Royalty Tax Rate Between India and Hong Kong Under DTAA

Royalty Tax Rate Between India and Hong Kong

Article 12 of the India-Hong Kong Double Taxation Avoidance Agreement (DTAA), signed on 19 March 2018 and in force from 30 November 2018, governs the taxation of royalty income flowing between India and Hong Kong. The treaty provides a reduced withholding tax rate of 10% on the gross amount of royalties, compared to India's domestic rate of 20% (plus applicable surcharge and 4% health and education cess) under Section 195 read with Section 115A of the Income Tax Act, 1961.

The 50% reduction in effective withholding tax is a significant benefit for cross-border intellectual property licensing, technology transfers, patent licensing, trademark usage, and content distribution between India and Hong Kong. Given Hong Kong's position as a major hub for media, technology, and IP-holding structures serving the Asia-Pacific region, the royalty provisions of this treaty are heavily utilised by multinational corporations, technology companies, and content producers operating across the India-Hong Kong corridor.

As a modern treaty negotiated in the post-BEPS era, the India-Hong Kong DTAA embeds anti-avoidance provisions directly within Article 12, denying treaty benefits where the main purpose of an arrangement is to obtain the reduced royalty rate. India's ratification of the Multilateral Instrument (MLI) on 25 June 2019 adds the Principal Purpose Test (PPT) as an additional safeguard against treaty abuse. For a comprehensive overview of all treaty provisions, see our India-Hong Kong DTAA complete guide. For interest taxation details, refer to our interest tax rate guide for India-Hong Kong.

Treaty Rate vs Domestic Rate: Detailed Comparison

Article 12 of the India-Hong Kong DTAA establishes a clear, single-tier rate structure for royalties:

10% Rate on All Royalties

Under Article 12(2), royalties arising in one contracting party and paid to a resident of the other party who is the beneficial owner may be taxed in the source country, but the withholding tax shall not exceed 10% of the gross amount of the royalties. This uniform rate applies to all categories of royalty income, including:

• Payments for the use of, or right to use, any copyright of literary, artistic, or scientific work, including cinematograph films, television and radio broadcasting films or tapes
• Payments for the use of, or right to use, any patent, trademark, design, or model
• Payments for the use of, or right to use, a secret formula or process
• Payments for the use of, or right to use, industrial, commercial, or scientific equipment (equipment royalties)
• Payments for information concerning industrial, commercial, or scientific experience (know-how)

Domestic Rate Comparison

India's domestic withholding rate on royalties paid to non-residents was increased from 10% to 20% by the Finance Act, 2023 (effective 1 April 2023) under Section 115A. With surcharge and health and education cess, the effective domestic rate can exceed 21.84%. The DTAA rate of 10% flat (without surcharge or cess) therefore provides a saving of over 50% compared to the domestic rate.

Who Qualifies for the Reduced Rate

The reduced 10% rate under Article 12 is available when the following conditions are satisfied:

Beneficial Ownership Requirement

The royalties must be beneficially owned by a resident of the other contracting party. The beneficial owner must have the legal and economic right to use, enjoy, and dispose of the royalty income independently. Conduit arrangements where a Hong Kong entity merely receives royalties and passes them on to a third-country principal, nominee arrangements, and back-to-back licensing structures do not qualify. The Hong Kong entity must demonstrate that it exercises genuine ownership and control over the intellectual property rights generating the royalties.

Built-in Anti-Avoidance Clause (Article 12 GAAR)

Unlike many older DTAAs, the India-Hong Kong treaty embeds an anti-avoidance provision directly within Article 12. The benefits of this article shall not be available if the main purpose or one of the main purposes of any person concerned with the creation or assignment of the rights in respect of which the royalties are paid is to take advantage of this article. This is a treaty-level General Anti-Avoidance Rule (GAAR) that operates independently of India's domestic GAAR under Sections 95-102 of the Income Tax Act.

