India-South Korea DTAA: Complete Guide to Treaty Rates, Articles & Benefits

Overview of the India-South Korea DTAA

The Double Taxation Avoidance Agreement between India and the Republic of Korea (South Korea) is a comprehensive bilateral tax treaty designed to eliminate double taxation on cross-border income flows between the two countries. The original treaty was signed on 19 July 1985 and notified on 26 September 1986. It was comprehensively revised with a new treaty signed on 18 May 2015 during Prime Minister Narendra Modi's visit to Seoul, which came into force on 12 September 2016 and took effect for Indian income derived in fiscal years beginning on or after 1 April 2017.

India and South Korea share a significant economic relationship. South Korea is a major source of foreign direct investment into India, particularly through conglomerates like Samsung, Hyundai, LG, and Kia that maintain substantial manufacturing and R&D operations in India. Conversely, Indian IT and pharmaceutical companies are expanding their presence in the Korean market. Bilateral trade between the two countries exceeds USD 25 billion annually, making the DTAA crucial infrastructure for cross-border commerce.

The revised treaty is based on a hybrid model, drawing elements from both the OECD and UN Model Tax Conventions. The treaty covers withholding tax on dividends, interest, royalties, and fees for technical services (FTS), permanent establishment rules, capital gains treatment, and enhanced provisions for mutual agreement, exchange of information, and limitation of benefits.

Treaty History & Current Status

The original India-South Korea DTAA was signed on 19 July 1985 and came into force on 26 September 1986. After nearly three decades, the treaty was comprehensively renegotiated. The revised DTAA was signed on 18 May 2015 during the state visit of Indian Prime Minister Narendra Modi to Seoul and entered into force on 12 September 2016 by notification in the Official Gazette (Notification No. 96/2016 dated 24 October 2016).

The revised treaty introduced several important changes from the original agreement. Key amendments include reduced withholding rates on interest (from 15% to 10%), royalties (from 15% to 10%), and FTS (from 15% to 10%). The revised treaty also introduced source-based taxation for capital gains on shares (aligning with India's treaty renegotiation policy), a new Limitation of Benefits (LOB) article, enhanced exchange of information provisions, and provisions for bilateral Advance Pricing Agreements (APAs).

Both India and South Korea signed the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS (MLI) on 7 June 2017. India ratified the MLI on 25 June 2019, and South Korea ratified it on 13 May 2020. The MLI modifications apply to the India-Korea DTAA, introducing the Principal Purpose Test (PPT) as the primary anti-abuse mechanism. Under the PPT, treaty benefits can be denied if one of the principal purposes of an arrangement was to obtain those benefits.

Key Treaty Articles

Article 5: Permanent Establishment

Under Article 5 of the revised India-South Korea DTAA, a permanent establishment (PE) is defined as a fixed place of business through which an enterprise wholly or partly carries on its business. The revised treaty modified the PE thresholds from the original agreement:

• Construction PE: A building site, construction, installation, or assembly project, or supervisory activities in connection therewith, constitutes a PE only if it lasts more than 183 days. The original treaty had a 9-month threshold, so the revised treaty slightly loosened this requirement.
• Services PE: The furnishing of services, including consultancy services, by an enterprise through employees or other personnel constitutes a PE if activities continue for the same or a connected project for a period or periods aggregating more than 183 days within any 12-month period.

Article 7: Business Profits

Business profits of an enterprise are taxable only in its country of residence unless the enterprise carries on business through a PE in the other country. If a PE exists, only the profits attributable to that PE are taxable in the source country. The revised treaty introduced Article 9(2), enabling taxpayers to invoke the Mutual Agreement Procedure (MAP) in transfer pricing disputes and apply for bilateral Advance Pricing Agreements.

Article 10: Dividends

Dividends paid by a company resident in one country to a beneficial owner resident of the other country may be taxed in both countries. However, the source-country tax is capped at 15% of the gross amount. The revised treaty simplified this from the original, which had a 20% general rate and a 15% rate for substantial holdings. Now a flat 15% cap applies regardless of the ownership percentage.

