India-China DTAA: Complete Guide to the Double Taxation Avoidance Agreement

Quick answer: The India-China DTAA applies a uniform 10% withholding rate on dividends, interest, royalties, and fees for technical services — half India's 20% domestic rate — with government/RBI/central bank interest fully exempt. Signed 18 July 1994 and in force from 21 November 1994, the treaty is not covered by the MLI since China excluded it, so a separate 2018 Protocol (in force from 5 June 2019) introduced BEPS-aligned anti-abuse rules instead.

Key takeaways:

• Uniform 10% rate on dividends, interest, royalties, and FTS
• Government/RBI/central bank interest is fully exempt
• Not covered by the MLI; China excluded it from its notification list
• 2018 Protocol (in force from 5 June 2019) added BEPS anti-abuse provisions
• Construction/services PE threshold is 183 days (about six months)

Overview of the India-China DTAA

The Double Taxation Avoidance Agreement (DTAA) between India and China is one of the most significant bilateral tax treaties in the Asia-Pacific region, governing the tax treatment of cross-border income between the world's two most populous nations. Signed on 18 July 1994 in New Delhi, the agreement entered into force on 21 November 1994 and has since served as the foundation for bilateral trade flows of well over USD 100 billion annually.

The treaty covers income taxes levied by both countries — India's Income Tax (including surcharges) and China's Enterprise Income Tax and Individual Income Tax. It follows the UN Model Tax Convention, which favours source-country taxation — a principle important to both nations as major recipients of foreign direct investment.

A landmark Protocol amending the treaty was signed on 26 November 2018 and entered into force on 5 June 2019, effective in India from 1 April 2020 and in China from 1 January 2020. This Protocol introduced BEPS-aligned anti-abuse provisions and modernised several key articles.

Treaty History and Current Status

The India-China DTAA has evolved significantly since its original signing in 1994:

• Original treaty signed: 18 July 1994 in New Delhi
• Entry into force: 21 November 1994
• 2018 Protocol signed: 26 November 2018 in New Delhi
• Protocol entry into force: 5 June 2019
• Effective in India: 1 April 2020 (fiscal years beginning on or after)
• Effective in China: 1 January 2020

The 2018 Protocol was a significant update that incorporated minimum standards from the OECD's Base Erosion and Profit Shifting (BEPS) Action Plan. Key changes include updates to the permanent establishment definition, introduction of a new 'Entitlement to Benefits' article (Article 27A) containing a Principal Purpose Test, and modernised information exchange provisions aligned with international standards.

Notably, the India-China DTAA is not covered by the Multilateral Instrument (MLI). Although India initially listed the treaty as a Covered Tax Agreement when signing the MLI in 2017, China excluded it from its notification list. India subsequently removed it during ratification in 2019. The 2018 bilateral Protocol effectively serves the same purpose as MLI modifications.

Key Treaty Articles

Business Profits (Article 7)

Business profits of a Chinese enterprise are taxable in India only if the enterprise carries on business through a permanent establishment (PE) situated in India, and vice versa. Profits are attributed to the PE on an arm's length basis, consistent with transfer pricing principles.

Dividends (Article 10)

Dividends paid by an Indian company to a Chinese resident (or vice versa) may be taxed in the source country, but the tax cannot exceed 10% of the gross amount if the beneficial owner is a resident of the other state. This is significantly lower than India's domestic withholding tax rate of 20% on dividends paid to non-residents.

Interest (Article 11)

Interest income is taxable at source at a maximum rate of 10%. However, interest paid to the government of either contracting state, the Reserve Bank of India, the People's Bank of China, or other specified government-owned financial institutions is fully exempt from source-country taxation, as is interest on loans guaranteed or insured by these government entities — an important provision for sovereign lending arrangements.

Royalties and Fees for Technical Services (Article 12)

Both royalties and fees for technical services (FTS) are capped at 10% of the gross amount when paid to a beneficial owner resident in the other state. This covers payments for the use of copyrights, patents, trademarks, industrial know-how, and managerial, technical, or consultancy services. Indian payers must comply with Section 195 TDS requirements.

Capital Gains (Article 13)

The treaty provides for source-based taxation of capital gains from immovable property and shares deriving value primarily from immovable property. Gains from alienation of movable property forming part of a PE's business assets may be taxed in the PE's country. Gains from ships or aircraft operated in international traffic are taxable only in the state of which the alienator is a resident. Unlike OECD-model treaties, the residual rule is source-based: under Article 13(5), gains from any other property — including shares not covered by the immovable-property rule — arising in a contracting state may also be taxed in that state.

Withholding Tax Rates Summary

The following table compares the DTAA rates with India's domestic rates applicable to payments to non-resident Chinese entities:

The uniform 10% rate across all categories makes the India-China DTAA one of the most streamlined treaties in India's network. Taxpayers should note that domestic rates are further increased by applicable surcharge and health and education cess, taking the effective domestic rate for non-resident companies to between 20.8% and 21.84%, depending on the applicable surcharge.