Principal Purpose Test (MLI PPT)

The MLI PPT, effective from 1 October 2019 for India, provides an additional layer of anti-avoidance scrutiny. If obtaining the DTAA benefit was one of the principal purposes of an IP licensing arrangement, the 10% rate may be denied and the domestic rate of 20% (plus surcharge and cess) applied instead. This is particularly relevant for IP migration structures where rights are transferred to Hong Kong entities shortly before royalty-generating transactions.

Arm's Length Requirement

Under Article 12(6), where the amount of royalties paid exceeds the arm's length amount due to a special relationship between the payer and the beneficial owner (or between both and a third person), only the arm's length portion of the royalties qualifies for the 10% treaty rate. The excess is taxed under domestic law. This provision directly intersects with India's transfer pricing rules under Sections 92-92F of the Income Tax Act.

Royalty-Specific Treaty Provisions

Definition of Royalties (Article 12(3))

The term "royalties" under Article 12(3) means 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, or films or tapes used for television or radio broadcasting
• The use of, or the right to use, any patent, trademark, design or model, plan, secret formula or process
• The use of, or the right to use, industrial, commercial, or scientific equipment
• Information concerning industrial, commercial, or scientific experience

This definition is broadly consistent with the UN Model Convention and covers both traditional IP licensing (patents, copyrights, trademarks) and know-how payments. Notably, it includes equipment royalties, which some treaties exclude.

Source Rules for Royalties (Article 12(5))

Royalties are deemed to arise in a contracting party when the payer is a resident of that party. Additionally, where the payer has a permanent establishment in a contracting party and the obligation to pay royalties was incurred in connection with that PE, the royalties are deemed to arise in the party where the PE is situated, regardless of the payer's residence.

PE Attribution Exception (Article 12(4))

If the beneficial owner carries on business through a PE in the source country and the right or property generating the royalties is effectively connected with that PE, the royalties are taxed as business profits under Article 7 rather than under Article 12. This means royalties attributable to a Hong Kong entity's PE in India would be taxed at the applicable corporate tax rate (35% for foreign companies) rather than the 10% withholding rate.

Hong Kong's Domestic Position on Royalties

Hong Kong levies a withholding tax on royalty payments under its domestic tax law. Royalties paid to a non-resident for the use of IP in Hong Kong are subject to a 4.95% withholding tax (based on a deemed profit ratio of 30% taxed at the corporate rate of 16.5%). For connected party transactions, the deemed profit ratio increases to 100%, resulting in an effective withholding rate of 16.5%. Where the India-Hong Kong DTAA applies, these rates may be further reduced.

Documentation Required

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

Tax Residency Certificate (TRC)

The Hong Kong resident must obtain a Certificate of Resident Status from the Hong Kong Inland Revenue Department (IRD). The TRC is a mandatory prerequisite under Section 90(4) of the Indian Income Tax Act and must cover the period during which the royalty income is earned. Applications for benefits under non-Mainland-China treaties (including the India-Hong Kong DTAA) are made on Form IR1313B, available in both an individual version and a company/entity version (Form IR1313A is reserved for the Hong Kong-Mainland China arrangement).

Form 10F

Form 10F must be filed electronically on India's Income Tax e-filing portal, providing details such as the recipient's status (individual, company, etc.), nationality, tax identification number, period of residential status, and Hong Kong address. Form 10F is mandatory even when a TRC has been provided.

Self-Declaration

A self-declaration confirming beneficial ownership, the absence of a permanent establishment in India, the arm's length nature of the royalty payment, and that the arrangement does not have treaty benefit as its main purpose is typically required by the Indian payer.

IP Licensing Agreements

The underlying IP licensing agreement should clearly specify the nature of the intellectual property, the scope of usage rights granted, the territory covered, the royalty rate and calculation methodology, and the duration of the licence. Indian tax authorities may request copies of these agreements during assessment proceedings.