Article 11: Interest

Interest arising in one country and paid to a beneficial owner resident of the other country may be taxed in both countries, with the source-country tax capped at 10% of the gross amount. This represents a significant reduction from the original treaty's 15% rate. The lower rate applies to all categories of interest without distinction between banks and other recipients.

Article 13: Royalties and Fees for Technical Services

The India-South Korea DTAA includes a combined article for royalties and FTS under Article 13. Both are subject to a maximum rate of 10% of the gross amount, reduced from the original 15% rate. This combined treatment of royalties and FTS is characteristic of India's treaty practice and differs from the OECD model, which does not include a separate FTS provision. The article covers payments for the use of or right to use any copyright, patent, trademark, design, model, plan, secret formula, or process, as well as fees for technical, managerial, or consultancy services.

Article 14: Capital Gains

The revised treaty introduced a significant change in capital gains taxation. Under the original treaty, capital gains on shares were taxable only in the country of residence (following the OECD model approach). The revised treaty provides for source-based taxation of capital gains from alienation of shares if the transferor held, directly or indirectly, at least 5% of the capital of the company during the 12-month period before the transfer. This aligns with India's policy of ensuring source-country taxing rights on substantial share transfers.

Gains from alienation of immovable property remain taxable in the country where the property is situated. Gains from ships or aircraft in international traffic are taxable only in the country of residence.

Withholding Tax Rates Summary

Note: India's domestic withholding rate of 20% is subject to surcharge (2% for foreign companies with income between INR 1 crore and INR 10 crore, or 5% above INR 10 crore) and 4% health and education cess. DTAA treaty rates do not attract surcharge or cess, making the effective saving larger than the headline rate difference. Under Section 90 of the Income Tax Act, a non-resident can apply whichever rate is more beneficial.

Permanent Establishment Rules

The PE provisions in the revised India-South Korea DTAA follow the standard fixed-place-of-business test with specific thresholds for construction and services PEs. The 183-day threshold for both construction and services PEs means that Korean companies undertaking projects or furnishing services in India must carefully track the duration of their activities.

The Samsung Electronics PE case is a notable judicial precedent under this treaty. In this case, Indian tax authorities alleged that Samsung Korea had a PE in India through the activities of expatriate employees seconded to its Indian subsidiary. The dispute revolved around whether the expatriates' activities constituted a PE under Article 5 of the India-Korea DTAA, and whether profits should be attributed to the alleged PE under Article 7.

Under the MLI modifications, the PE definition has been further strengthened. The anti-fragmentation rule prevents enterprises from splitting contracts to avoid PE thresholds, and the PPT can deny treaty benefits if arrangements are structured primarily to avoid PE creation.

Tax Residency & Certificate Requirements

To claim DTAA benefits, the taxpayer must be a tax resident of one of the treaty countries. The treaty includes tie-breaker rules for individuals (permanent home, centre of vital interests, habitual abode, nationality) and for persons other than individuals (place of effective management).

For South Korean residents claiming DTAA benefits in India, the following documentation is required:

• Tax Residency Certificate (TRC) issued by the National Tax Service (NTS) of South Korea. The TRC must confirm that the person is a tax resident of South Korea for the relevant financial year.
• Form 10F filed electronically on the Indian income tax e-filing portal (incometax.gov.in). This self-declaration form captures treaty-relevant details including status, nationality, tax identification number, period of residential status, and address in the country of residence.
• Beneficial ownership declaration confirming the recipient is the beneficial owner of the income and not merely an agent, nominee, or conduit.
• No PE declaration (where relevant) confirming the recipient does not have a PE in India through which the income is effectively connected.

Mutual Agreement Procedure (MAP)

Article 24 of the revised India-South Korea DTAA provides for a Mutual Agreement Procedure to resolve cases of taxation not in accordance with the treaty. A significant improvement in the revised treaty is Article 9(2), which provides a specific MAP mechanism for transfer pricing disputes, enabling taxpayers to seek bilateral APAs.

