Interest Tax Rate Between India and Denmark Under DTAA

Quick answer: Under Article 12 of the India-Denmark DTAA (signed 8 March 1989, effective in India from the financial year beginning 1 April 1990), interest paid to a Danish beneficial owner is capped at 10% where the lender is a bank (Article 12(2)(a)) and 15% in all other cases (Article 12(2)(b)) — both well below India's 20% domestic rate under section 207(1) of the Income-tax Act, 2025. Interest derived by the Government of Denmark, Danmarks Nationalbank, any Danish government agency, or by any other Danish resident on debt-claims financed, guaranteed or insured by those bodies, is fully exempt from Indian tax under Article 12(3) — and the same exemption runs in reverse for interest paid to Indian government bodies.

Key takeaways:

• 10% on interest paid on loans of whatever kind granted by a bank (Article 12(2)(a))
• 15% on all other interest — bonds, debentures, inter-company loans (Article 12(2)(b))
• 0% (fully exempt) for interest to the Danish Government, Danmarks Nationalbank, a government agency, or a Danish resident on government-guaranteed debt (Article 12(3))
• Domestic rate is 20% for foreign-currency debt (section 207(1)); rupee-denominated debt is at rates in force (30%/35%)
• The 10%/15% caps apply only to loans or debts created after the treaty entered into force, 13 June 1989

Interest Tax Rate Between India and Denmark

The India-Denmark DTAA, signed at Copenhagen on 8 March 1989 and effective in India from the financial year beginning 1 April 1990, governs interest income under Article 12 — one number higher than the OECD Model's Article 11, since this is a shifted-numbering, income-and-capital convention. The treaty gives Danish lenders a meaningful rate advantage over India's 20% domestic withholding tax, with an even lower rate for bank lending and a full exemption for government and institutional flows.

For the treaty's history, PE rules, and dispute-resolution provisions, see the India-Denmark DTAA complete guide; for the consolidated rate table across all income types, see the withholding tax rates page.

Treaty Rate vs Domestic Rate: Detailed Comparison

Domestic Rate (Without DTAA)

Under section 207(1) (Table, Sl. No. 3) of the Income-tax Act, 2025 (section 115A of the Income-tax Act, 1961), interest paid to a non-resident on money borrowed in foreign currency is taxed at 20% (plus surcharge and cess). This entry is scoped to foreign-currency debt; rupee-denominated interest owed to a non-resident falls outside it and is withheld at the rates in force instead — 30% for individuals and non-corporate entities, 35% for foreign companies.

DTAA Rate (With Treaty)

Article 12(2) of the India-Denmark DTAA caps the source-state tax at 10% of the gross amount where the interest is paid on any loan of whatever kind granted by a bank, and at 15% in all other cases — covering bonds, debentures, and ordinary inter-company loans. The treaty text does not further define "bank"; the ordinary commercial meaning applies. Notably, these caps apply only to interest on a loan or debt created after the Convention's entry into force on 13 June 1989 — a temporal condition now academic, since virtually no pre-1989 loans remain outstanding.

Government and Institutional Exemption (Article 12(3))

Interest is fully exempt from tax in the source State when derived by the Government of the other Contracting State, a political sub-division or local authority, the Central Bank of that State, or any agency of that Government — or by any other resident of that State on debt-claims financed, guaranteed or insured by those same bodies. For Danish lenders, this means interest paid by an Indian borrower to the Danish Government, Danmarks Nationalbank, or a Danish government agency is exempt — and so is interest paid to an ordinary Danish company or bank if the underlying loan is financed, guaranteed or insured by the Danish Government, a sub-division, Danmarks Nationalbank, or a government agency. Purely commercial lending with no such government backing still falls into the 10% (bank) or 15% (other) tiers.

Effective Tax Savings

For a Danish bank lending EUR 10 million to an Indian company at 5% interest, annual interest is EUR 500,000. The DTAA saves EUR 50,000 a year — 10% (EUR 50,000) instead of 20% (EUR 100,000) — directly reducing the Indian borrower's cost of funds or improving the Danish lender's net yield.

Who Qualifies for the Reduced Rate

Beneficial Ownership

Article 12(2) limits the reduced rates to interest whose recipient is the beneficial owner. A back-to-back arrangement, where a Danish entity borrows from a third country and on-lends to India with no real economic risk or margin, is unlikely to satisfy this test.

Tax Residency Certificate from Skattestyrelsen

The Danish lender must obtain a Tax Residency Certificate from Skattestyrelsen confirming Danish tax residency, under section 159(8) of the Income-tax Act, 2025 (section 90(4) of the Income-tax Act, 1961). If the TRC lacks any prescribed particular, Form 41 (formerly Form 10F) must also be filed electronically.

