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. However, the Protocol to the treaty includes a Most Favoured Nation (MFN) clause that has reduced the effective rate to 10%, matching the lower rates India agreed with other OECD member states. This reduction was given effect by a CBDT notification dated 19 January 2001.

This MFN-driven reduction from 20% to 10% represents a 10 percentage point saving on the original treaty rate 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 115A read with 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 requires understanding three layers: the original treaty rate, the MFN-adjusted rate, and the domestic rate.

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

The original Article 12(2) provides that royalties and fees for technical services arising in India and paid to a Belgian beneficial owner may be taxed in India at a rate not exceeding 20% of the gross amount. This rate applies to rights granted or contracts signed after 23 January 1988. For rights granted before that date, the domestic law rate applies. The 20% rate was relatively high by international standards and reflected the negotiating dynamics of the early 1990s.

MFN-Adjusted Rate: 10% (Protocol)

The Protocol to the India-Belgium DTAA contains an MFN clause providing that if India enters into a DTAA with any OECD member country after the specified date and agrees to lower rates on royalties and FTS, those lower rates shall automatically apply to Belgium. Since India has agreed to 10% royalty rates with several OECD members (including Sweden, Portugal, and others), the effective rate for Belgian royalties has been reduced to 10%, as notified by the CBDT on 19 January 2001.

Domestic Rate: 20% Plus Surcharge and Cess

India's domestic withholding rate on royalties paid to non-residents is 20% under Section 115A (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 MFN-adjusted 10% 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(5), 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.

MFN Clause Invocation and Notification Requirement

The Supreme Court of India, in its landmark 2023 ruling (Assessing Officer v. Nestle SA), held that the MFN clause in DTAAs is not self-executing. A separate notification under Section 90 of the Income Tax Act is required for the lower MFN rate to apply. The CBDT has issued notifications for certain MFN-adjusted rates, but Belgian companies should verify that the specific MFN notification applicable to the India-Belgium DTAA is in effect. When claiming the 10% rate, the taxpayer should explicitly reference the MFN clause and the relevant CBDT notification in their documentation.

Post-23 January 1988 Contracts

The reduced rates apply only to royalties paid for rights granted or contracts signed after 23 January 1988. For older contracts, the domestic law rate applies. Given the treaty was signed in 1993, this threshold is rarely relevant for current transactions.

Royalty-Specific Treaty Provisions

Definition of Royalties (Article 12(3))

Article 12(3) defines royalties broadly to include 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
• The use of, or the right to use, industrial, commercial, or scientific equipment

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.

MFN Clause and Scope Restriction

The MFN clause in the Protocol does not merely reduce the rate; it can also restrict the scope of what constitutes a royalty or FTS. If India's treaty with another OECD member defines royalties more narrowly or excludes equipment royalties, the narrower definition may apply to Belgium through the MFN clause. This has been the subject of judicial interpretation, with some tribunals holding that the MFN clause imports both rate reductions and scope restrictions from the third-country treaty.

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 the MFN-adjusted 10%.

Deemed Source Rule

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 10F

The non-resident must furnish Form 10F 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 195 of the Income Tax Act:

Section 195 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%.

Form 15CA and Form 15CB

For royalty remittances exceeding INR 5 lakh, the remitter must comply with Form 15CA/15CB requirements. The Chartered Accountant issuing Form 15CB must specifically address the MFN clause and confirm that the 10% rate applies (rather than the original 20% treaty rate). The CA should reference the Protocol clause and the triggering OECD member treaty.

Quarterly TDS Return (Form 27Q)

The Indian payer must file quarterly TDS returns in Form 27Q, 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 90 of the Income Tax Act. 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.

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 and MFN Scope

Some tribunals have held that the MFN clause can exclude equipment royalties from the scope of Article 12 entirely, if India's treaty with the triggering OECD member state does not include equipment use payments in its definition of royalties. This would mean payments for the use of industrial, commercial, or scientific equipment would be classified as business profits (taxable only if a PE exists), providing even greater tax savings than the 10% rate.

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 treaty rate (Article 12(2)): 20% = INR 1,60,00,000
• MFN-adjusted rate: 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 (MFN 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).
• MFN-adjusted rate: 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 original treaty rate is 20% under Article 12(2), but the MFN clause in the Protocol has reduced the effective rate to 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 does the MFN clause reduce the royalty rate from 20% to 10%?

The Protocol to the India-Belgium DTAA provides that if India agrees to lower royalty rates with any OECD member country, those lower rates automatically apply to Belgium. Since India has 10% royalty rates with several OECD members (such as Sweden and Portugal), the effective Belgian rate is 10%, as notified by the CBDT on 19 January 2001.

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 90 of the Income Tax Act. 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 MFN-adjusted 10% rate continues to apply.

Can the MFN clause exclude equipment royalties from Article 12?

Possibly. Some tribunals have held that if the triggering OECD member treaty excludes equipment use payments from its royalty definition, the MFN clause imports that exclusion into the India-Belgium treaty. This would classify equipment payments as business profits (taxable only with PE) rather than royalties at 10%.

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 10F 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.