FTS Tax Rate Between India and South Korea Under DTAA

Fees for Technical Services Tax Rate Between India and South Korea

The revised India-South Korea Double Taxation Avoidance Agreement (DTAA), signed on 18 May 2015 and effective from 12 September 2016, caps the withholding tax rate on fees for technical services (FTS) at 10% of the gross amount under Article 12. This represents a significant reduction from the 15% rate under the old 1985 treaty, designed to encourage cross-border technology cooperation and investment between India and South Korea.

Following the Finance Act 2023, India's domestic withholding tax on FTS under Section 115A was doubled from 10% to 20%. With surcharge and 4% health & education cess, the effective domestic rate reaches approximately 20.8% for non-corporate non-residents and 21.84% for foreign companies. The DTAA rate of 10% therefore delivers savings exceeding 10% on every FTS payment between India and South Korea.

South Korea's economy, driven by globally competitive technology, engineering, and manufacturing companies, generates substantial cross-border technical service flows with India. Korean companies providing engineering, IT implementation, project management, and strategic consultancy services to Indian clients benefit significantly from the revised treaty rate. Similarly, Indian IT services companies providing technical services to Korean entities can leverage the treaty in the reverse direction.

Treaty Rate vs Domestic Rate: Detailed Comparison

The evolution of both treaty and domestic rates tells a compelling story of increasing treaty value:

Under the old 1985 treaty, the FTS rate was 15% — actually higher than the pre-2023 domestic rate of 10% plus surcharge and cess (~10.4%). This meant the old treaty provided no benefit for FTS; taxpayers would simply apply the lower domestic rate under Section 90(2). The revised treaty corrected this imbalance by reducing the rate to 10%.

After the Finance Act 2023 increased the domestic rate to 20%, the 10% treaty rate transformed from a technical advantage (saving only surcharge and cess) into a substantial tax planning tool delivering savings exceeding 10.8%. For foreign companies, where the effective domestic rate including higher surcharge reaches 21.84%, savings are even greater at 11.84%.

On South Korea's side, domestic withholding on technical service fees to non-residents is 20% (plus 2% local income tax, totalling 22%). Indian service providers receiving FTS from Korean payers therefore also benefit from the 10% treaty rate.

Who Qualifies for the Reduced Rate

Claiming the 10% treaty rate on FTS under the revised India-South Korea DTAA requires meeting several conditions:

Beneficial Ownership Requirement

Article 12(2) restricts the reduced rate to FTS where the beneficial owner is a resident of the other Contracting State. The beneficial owner must have genuine economic entitlement to the service fees — not merely receive payments as an intermediary. Arrangements where a Korean entity subcontracts work to a third-country service provider and merely routes payments through Korea are vulnerable to denial of benefits.

Definition of FTS — Article 12(4)

Under the revised India-South Korea DTAA, fees for technical services means payments of any kind to any person in consideration for the rendering of managerial, technical, or consultancy services, including the provision of services of technical or other personnel. This definition is broad and, like the India-China DTAA, does not include a "make available" requirement.

However, the treaty specifies an important exclusion: the benefit of a tax treaty for FTS will not be provided to residents if they are being controlled either directly or indirectly by non-residents of the contracting states. This anti-conduit rule prevents third-country entities from routing service fees through Korean entities to access the treaty rate.

No Permanent Establishment Connection

If the beneficial owner has a permanent establishment (PE) in the source state and the services are effectively connected with that PE, the FTS is taxed as business profits under Article 7. Major Korean companies with Indian branches, project offices, or liaison offices (Samsung, Hyundai, LG, SK, POSCO) must carefully assess whether the services provided are PE-connected before claiming the 10% FTS rate.

Anti-Abuse Provisions and MLI

Both India and South Korea signed the MLI on 7 June 2017. The MLI introduces the Principal Purpose Test (PPT) as an additional anti-abuse filter. Service arrangements where obtaining the 10% FTS rate is one of the principal purposes may be denied treaty benefits. India's domestic GAAR provisions (effective from 1 April 2017) provide an independent basis for denial of benefits on arrangements lacking commercial substance.

FTS-Specific Treaty Provisions Under Article 12

Article 12 of the revised India-South Korea DTAA addresses both royalties and FTS. Key FTS provisions include:

Article 12(1): Primary Taxing Right

FTS arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. The residence state has the primary right to tax FTS income.

Article 12(2): Source State Rate Cap

The source state may also tax FTS, but the tax shall not exceed 10% of the gross amount of the fees if the beneficial owner is a resident of the other Contracting State. This flat rate applies to all categories of FTS — managerial, technical, and consultancy — without tiering based on service type or quantum.