Anti-Abuse: PPT Applies; Denmark's PE Reservations Are Separate

Both countries signed the Multilateral Instrument (MLI) on 7 June 2017; it is in force for India from 1 October 2019 and Denmark from 1 January 2020, making this a matched Covered Tax Agreement on which the Principal Purpose Test applies from FY 2020-21. Denmark also reserved entirely against MLI Articles 12, 13 and 14 — its own anti-abuse rules on agency PE, specific-activity exemptions and contract-splitting — which is easy to confuse with this treaty's Article 12 on interest, but the reservation only changes how a permanent establishment is defined under the treaty's Article 5; it has no bearing on the interest rate itself. India's domestic GAAR remains a backstop against artificial interest-routing structures.

No PE or Fixed-Base Attribution

Under Article 12(5), the reduced rates do not apply where the Danish beneficial owner carries on business through a permanent establishment in India, or performs independent personal services from an Indian fixed base, and the debt-claim generating the interest is effectively connected with that PE or fixed base. The interest is then taxed as business profits under Article 7, or under Article 15 for independent personal services.

Interest-Specific Treaty Provisions Under Article 12

Definition of Interest (Article 12(4))

"Interest" means income from debt-claims of every kind, whether or not secured by mortgage and whether or not carrying a right to participate in the debtor's profits — including income from government securities, bonds and debentures, and any premiums or prizes attached to them. Penalty charges for late payment are expressly excluded from the definition.

Article 12(1): Residence-State Taxation

Interest arising in a Contracting State and paid to a resident of the other State may be taxed in that other (residence) State — Denmark's primary taxing right over interest received by its residents.

Article 12(6): Source Rule

Interest is deemed to arise in the State where the payer is resident. Where the payer has a PE or fixed base in a State and the debt was incurred for it, with the interest borne by that PE or fixed base, the interest is instead deemed to arise where the PE or fixed base is situated, regardless of the payer's own residence.

Article 12(7): Arm's Length Rule

Where a special relationship between payer and beneficial owner inflates the interest above an arm's-length amount, the treaty caps apply only to the arm's-length portion; the excess remains taxable under each country's domestic law, closely tracking transfer pricing principles.

Documentation Required to Claim the Reduced Rate

Tax Residency Certificate (TRC)

A TRC from Skattestyrelsen for the relevant financial year, mandatory under section 159(8) of the Income-tax Act, 2025 (section 90(4) of the Income-tax Act, 1961).

Form 41 (formerly Form 10F)

If the TRC omits any prescribed particular, Form 41 must be filed electronically on the Indian income-tax portal, even without an Indian PAN.

Self-Declaration and No-PE Certificate

A written declaration of beneficial ownership and confirmation that the debt-claim is not connected with an Indian PE or fixed base of the Danish lender.

Loan Agreement and Government-Backing Evidence

Where claiming the Article 12(3) exemption on grounds of government financing, guarantee or insurance, documentary evidence of that backing (e.g. an export-credit guarantee or sovereign-linked facility agreement) should be retained alongside the loan agreement.

Withholding Procedure for Indian Payers

Section 393(2): The TDS Obligation

Under section 393(2) of the Income-tax Act, 2025 (Table, Sl. No. 17; section 195 of the Income-tax Act, 1961), the Indian payer deducts tax at source at payment or credit, whichever is earlier — 10% for bank loans, 15% for other interest, or nil where the Article 12(3) exemption applies and documentation is in order; otherwise the domestic rate applies.

Forms 145 and 146 (formerly Forms 15CA and 15CB)

Before remitting interest to Denmark, the payer files Form 145 online; for remittances exceeding INR 5 lakh in a financial year, a Chartered Accountant must also certify Form 146, confirming the applicable rate and that TDS was correctly deducted.

Section 395(1): Lower or Nil Withholding Certificate

A Danish lender expecting its actual tax liability to fall below the standard deduction can apply to the Assessing Officer for a certificate under section 395(1) of the Income-tax Act, 2025 (section 197 of the Income-tax Act, 1961).

