Royalty Tax Rate Between India and Belgium Under DTAA

Royalty Tax Rate Between India and Belgium

The India-Belgium Double Taxation Avoidance Agreement (DTAA), signed on 26 April 1993 in Brussels and effective from 1 October 1997, establishes the taxation framework for royalty payments under Article 12. The original text of Article 12(2) set the withholding tax rate at 20% of the gross amount. The Protocol to the treaty carries a Most Favoured Nation (MFN) clause, and India's later convention with Sweden triggered it: Notification S.O. 54(E) dated 19 January 2001 substituted Article 12 in full, capping royalties and fees for technical services at 10%. The 10% is therefore the operative text of the treaty today, not a rate a taxpayer has to construct out of the MFN clause.

That reduction from 20% to 10% is a 10 percentage point saving on the rate as originally signed and a saving compared to India's current domestic withholding tax rate of 20% (plus applicable surcharge and 4% health and education cess) under section 207(2) (Table, Sl. No. 1) of the Income-tax Act, 2025 (section 115A of the Income-tax Act, 1961) read with section 393(2) (Table, Sl. No. 17; section 195 of the Income-tax Act, 1961). For Belgian companies with significant intellectual property portfolios -- particularly in pharmaceuticals, chemicals, and technology -- understanding the MFN mechanism is essential for tax planning.

The India-Belgium DTAA has also been recently modernized. An Amending Protocol signed on 9 March 2017 entered into force on 26 June 2025, strengthening information exchange and introducing mutual assistance in tax collection. Combined with the MLI modifications effective from FY 2020-21, the treaty landscape has changed significantly in recent years.

Treaty Rate vs Domestic Rate: Detailed Comparison

The effective royalty rate under the India-Belgium DTAA sits on three layers: the rate as originally signed, the rate substituted into Article 12 in 2001, and India's domestic rate.

Original Treaty Rate: 20% (Article 12(2))

As signed in 1993, Article 12(2) provided that royalties and fees for technical services arising in India and paid to a Belgian beneficial owner could be taxed in India at a rate not exceeding 20% of the gross amount. The 20% rate was high by international standards and reflected the negotiating dynamics of the early 1990s.

Current Treaty Rate: 10% (Article 12 as substituted in 2001)

The Protocol to the India-Belgium DTAA (Ad Articles 5, 7 and 12) provides that if, after 1 January 1990, India limits its taxation of royalties or fees for technical services under a convention with an OECD member country to a lower rate or a narrower scope, the same rate or scope applies to Belgium. India's convention with Sweden triggered the clause, and Notification S.O. 54(E) dated 19 January 2001 substituted Article 12 accordingly. The cap on Belgian royalties is therefore 10% — written into the article itself, with retrospective effect from 1 April 1998 on the Indian side and 1 January 1998 on the Belgian side.

Domestic Rate: 20% Plus Surcharge and Cess

India's domestic withholding rate on royalties paid to non-residents is 20% under section 207(2) (increased from 10% by the Finance Act 2023, effective 1 April 2023), plus applicable surcharge and 4% health and education cess. The effective domestic rate can reach approximately 21.84%. The 10% DTAA rate (without surcharge and cess when applying treaty rates) provides significant savings.

Who Qualifies for the Reduced Rate

Claiming the 10% treaty rate on royalties requires satisfying several conditions:

Belgian Tax Residency

The recipient must be a tax resident of Belgium, confirmed by a Tax Residency Certificate from the Belgian Federal Public Service Finance (SPF Finances/FOD Financien). For companies, this means incorporation and effective management in Belgium.

Beneficial Ownership

The Belgian entity must be the beneficial owner of the royalty income. Shell companies or conduit entities that merely pass through royalty payments to ultimate beneficiaries in third countries would not qualify. The beneficial ownership requirement ensures that treaty benefits accrue to entities with genuine economic substance in Belgium.