Article 12(4): Definition of FTS

The term "fees for technical services" means payments of any kind to any person in consideration for the rendering of any managerial, technical, or consultancy services, including the provision of services of technical or other personnel. The definition excludes:

• Payments to employees of the payer (covered under employment income provisions)
• Payments for services in Article 14 (independent personal services) or Article 15 (dependent personal services)
• Payments for teaching or instruction in educational institutions

The absence of a "make available" clause means the scope of taxable FTS is broad — any payment for managerial, technical, or consultancy services qualifies, regardless of whether the service provider transfers technical knowledge enabling the recipient to independently perform the services.

Article 12(5): PE Exception

If the beneficial owner has a PE in the source state and the services are effectively connected with that PE, the FTS is taxed as business profits under Article 7 at net-basis corporate rates rather than the 10% gross rate.

Article 12(6): Source Rule

FTS is deemed to arise in a Contracting State when the payer is a resident of that state, or when the service obligation was incurred in connection with a PE situated in that state.

Documentation Required for Claiming the Reduced Rate

Indian entities paying FTS to South Korean service providers must maintain proper documentation:

Tax Residency Certificate (TRC)

The South Korean service provider must provide a valid Tax Residency Certificate (TRC) from the National Tax Service of South Korea confirming tax residency for the relevant financial year.

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. This self-declaration provides supplementary information including the Korean entity's status, nationality, PAN (if available), and period of residential status in South Korea.

Self-Declaration and No-PE Certificate

A self-declaration from the Korean service provider confirming that: (a) the entity is the beneficial owner of the FTS; (b) the services are not effectively connected with a PE in India; (c) the entity is not controlled directly or indirectly by non-residents of India or South Korea; and (d) the service arrangement has genuine commercial substance.

Service Agreement and Deliverables

The underlying service agreement, statements of work, deliverables, and evidence of service completion should be maintained. For transfer pricing purposes — particularly relevant for intercompany arrangements between Korean parents and Indian subsidiaries — the service agreement should clearly specify the nature of services, deliverables, pricing methodology, and arm's length justification. For FEMA compliance, service fee remittances may require documentation with the authorised dealer bank.

Withholding Procedure for Indian Payers

The withholding compliance process for FTS payments to South Korean service providers under Section 195 of the Income Tax Act:

Step 1: Classify the Payment

Determine whether the payment constitutes FTS (managerial, technical, or consultancy services), royalties (use of IP), business profits (general commercial activities), or independent personal services. Korean guarantee fee arrangements, for instance, have been classified as "Other Income" rather than FTS in recent ITAT rulings.

Step 2: Verify Treaty Eligibility

Confirm the Korean service provider's tax residency through the TRC, verify beneficial ownership, and ensure no PE connection exists. For Korean companies sending personnel to India, assess whether the duration of presence triggers a service PE (generally 183 days or more in any 12-month period under the revised treaty).

Step 3: Deduct TDS at the Treaty Rate

Deduct TDS at 10% of the gross FTS amount. No surcharge or cess applies at the treaty rate. If documentation is incomplete, apply the full domestic rate of 20% plus surcharge and cess (~20.8% to 21.84%).

Step 4: File Form 15CA/15CB

For remittances exceeding INR 5 lakh, file Form 15CA online after uploading the CA's certificate in Form 15CB. The CA must reference Article 12(2) and the 10% rate. For comprehensive compliance support, see our FEMA-RBI compliance and tax advisory services.

Step 5: Deposit TDS and File Returns

Deposit TDS by the 7th of the following month (30 April for March). File quarterly TDS returns in Form 27Q. Maintain all documentation for a minimum of six years for potential assessment proceedings.

Common Disputes and Judicial Precedents

FTS taxation under the India-South Korea DTAA has generated notable judicial attention:

Korean Guarantee Fees — Not FTS (October 2024 ITAT Ruling)

In an important October 2024 ITAT ruling, guarantee fees received by a Korean company from its Indian subsidiaries were held to constitute "Other Income" under Article 22 of the India-Korea DTAA, not FTS under Article 12. Since the Korean company had no PE in India, the income was held to be taxable exclusively in Korea. This ruling provides clear precedent that guarantee fees are not managerial, technical, or consultancy services.

Samsung Electronics — PE and Transfer Pricing

The Delhi High Court's July 2024 rulings on Samsung Electronics involved disputes over whether Samsung's Indian subsidiary constituted a PE of Samsung Korea. The court upheld decisions in favour of Samsung Korea, emphasising insufficient evidence that Samsung Korea conducted business in India through its subsidiary. For FTS arrangements, this reinforces that a Korean company's Indian subsidiary does not automatically create a PE that would negate the 10% FTS rate.

FTS vs Business Profits — Classification Challenge

A key dispute area is whether payments for routine support services constitute FTS or business profits. Services lacking a managerial, technical, or consultancy character — such as data entry, routine processing, or administrative support — may not qualify as FTS. If classified as business profits and the Korean entity has no PE in India, the payment is not taxable in India, resulting in zero withholding rather than 10%.