Permanent Establishment Rules

Article 5 of the treaty, as amended by the 2018 Protocol, defines a permanent establishment as a fixed place of business through which the business of an enterprise is wholly or partly carried on. The PE definition includes:

• Fixed place PE: Office, factory, workshop, place of management, mine, oil/gas well, quarry, or any other place of extraction of natural resources
• Construction PE: A building site, construction, installation, or assembly project lasting more than 183 days (about six months). The 2018 Protocol added anti-splitting rules under which connected activities carried on by closely related enterprises must be aggregated for this threshold
• Service PE: Furnishing of services (other than technical services) through employees or other personnel for more than 183 days within any 12-month period, with connected periods of activity aggregated when applying this threshold

The 2018 Protocol also updated the list of excluded preparatory and auxiliary activities (such as storage, display, and delivery of goods) and tightened the dependent-agent rules to prevent artificial avoidance of PE status through commissionnaire-type arrangements. Companies should seek professional tax advisory guidance on PE exposure assessments.

Tax Residency and Certificate Requirements

To claim DTAA benefits, a Chinese resident receiving income from India (or an Indian resident receiving income from China) must provide:

• Tax Residency Certificate (TRC): Issued by the tax authority of the country of residence. Chinese residents obtain this from the State Taxation Administration. Learn more about TRC requirements
• Form 10F: A self-declaration filed by the non-resident containing prescribed information including name, status, nationality, tax identification number, period of residential status, and address in the country of residence
• No PE declaration: A letter confirming that the non-resident does not have a permanent establishment in India through which the income is earned
• Beneficial ownership declaration: Confirmation that the recipient is the beneficial owner of the income, not merely an agent, nominee, or conduit

Indian payers making remittances to Chinese residents must complete Form 15CA/15CB for foreign remittance reporting under the Income Tax Act, and ensure proper TDS under Section 195.

Mutual Agreement Procedure (MAP)

Article 25 provides the Mutual Agreement Procedure for resolving disputes where a taxpayer believes that the actions of one or both contracting states result in taxation not in accordance with the treaty. Key aspects include:

• A taxpayer must present their case to the competent authority within three years of the first notification of the action giving rise to double taxation
• The competent authorities shall endeavour to resolve the case by mutual agreement and may communicate directly to reach a resolution
• The MAP process can also be used to resolve cases of double taxation not specifically addressed in the treaty
• Article 25 was left unchanged by the 2018 Protocol — MAP remains the primary treaty mechanism for resolving India-China double taxation disputes, and India applies the BEPS Action 14 minimum standard on MAP access as an Inclusive Framework member

India's competent authority for MAP purposes is the Joint Secretary (Foreign Tax and Tax Research), Central Board of Direct Taxes. For transfer pricing disputes, bilateral Advance Pricing Agreements (APAs) may also be pursued under Section 92CC of the Income Tax Act.

How to Claim Treaty Benefits

Claiming benefits under the India-China DTAA involves a systematic process. Here is a step-by-step guide:

Step 1: Establish Tax Residency

Obtain a valid Tax Residency Certificate (TRC) from the State Taxation Administration of China (for Chinese residents) or from the Indian Income Tax department (for Indian residents). The TRC must be valid for the financial year in which the income arises.

Step 2: File Form 10F

The non-resident must fill and submit Form 10F electronically on the Indian Income Tax portal. This form requires details of the taxpayer's residential status, nationality, and tax identification number in the home country.

Step 3: Provide Beneficial Ownership Declaration

Submit a self-declaration confirming beneficial ownership of the income. This is critical for invoking reduced treaty rates and demonstrating that the recipient is not merely acting as a conduit entity for treaty shopping purposes.

Step 4: Apply for Lower Withholding Certificate (if needed)

If the payer is unable to apply treaty rates at source, the non-resident may apply to the Assessing Officer for a lower or nil withholding certificate under Section 197 of the Income Tax Act. Alternatively, benefits can be claimed through double taxation relief under Section 90 while filing the income tax return.

Step 5: Ensure Compliance with Form 15CA/15CB

Indian payers must file Form 15CA (information about the remittance) and obtain a Form 15CB certificate from a chartered accountant before making cross-border payments to Chinese residents. Beacon Filing's cross-border payments service can assist with this compliance.

Step 6: Maintain Documentation

Keep all supporting documentation — TRC, Form 10F, beneficial ownership declaration, and invoices — for at least six years from the end of the relevant assessment year. Proper documentation is essential to withstand scrutiny during tax assessments and audits.

For comprehensive assistance with DTAA compliance, consider Beacon Filing's tax advisory services or our FEMA and RBI compliance support for cross-border transaction reporting.

Frequently Asked Questions