TRC issued by the Israeli Tax Authority (Rashut HaMisim) for the relevant financial year. This is the primary document establishing treaty eligibility under Section 90(4) of the Indian Income Tax Act.

Form 10F

Form 10F is a self-declaration providing the Israeli entity's status, nationality, tax identification number, period of residential status, and registered address. Since 2022, Form 10F must be filed electronically on the Indian income tax e-filing portal.

No Permanent Establishment Declaration

A declaration confirming that the Israeli service provider does not have a PE in India, or that the services generating FTS income are not rendered through a PE in India.

Beneficial Ownership Declaration

A self-declaration confirming that the Israeli entity is the beneficial owner of the FTS income and is not acting as a conduit or intermediary.

Withholding Procedure for Indian Payers

Indian companies engaging Israeli service providers must follow specific compliance procedures:

Section 195 Compliance

Under Section 195 of the Income Tax Act, any person paying FTS to a non-resident must deduct tax at source. When the DTAA rate of 10% is lower than the domestic rate and the payee has furnished valid documentation, the payer may apply the treaty rate. It is the payer's responsibility to verify the authenticity of the TRC and supporting documents.

Form 15CA and Form 15CB

For remittances exceeding specified thresholds, the Indian payer must file Form 15CA (an online declaration) and obtain Form 15CB (a certificate from a Chartered Accountant). Form 15CB certifies the nature of the payment, the applicable DTAA provisions, and confirms that the treaty rate is being correctly applied. Both forms must be completed before the remittance is processed through the authorized dealer bank.

Section 197 Lower Withholding Certificate

Where appropriate, the Israeli service provider or the Indian payer may apply under Section 197 for a lower or nil withholding certificate if the actual tax liability is expected to be lower than the amount computed at the statutory rate.

Common Disputes and Judicial Precedents

Scope of "Technical Services" — What Qualifies?

Indian tax authorities have frequently disputed the classification of payments as FTS, arguing for a broad interpretation. Key areas of dispute include whether standard IT support services, routine maintenance, and general business process services qualify as "technical" services. The Delhi ITAT has held in multiple cases that routine IT and non-IT support services that do not involve any specialized technical skill or knowledge being "made available" to the recipient do not constitute FTS.

Services Rendered Outside India

A recurring dispute is whether FTS can be taxed in India when the services are rendered entirely outside India but the payer is an Indian entity. Under Article 13(5) of the India-Israel DTAA, FTS is deemed to arise in India only when the services are rendered in India and the payer is an Indian resident (or when the fees are borne by a PE or fixed base in India). Unlike many other Indian treaties, this place-of-rendering condition means that fees for services performed entirely outside India may fall outside India's taxing right under the treaty, even though Indian domestic law (Section 9(1)(vii)) taxes such fees regardless of where the services are performed.

FTS vs Business Profits Classification

In the case of ADIT v. TII Team Telecom International Pvt. Ltd. (2011), the Mumbai ITAT examined Articles 5, 7, and 12 of the India-Israel DTAA in the context of an Israeli company providing telecom services in India. The Tribunal analyzed whether the Israeli company had a PE in India and whether its income should be classified as business profits under Article 7 or FTS under Article 13. This case illustrates the importance of correctly characterizing the nature of services and the presence or absence of a PE.

Reimbursement of Expenses vs FTS

Indian tribunals have held that pure reimbursements of expenses (without any element of income or service) do not constitute FTS. If an Israeli company bills an Indian client for out-of-pocket expenses (such as travel costs) separately from the service fee, the reimbursement component may not be subject to FTS withholding, provided proper documentation supports the reimbursement character.

Practical Examples and Calculations

Example 1: Israeli Cybersecurity Firm Providing Audit Services to an Indian Bank

An Israeli cybersecurity company conducts a comprehensive security audit for an Indian bank. The engagement fee is INR 75,00,000 (approximately USD 90,000).

• Without DTAA: Tax at domestic rate = 20% + 4% cess = 20.80% = INR 15,60,000
• With DTAA: Tax at treaty rate = 10% = INR 7,50,000
• Net saving: INR 8,10,000 (approximately USD 9,700)

The Israeli company can claim a foreign tax credit of INR 7,50,000 against its Israeli corporate tax liability.

Example 2: Israeli Management Consultant Advising an Indian Startup

An Israeli management consulting firm advises an Indian tech startup on market entry strategy for the Israeli market. The consultancy fee is INR 20,00,000 (approximately USD 24,000).

• Without DTAA: Tax at domestic rate ≈ 21.84% = INR 4,36,800
• With DTAA: Tax at treaty rate = 10% = INR 2,00,000
• Net saving: INR 2,36,800 (approximately USD 2,800)

Example 3: Israeli Defence Contractor Providing Technical Training

An Israeli defence technology company provides technical training to Indian military personnel on the operation and maintenance of defence equipment. The training fee is INR 5,00,00,000 (approximately USD 600,000).

• Without DTAA: Tax at domestic rate ≈ 21.84% = INR 1,09,20,000
• With DTAA: Tax at treaty rate = 10% = INR 50,00,000
• Net saving: INR 59,20,000 (approximately USD 71,000)

Note: If the training constitutes services rendered by employees of the Israeli company in India for a sustained period, the PE provisions of Article 5 may be triggered, potentially changing the tax treatment from FTS to business profits.

Frequently Asked Questions

What is the FTS withholding tax rate under the India-Israel DTAA?

Under Article 13(2) of the India-Israel DTAA, the maximum withholding tax rate on Fees for Technical Services is 10% of the gross amount, provided the recipient is the beneficial owner and a tax resident of Israel. This compares with the domestic Indian rate of 20% plus surcharge and cess.

What types of services qualify as FTS under the India-Israel DTAA?

FTS is defined as payments for services of a managerial, technical, or consultancy nature, including the provision of services by technical or other personnel. This covers management consultancy, engineering services, IT services, cybersecurity audits, and professional advisory services, among others.

Does the India-Israel DTAA have a "make available" requirement for FTS?

The treaty text itself does not contain a "make available" clause. However, the original protocol had an MFN clause that could have imported this restriction from other Indian DTAAs. The 2015 Protocol removed the MFN clause, so the current position is that services of a managerial, technical, or consultancy nature qualify as FTS without needing to "make available" technical knowledge.

How does the 2023 domestic rate increase affect FTS payments to Israel?

The Finance Act 2023 doubled India's domestic FTS withholding rate from 10% to 20% (plus surcharge and cess). Before this change, the DTAA rate and domestic rate were identical. The increase has made the DTAA rate critically important, providing savings of approximately 11-12 percentage points on every FTS payment to Israeli service providers.

Can FTS be taxed in India if the Israeli company has no PE here?

Yes. Unlike DTAAs that lack an FTS clause (such as India-Saudi Arabia or India-UAE), the India-Israel DTAA explicitly allows India to tax FTS at 10% even if the Israeli service provider has no PE in India. The FTS clause operates independently of the PE requirement.

What documents are required to claim the 10% FTS rate?

The Israeli service provider must furnish a valid Tax Residency Certificate from the Israeli Tax Authority, Form 10F (filed electronically), a no-PE declaration, and a beneficial ownership declaration. The Indian payer must file Form 15CA and obtain Form 15CB before remitting the payment.

Are reimbursements of expenses subject to FTS withholding?

Pure reimbursements of actual out-of-pocket expenses (such as travel and accommodation) are generally not subject to FTS withholding, provided they are separately billed and properly documented as reimbursements rather than embedded in the service fee. However, the Indian payer should ensure proper documentation to support the reimbursement character of such payments.