Transition Rate Disputes

The revised treaty reduced FTS rates from 15% to 10%, effective from FY 2017-18. Disputes have arisen regarding FTS payments straddling the transition date — whether the old 15% rate or new 10% rate applies. The date of credit or payment determines the applicable rate, so FTS paid from FY 2017-18 onwards qualifies for the 10% rate regardless of when the underlying service contract was entered.

Transfer Pricing on Intercompany Service Fees

Service fees between Korean parents and Indian subsidiaries (particularly common for Korean chaebols operating in India) are subject to transfer pricing scrutiny under Section 92 of the Income Tax Act. The Transfer Pricing Officer may benchmark the service fee using CUP, TNMM, or cost-plus methods. The revised treaty's Article 9(2) enables Mutual Agreement Procedure (MAP) and bilateral Advance Pricing Agreements (APAs) to resolve such disputes through inter-governmental consultation.

Practical Examples and Calculations

Example 1: Korean Engineering Company Providing Project Management Services

A Korean engineering company provides project management and technical supervisory services to an Indian steel plant. Annual service fee: USD 1.5 million (approximately INR 12,60,00,000 at INR 84/USD).

• Without DTAA: TDS at 20% + surcharge (2%) + cess (4%) = ~20.8% = INR 2,62,08,000 withheld
• With DTAA (Article 12(2)): TDS at 10% = INR 1,26,00,000 withheld
• Tax saving: INR 1,36,08,000 per year

Example 2: Korean IT Company Providing Implementation Services

A Korean IT services company provides ERP implementation and customisation services to an Indian manufacturer. Quarterly service fee: INR 2,00,00,000 (annual: INR 8,00,00,000).

• Without DTAA: TDS at ~20.8% = INR 1,66,40,000 withheld annually
• With DTAA (Article 12(2)): TDS at 10% = INR 80,00,000 withheld annually
• Tax saving: INR 86,40,000 per year

Note: If the Korean IT company's personnel are present in India for more than 183 days in the 12-month period, a service PE may be triggered, requiring net-basis taxation under Article 7 instead of the 10% gross rate.

Example 3: Korean Management Consultancy to Indian Subsidiary

A Korean parent company provides strategic management and HR advisory services to its Indian subsidiary. Annual management fee: INR 3,00,00,000. This is an intercompany transaction subject to transfer pricing requirements.

• Without DTAA: TDS at ~20.8% = INR 62,40,000 withheld
• With DTAA (Article 12(2)): TDS at 10% = INR 30,00,000 withheld
• Tax saving: INR 32,40,000 per year

A contemporaneous transfer pricing study documenting the arm's length nature of the management fee, the benefit test (demonstrating actual services received and value derived by the Indian subsidiary), and the pricing methodology is essential to withstand TPO scrutiny.

Frequently Asked Questions

What is the FTS tax rate under the revised India-South Korea DTAA?

Under Article 12(2) of the revised India-South Korea DTAA (effective from FY 2017-18), the maximum withholding tax rate on fees for technical services is 10% of the gross amount when the beneficial owner is a resident of the other Contracting State. This was reduced from 15% under the old 1985 treaty.

What types of services qualify as FTS?

The revised treaty defines FTS broadly as payments for managerial, technical, or consultancy services, including the provision of services of technical or other personnel. There is no "make available" requirement — any payment for these categories qualifies as FTS.

Is there a make available test for FTS?

No. Unlike DTAAs with the USA and UK, the revised India-South Korea DTAA does not include a "make available" clause for FTS. This gives the source state broader taxing rights over service payments.

When did the reduced 10% FTS rate come into effect?

The revised DTAA applies to income derived in fiscal years beginning on or after 1 April 2017 (FY 2017-18). FTS payments from that fiscal year onwards benefit from the reduced 10% rate.

Are Korean guarantee fees considered FTS?

No. The ITAT ruled in October 2024 that guarantee fees from Indian subsidiaries to a Korean parent constitute Other Income under Article 22, not FTS under Article 12. Without a PE in India, such income is taxable exclusively in Korea.

What documentation is required to claim the 10% rate?

The Korean service provider must provide a valid TRC from the National Tax Service of South Korea, Form 10F, a beneficial ownership and no-PE declaration, and confirmation that the entity is not controlled by non-residents of the contracting states. The Indian payer files Form 15CA/15CB.

How does the Finance Act 2023 impact FTS taxation?

The Finance Act 2023 doubled the domestic FTS rate from 10% to 20% under Section 115A, effective 1 April 2023. The 10% DTAA rate now delivers savings exceeding 10.8% compared to the domestic rate, making treaty benefit claims essential.