Withholding Procedure for Indian Payers

Indian entities paying royalties to Hong Kong residents must comply with Section 195 of the Income Tax Act:

TDS Deduction at 10%

The Indian payer deducts TDS at 10% flat (no surcharge or cess) on the gross royalty amount at the time of credit or payment, whichever is earlier. The TDS must be deposited with the government by the 7th of the following month (30 April for March deductions).

Form 15CA and Form 15CB

For royalty remittances to Hong Kong:

• Form 15CB: A Chartered Accountant must file Form 15CB on the Income Tax portal, certifying the TDS rate, the applicable DTAA provision (Article 12(2)), and that all treaty conditions are satisfied
• Form 15CA Part C: The remitter files Form 15CA Part C online, referencing the 15CB acknowledgement number
• For remittances up to INR 5 lakh in a financial year: Only Form 15CA Part A is required

Lower Withholding Certificate (Section 197)

A Hong Kong resident expecting regular royalty income from India can apply for a lower withholding certificate under Section 197 from the Assessing Officer, specifying the TDS rate based on the DTAA provisions and the recipient's overall tax liability.

RBI/FEMA Compliance

Royalty payments to non-residents must comply with FEMA regulations. Under the automatic route, royalty payments for use of trademarks and brand names are permitted up to specified limits. Technology transfer agreements involving patents and know-how may require RBI approval depending on the quantum and nature of the payment.

Common Disputes and Judicial Precedents

Software Payments: Royalty vs Business Income

A significant area of dispute concerns whether payments for software licences constitute "royalties" under Article 12 or are business profits under Article 7. The Supreme Court of India in the landmark Engineering Analysis Centre of Excellence Pvt Ltd case (2021) held that payments for copyrighted software (as opposed to copyright in software) do not constitute royalties under Section 9(1)(vi) of the Income Tax Act. However, the application of this ruling to DTAA provisions varies depending on the specific treaty's definition of royalties. Under the India-Hong Kong DTAA, equipment royalties are explicitly included in the definition, but the characterisation of software payments remains fact-specific.

Equipment Royalties vs Service Fees

Disputes arise over whether payments for access to cloud computing infrastructure, SaaS platforms, and data centre services constitute "royalties" for the use of industrial, commercial, or scientific equipment or are fees for technical services under Article 13. The characterisation affects whether the payment falls under Article 12 or Article 13, though both carry the same 10% rate under this treaty.

Beneficial Ownership in IP Holding Structures

Indian tax authorities have scrutinised Hong Kong-based IP holding structures where the Hong Kong entity lacks genuine substance and operational control over the intellectual property. If the Hong Kong entity is merely a pass-through conduit for a third-country parent, the 10% treaty rate may be denied under the beneficial ownership requirement, the built-in Article 12 GAAR, or the MLI PPT. The entity must demonstrate that it has independent decision-making authority, bears economic risk related to the IP, and maintains adequate economic substance in Hong Kong.

Transfer Pricing on Related-Party Royalties

Indian transfer pricing officers frequently challenge royalty rates in intercompany transactions, particularly when an Indian subsidiary pays royalties to its Hong Kong parent or affiliate for brand usage, technology licences, or management IP. Under Article 12(6), only the arm's length portion qualifies for the treaty rate. ITAT rulings have generally required benchmarking of royalty rates using comparable uncontrolled price (CUP) methodology against independent licensing agreements in similar industries and geographies.

Practical Examples and Calculations

Example 1: Technology Licence from Hong Kong Company

A Hong Kong technology company licences its patented manufacturing process to an Indian manufacturer for a royalty of USD 500,000 per year.

• Domestic rate: 20% = USD 100,000 (plus surcharge and cess, effective ~USD 109,200)
• DTAA rate (Article 12(2)): 10% = USD 50,000
• Tax saving under DTAA: USD 50,000+ per year

The Hong Kong company provides TRC from the IRD, Form 10F, and beneficial ownership declaration. The Indian manufacturer deducts TDS at 10% flat and remits USD 450,000.