No PE Attribution

Under Article 12(4), if the beneficial owner carries on business through a permanent establishment in India and the royalty-generating right or property is effectively connected with that PE, the royalties are taxed as business profits under Article 7 at the applicable corporate tax rate (35% for foreign companies), not under the reduced Article 12 rates.

The Notification Requirement, and Why It Does Not Threaten the 10%

The Supreme Court of India, in its 2023 ruling (Assessing Officer v. Nestle SA), held that an MFN clause is not self-executing: a separate notification under section 159 of the Income-tax Act, 2025 (section 90 of the Income-tax Act, 1961) is needed before a lower MFN rate can be claimed. Belgium is not exposed to that problem on the headline rate. The CBDT issued its notification long ago — S.O. 54(E) dated 19 January 2001 — and it did not merely announce a rate, it substituted the text of Article 12. A payer withholding at 10% is applying the treaty as it now reads, not making an MFN claim. The Nestle principle still bites on any attempt to import a narrower scope from a third-country treaty beyond what the substituted article already says.

No Contract-Date Cut-Off

A 23 January 1988 cut-off is sometimes quoted for Indo-Belgian royalties. It belongs to the earlier India-Belgium agreement, as explained in CBDT Circular No. 553 of 13 February 1990, and that agreement was superseded by the 1993 convention. The Article 12 now in force — paragraph 2 as substituted in 2001 — contains no temporal qualifier at all. The 10% cap turns on beneficial ownership and Belgian residence, not on when the right was granted or the contract signed.

Royalty-Specific Treaty Provisions

Definition of Royalties (Article 12(3)(a))

Article 12(3)(a), as substituted in 2001, defines royalties as payments of any kind received as consideration for:

• The use of, or the right to use, any copyright of literary, artistic, or scientific work (including cinematograph films and tapes for broadcasting)
• Any patent, trademark, design or model, plan, secret formula or process
• Information concerning industrial, commercial, or scientific experience

Note what is absent. Unlike the pre-2001 text, and unlike many of India's other treaties, this definition has no limb for the use of, or the right to use, industrial, commercial or scientific equipment. Equipment-use payments therefore fall outside Article 12 altogether — see below.

Belgium is home to significant pharmaceutical, chemical, and technology industries. Companies like UCB, Solvay, and Agfa frequently license IP to Indian entities, making the royalty article particularly important for Indo-Belgian trade.

Scope, Not Just Rate

The Protocol's MFN clause reaches a lower rate or a narrower scope. On both counts the work has largely been done already: the 2001 notification substituted Article 12 wholesale, and the royalty definition it inserted is narrower than the 1993 one — most visibly, it drops equipment. What remains contested is whether anything further can be imported from a third-country treaty on top of the substituted text. Some tribunals have held that the MFN clause carries scope restrictions as well as rates; after Nestle SA, any such claim has to be squared with the absence of a further notification.

Source Country Taxation (Article 12(1) and 12(2))

Article 12(1) allows royalties to be taxed in the state of residence (Belgium). Article 12(2) preserves India's right to tax at source, subject to the rate ceiling. India retains the right to withhold tax on royalties paid by Indian entities to Belgian residents, but the rate is capped at 10%.

Deemed Source Rule (Article 12(5))

Royalties are deemed to arise in a contracting state when the payer is a resident of that state, or when the obligation to pay royalties is incurred in connection with a PE situated in that state. This determines when Indian withholding obligations are triggered.

Documentation Required

To claim the reduced 10% DTAA rate on royalties, the following documentation is mandatory:

Tax Residency Certificate (TRC)

The Belgian recipient must obtain a Tax Residency Certificate from the Belgian Federal Public Service Finance (SPF Finances/FOD Financien). This certificate confirms Belgian tax residency for the relevant period and is the primary document for claiming treaty benefits.

Form 41 (formerly Form 10F)

The non-resident must furnish Form 41 electronically on India's income tax e-filing portal, providing details such as status, nationality, Belgian enterprise number (BCE/KBO number), and period of residential status.