FEMA/ECB Compliance

External Commercial Borrowings from Danish lenders must also satisfy the Foreign Exchange Management (Borrowing and Lending) Regulations, 2018, whose Schedule I was substituted by Notification FEMA 3(R)(5)/2026-RB (in force 16 February 2026). Form ECB-2 is due within seven calendar days from the end of the month in which proceeds were received or debt serviced, filed through the designated AD Category-I bank (Notification FEMA 3(R)(5)/2026-RB, para 16(1)(c); the rule applies to pre-existing ECBs too). Under the same notification the fixed all-in-cost ceiling no longer applies to ECB with an average maturity of three years or more (pricing must be in line with prevailing market conditions), while ECB with an average maturity under three years remains subject to the Trade Credit ceiling of benchmark plus 300 basis points for foreign-currency borrowing.

Common Disputes and Practical Considerations

Surcharge and Cess Over the Treaty Rate

Whether surcharge and health & education cess can be added on top of the 10%/15% treaty rate is a recurring dispute. Several Income Tax Appellate Tribunal rulings treat the treaty rate as an all-inclusive ceiling, though tax authorities do not always apply this position at the assessment stage.

Characterising Loan Fees as Interest or FTS

Arrangement, commitment or processing fees charged alongside a loan are sometimes disputed as to whether they fall under Article 12 (interest, given the broad debt-claim definition) or Article 13 (fees for technical services, at the higher 20% rate). The characterisation matters most for export-credit and development-finance facilities, where interest may be exempt under Article 12(3) but a fee re-characterised as FTS would bear 20%.

Beneficial Ownership in Back-to-Back Loans

Indian tax authorities have challenged beneficial-ownership claims where a Danish entity is found to be a conduit, with the underlying funds actually sourced from a third country with a less favourable treaty with India.

Practical Examples and Calculations

Example 1: Danish Bank Loan to an Indian Corporate

Copenhagen Finans A/S, a Danish bank, lends EUR 20 million to an Indian company at 4.5% per annum. Annual interest is EUR 900,000.

• Without DTAA: TDS at 20% = EUR 180,000. Net interest received = EUR 720,000.
• With DTAA (Article 12(2)(a), bank loan): TDS at 10% = EUR 90,000. Net interest received = EUR 810,000.
• Annual saving: EUR 90,000.

Example 2: Non-Bank Inter-Company Loan

A Danish parent lends INR 20 crore to its Indian subsidiary at 9% (INR 1.8 crore annual interest), with no government guarantee involved.

• Applicable rate: 15% under Article 12(2)(b), since the lender is not a bank.
• TDS: INR 27 lakh, versus INR 36 lakh (20%) without the treaty — a saving of INR 9 lakh.

Example 3: Government-Guaranteed Export Credit

A Danish exporter provides buyer's credit to an Indian importer, guaranteed by the Danish Government's export credit agency. Under Article 12(3), this interest is fully exempt from Indian withholding tax, since the debt-claim is guaranteed by a body named in that paragraph.

Frequently Asked Questions

What is the interest withholding tax rate under the India-Denmark DTAA?

Article 12(2) caps the rate at 10% where the interest is paid on a loan granted by a bank, and 15% in all other cases, both well below India's 20% domestic rate under section 207(1) of the Income-tax Act, 2025.

Is any interest fully exempt under the India-Denmark DTAA?

Yes. Article 12(3) exempts interest derived by the Government of Denmark, a political sub-division or local authority, Danmarks Nationalbank, or any Danish government agency — and also interest derived by any other Danish resident on debt-claims financed, guaranteed or insured by those bodies. The same exemption runs the other way for Indian government bodies.

Does the 0% exemption apply to any private Danish lender?

Only where the specific debt-claim is financed, guaranteed or insured by the Danish Government, a political sub-division, Danmarks Nationalbank, or a government agency — for example, export-credit-guaranteed lending. Ordinary commercial loans from private Danish banks or companies fall into the 10% (bank) or 15% (other) tiers instead.

Does the MLI's Principal Purpose Test apply to interest under this treaty?

Yes. The MLI is in force for both India (from 1 October 2019) and Denmark (from 1 January 2020), and its Principal Purpose Test applies to this treaty from FY 2020-21. Denmark's separate reservations against MLI Articles 12 to 14 affect only the treaty's permanent establishment definition (Article 5), not the interest rate.

What happens if the Danish lender has a PE in India?

If the debt-claim is effectively connected with a permanent establishment or fixed base the Danish lender has in India, Article 12(5) disapplies the 10%/15% caps, and the interest is taxed as business profits under Article 7 (or Article 15) instead.

What documentation does a Danish lender need to claim the reduced rate?

A Tax Residency Certificate from Skattestyrelsen, Form 41 (formerly Form 10F) filed electronically if the TRC lacks prescribed details, a self-declaration of beneficial ownership and no-PE status, and — for the Article 12(3) exemption — evidence of government financing, guarantee or insurance on the debt-claim.