Example 2: Brand Licensing by Hong Kong Parent to Indian Subsidiary

A Hong Kong parent company licences its brand and trademarks to its Indian subsidiary for 3% of net sales. Indian subsidiary's net sales are INR 100 crore, resulting in royalty of INR 3 crore.

• Domestic rate: 20% = INR 60 lakh (plus surcharge and cess)
• DTAA rate (Article 12(2)): 10% = INR 30 lakh
• Tax saving under DTAA: INR 30 lakh+ per year

The royalty rate of 3% must be at arm's length. If Indian TP authorities determine the arm's length rate is 2%, only the royalty at 2% of sales (INR 2 crore) qualifies for the treaty rate. The excess INR 1 crore may be denied deduction under Section 92 and may not qualify for the DTAA rate under Article 12(6).

Example 3: Film Distribution Rights

A Hong Kong film production company licences distribution rights for its film library to an Indian OTT platform for INR 5 crore per year.

• Domestic rate: 20% = INR 1 crore (plus surcharge and cess)
• DTAA rate (Article 12(2)): 10% = INR 50 lakh
• Tax saving under DTAA: INR 50 lakh+ per year

The payment qualifies as royalty under Article 12(3) as it is consideration for the use of copyright of cinematograph films. The Indian OTT platform deducts TDS at 10% and files Form 15CA/15CB. For a summary of all withholding rates under this treaty, see the India-Hong Kong withholding tax rates page.

Frequently Asked Questions

What is the royalty tax rate under the India-Hong Kong DTAA?

The treaty provides a uniform rate of 10% on the gross amount of all royalty payments under Article 12(2). This compares favourably with India's domestic rate of 20% (plus surcharge and cess) under Section 115A, providing an effective saving of over 50%.

Does the 10% rate apply to software licence payments?

The characterisation of software payments under the India-Hong Kong DTAA depends on the nature of the transaction. Payments for copyrighted software used in business (shrink-wrap or off-the-shelf licences) may not constitute royalties following the Supreme Court ruling in the Engineering Analysis Centre case. Payments for customised software development or for the copyright itself are more likely to be classified as royalties.

Are equipment royalties covered under this treaty?

Yes. Article 12(3) of the India-Hong Kong DTAA explicitly includes payments for the use of, or the right to use, industrial, commercial, or scientific equipment within the definition of royalties. Such payments are subject to the 10% withholding rate.

What anti-avoidance measures apply to royalty claims?

Three layers of anti-avoidance apply: the treaty's own GAAR provision within Article 12 (denying benefits where the main purpose is to take advantage of the article), the MLI Principal Purpose Test effective from October 2019, and India's domestic GAAR under Sections 95-102 of the Income Tax Act. IP migration structures and conduit arrangements are most at risk.

How do transfer pricing rules affect the DTAA rate on royalties?

Under Article 12(6), if royalties exceed the arm's length amount due to a special relationship between the payer and the beneficial owner, only the arm's length portion qualifies for the 10% treaty rate. Indian TP authorities regularly benchmark intercompany royalty rates using CUP methodology.

Does Hong Kong impose withholding tax on royalties?

Yes. Hong Kong imposes withholding tax on royalty payments to non-residents at an effective rate of 4.95% (30% deemed profit ratio at 16.5% corporate tax rate) for unconnected parties, and up to 16.5% for connected parties (100% deemed profit ratio). The India-Hong Kong DTAA may further reduce these rates.

How do I claim DTAA benefits on royalty income from India?

Provide a valid Tax Residency Certificate from the Hong Kong Inland Revenue Department, file Form 10F on India's e-filing portal, and submit a self-declaration of beneficial ownership to the Indian payer. For remittances exceeding INR 5 lakh, Form 15CA and Form 15CB must also be filed.