Self-Declaration and MFN Claim

A self-declaration confirming: (i) beneficial ownership of the royalty income; (ii) no permanent establishment in India to which the royalty is attributable; and (iii) explicit invocation of the MFN clause referencing the Protocol and the relevant OECD member treaty that triggered the rate reduction.

No-PE Certificate

A declaration confirming that the Belgian entity does not have a permanent establishment in India and that the royalty income is not effectively connected to any PE.

Withholding Procedure for Indian Payers

Indian entities paying royalties to Belgian residents must follow specific withholding procedures under section 393(2) of the Income-tax Act, 2025:

Section 393(2) TDS Deduction

The Indian payer must deduct TDS at the applicable treaty rate (10% per the MFN clause) at the time of credit or payment, whichever is earlier. When applying DTAA rates, surcharge and health and education cess are not added to the treaty rate -- a significant advantage over the domestic rate where the effective rate can reach approximately 21.84%.

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

For royalty remittances exceeding INR 5 lakh, the remitter must comply with Forms 145 and 146 requirements. The Chartered Accountant issuing Form 146 must specifically address the MFN clause and confirm that the 10% rate applies (rather than the 20% rate in the 1993 text). The CA should reference the Protocol clause and the triggering OECD member treaty.

Quarterly TDS Return (Form 144 (formerly Form 27Q))

The Indian payer must file quarterly TDS returns in Form 144, correctly reflecting the treaty rate applied (10%) and the relevant DTAA article number (Article 12). TDS must be deposited with the government by the 7th of the month following the month of deduction.

Common Disputes and Judicial Precedents

Supreme Court MFN Ruling (2023)

The Supreme Court of India's ruling in Assessing Officer v. Nestle SA (2023) addressed the automatic applicability of MFN clauses in DTAAs. The Court held that MFN clauses are not self-executing and require a separate notification under section 159. This ruling created uncertainty for Belgian companies claiming the 10% MFN rate. While the CBDT has issued notifications for certain treaties, Belgian companies should verify that the specific notification applicable to their MFN claim is in effect before relying on the reduced rate.

Soregam SA -- MFN Importing Make-Available Clause

In the Soregam SA case, the ITAT addressed whether the MFN clause in the India-Belgium DTAA Protocol could import the make-available condition from the India-Portugal DTAA into the scope of FTS under Article 12. The tribunal held that the MFN clause imports both rate reductions and scope restrictions. Since the India-Portugal DTAA restricts FTS to services that "make available" technical knowledge, this restriction was read into the India-Belgium treaty. IT support services that did not make available any knowledge were held to be outside the scope of FTS.

Two cautions before relying on this. First, the substituted Article 12 contains no make-available condition of its own — its FTS limb is the broad “managerial, technical or consultancy” formula — so the restriction exists only as an MFN import. Second, Nestle SA (2023) has since held that MFN imports are not self-executing without a section 159 notification. Treat make-available as an arguable position on Belgian FTS, not a settled one.

Software Payments as Royalties

The Supreme Court's 2021 ruling in Engineering Analysis Centre of Excellence Pvt. Ltd. applies to India-Belgium royalty payments as well. Payments for off-the-shelf software do not constitute royalties under the treaty, as the end user acquires only a licence to use the software, not rights in the underlying copyright. However, customised software development involving copyright transfer may still qualify as royalties.

Equipment Royalties Fall Outside Article 12

On the India-Belgium treaty this is not an argument, it is the text: the royalty definition substituted into Article 12(3)(a) in 2001 has no equipment limb. Payments for the use of, or the right to use, industrial, commercial or scientific equipment are simply not royalties under this treaty. They fall to be dealt with as business profits under Article 7, taxable in India only if the Belgian enterprise has a permanent establishment here — a better outcome than 10%. Because the Indian payer carries the withholding risk under section 393(2), document the characterisation before remitting without deduction.

Practical Examples and Calculations

Example 1: Belgian Pharmaceutical Company Licensing Patent to Indian Subsidiary

A Belgian pharmaceutical company licenses a patented drug formulation to its Indian subsidiary. The annual royalty payment is INR 8,00,00,000 (INR 8 crores).