A Memorandum of Understanding (MoU) on suspension of collection of taxes during the pendency of MAP was signed by the competent authorities of India and South Korea on 9 December 2015, providing practical relief to taxpayers while disputes are being resolved. The competent authorities are the CBDT (India) and the Minister of Strategy and Finance or an authorised representative (South Korea).

How to Claim Treaty Benefits

Claiming DTAA benefits on payments from India to South Korea involves a specific compliance process:

1. Obtain a TRC from the NTS: The South Korean recipient must apply to the National Tax Service of South Korea for a Tax Residency Certificate confirming Korean tax residence for the relevant period.
2. File Form 10F on the Indian portal: The recipient or their representative files Form 10F electronically on the Indian income tax e-filing portal.
3. Provide documents to the Indian payer: The TRC, Form 10F, beneficial ownership declaration, and no PE declaration are provided to the Indian company making the payment.
4. Indian payer applies reduced TDS rate: The Indian payer deducts TDS at the DTAA rate (e.g., 10% on interest instead of 20%+) based on the documentation received.
5. File Form 15CA/15CB: The Indian payer files Form 15CA (and Form 15CB if the remittance exceeds INR 5 lakh) before processing the foreign remittance through the authorised dealer bank.
6. Claim foreign tax credit in South Korea: The South Korean recipient claims a credit for Indian tax withheld against their Korean tax liability.

Under Section 90 of the Indian Income Tax Act, a non-resident can apply whichever rate is more beneficial between the domestic rate and the DTAA rate. The Indian payer should apply the lower rate when valid documentation is provided.

Frequently Asked Questions

What are the key changes in the revised India-South Korea DTAA compared to the original 1985 treaty?

The revised treaty (signed 2015, effective 2016) reduced withholding rates on interest, royalties, and FTS from 15% to 10%. It introduced source-based taxation for capital gains on shares where the transferor held 5% or more of the company's capital, added a Limitation of Benefits article, enhanced exchange of information provisions, and enabled bilateral Advance Pricing Agreements through MAP.

What is the dividend withholding rate under the India-South Korea DTAA?

The dividend withholding rate is capped at 15% of the gross amount under Article 10(2). The revised treaty simplified this from the original treaty's tiered structure, applying a flat 15% rate regardless of the ownership percentage held by the beneficial owner.

Is there a separate FTS article in the India-South Korea DTAA?

Yes. Unlike the OECD Model Convention and some of India's other DTAAs, the India-South Korea DTAA includes fees for technical services within Article 13, alongside royalties. Both are taxed at a maximum rate of 10% of the gross amount. This means standalone technical, managerial, or consultancy services are subject to withholding tax in the source country regardless of whether a PE exists.

How does capital gains taxation work under the revised treaty?

The revised treaty introduced source-based taxation for capital gains on shares. If the transferor held at least 5% of the company's capital directly or indirectly during the 12-month period before the transfer, gains are taxable in the country where the company is resident. Gains from shares where the transferor held less than 5% remain taxable only in the country of residence. Gains from immovable property are taxable where the property is situated.

What is the construction PE threshold under the India-South Korea DTAA?

A building site, construction, installation, or assembly project constitutes a PE only if it lasts more than 183 days. The revised treaty changed this from the original 9-month threshold. Similarly, the furnishing of services through employees creates a PE if activities continue for more than 183 days within any 12-month period.

Does the Limitation of Benefits (LOB) article affect treaty shopping?

Yes. The revised India-South Korea DTAA introduced a Limitation of Benefits article to prevent treaty abuse. Benefits for dividends, interest, capital gains, royalties, FTS, and other income are denied to residents who are controlled directly or indirectly by non-residents of both contracting states. This anti-abuse provision, combined with the PPT introduced through the MLI, significantly restricts treaty shopping opportunities.

How do South Korean companies claim lower TDS rates on payments from India?

South Korean companies must obtain a Tax Residency Certificate from the National Tax Service of South Korea, file Form 10F electronically on the Indian income tax portal, and provide these documents along with a beneficial ownership declaration to the Indian payer before the payment date. The Indian payer then applies the DTAA rate at the time of TDS deduction and files Form 15CA/15CB for the remittance.