• Original 1993 treaty rate: 20% = INR 2,40,00,000
• Treaty rate (Article 12(2)): 10% = INR 80,00,000
• Domestic rate: 20% = INR 1,60,00,000 (plus surcharge and cess, effective ~INR 1,74,72,000)
• Tax saving (treaty vs domestic): INR 94,72,000 per year

Example 2: Belgian Technology Company Licensing Software IP

A Belgian technology company licences proprietary software source code (not off-the-shelf) to an Indian enterprise. The royalty payment is INR 3,00,00,000 (INR 3 crores).

• Classification: Royalty under Article 12 (source code / copyright transfer).
• Treaty rate (Article 12(2)): 10% = INR 30,00,000
• Domestic rate: 20% + surcharge + cess = ~INR 65,52,000
• Tax saving under DTAA: INR 35,52,000

Example 3: Belgian Company Providing Off-the-Shelf Software (Not a Royalty)

A Belgian company sells off-the-shelf software licences to Indian customers. The annual payment is INR 1,00,00,000 (INR 1 crore).

• Classification: Per the Supreme Court's 2021 ruling, off-the-shelf software payments are not royalties.
• Treatment: Business profits under Article 7, taxable only if Belgian company has PE in India.
• No PE: 0% tax in India.
• Tax saving: INR 21,84,000 (entire domestic royalty tax eliminated).

Frequently Asked Questions

What is the royalty tax rate under the India-Belgium DTAA?

The rate is 10% under Article 12(2). The rate in the 1993 text was 20%; Notification S.O. 54(E) of 19 January 2001 substituted Article 12 and capped royalties and fees for technical services at 10%. This applies to royalties for copyrights, patents, trademarks, know-how, and similar intellectual property. The 10% rate compares favourably with the domestic rate of 20% plus surcharge and cess.

How did the royalty rate fall from 20% to 10%?

The Protocol provides that if India limits royalty or FTS taxation under a convention with an OECD member country, the same limit applies to Belgium. India's convention with Sweden triggered it, and the CBDT gave effect to the change on 19 January 2001 through Notification S.O. 54(E), which substituted Article 12 outright. The 10% is now the treaty text, not an MFN claim.

Is the MFN clause automatic or does it require a notification?

The Supreme Court held in 2023 (Nestle SA case) that MFN clauses are not self-executing and require a notification under section 159 of the Income-tax Act, 2025 (section 90 of the Income-tax Act, 1961). For the India-Belgium royalty/FTS rate, the CBDT issued the relevant notification on 19 January 2001, so the 10% MFN rate has long been in force. Belgian companies should nonetheless confirm the applicable notification when documenting a claim.

Are software payments considered royalties under the India-Belgium DTAA?

Off-the-shelf software payments are not royalties per the Supreme Court's 2021 ruling. Only payments involving copyright transfer, source code access, or customised software development qualify as royalties. Standard software licence fees are business profits, taxable only if the Belgian company has a PE in India.

Does the 2025 Amending Protocol affect royalty rates?

No. The 2025 Amending Protocol (signed 2017, effective 26 June 2025) replaces Articles 26 and 27, dealing with information exchange and mutual assistance in tax collection. It does not modify Article 12 or the royalty rates. The 10% cap continues to apply.

Are equipment rentals taxed as royalties under Article 12?

No. The royalty definition substituted into Article 12(3)(a) in 2001 has no equipment limb, so payments for the use of industrial, commercial or scientific equipment are not royalties under this treaty. They are business profits under Article 7, taxable in India only if the Belgian enterprise has a permanent establishment here.

What documents does a Belgian company need to claim the reduced rate?

A Belgian company needs: (1) Tax Residency Certificate from SPF Finances/FOD Financien; (2) Form 41 filed on India's e-filing portal; (3) a self-declaration of beneficial ownership with explicit MFN clause invocation; and (4) a no-PE declaration confirming no permanent establishment in India.