Royalty Tax Rate Between India and Italy Under DTAA

Royalty Tax Rate Between India and Italy

Under Article 13 of the India-Italy Double Taxation Avoidance Agreement (DTAA), royalties arising in one Contracting State and paid to a beneficial owner who is a resident of the other Contracting State may be taxed in the source State, but the tax shall not exceed 20% of the gross amount. This is one of the higher royalty rates in India's treaty network and matches the domestic withholding rate under Section 195 of the Income Tax Act, 1961, meaning the treaty provides no rate reduction for royalty payments to Italian residents.

The India-Italy DTAA was signed on 19 February 1993 and entered into force on 23 November 1995. The treaty is based on the OECD Model Tax Convention. Notably, the India-Italy DTAA is not covered under the Multilateral Instrument (MLI), so the original treaty provisions apply without overlays such as the Principal Purpose Test. A Second Protocol has been proposed that would reduce the royalty rate to 10%, but it has not yet entered into force.

For Italian companies licensing technology, trademarks, or intellectual property to Indian entities, the 20% rate means careful structuring of intercompany arrangements is essential. Our tax advisory and transfer pricing teams help optimize cross-border royalty flows.

Treaty Rate vs Domestic Rate: Detailed Comparison

India's domestic withholding tax rate on royalty payments to non-residents is 20% under Section 115A of the Income Tax Act (plus applicable surcharge and health and education cess). The treaty rate under Article 13(2) is also 20%, creating an unusual situation where the treaty does not offer a lower rate.

However, there is a subtle benefit. Under the DTAA, the 20% is applied on the gross amount without the addition of surcharge and health and education cess. The effective domestic rate, after surcharge and cess, can reach approximately 20.8% to 21.84% depending on the non-resident's total income slab. Therefore, the treaty rate of a flat 20% does provide a marginal saving of 0.8 to 1.84 percentage points when surcharge and cess are factored in.

Under Section 90(2) of the Income Tax Act, a non-resident can choose the more beneficial rate between the domestic law and the treaty. Since the treaty rate of 20% (without surcharge and cess) is lower than the effective domestic rate (with surcharge and cess), Italian residents should claim the treaty rate to avail this marginal benefit.

Who Qualifies for the Reduced Rate

To claim the 20% treaty rate on royalties under the India-Italy DTAA, the recipient must satisfy several conditions:

Beneficial Ownership Requirement

The recipient must be the beneficial owner of the royalties. This means the Italian entity must have the right to use and enjoy the royalty income without any contractual or legal obligation to pass it on to another person. Conduit arrangements where royalties flow through Italy to a third country will not qualify. Since the India-Italy DTAA is not covered by the MLI, there is no Principal Purpose Test overlay, but India's domestic GAAR provisions (Sections 95-102 of the Income Tax Act) can still be invoked to deny treaty benefits in abusive arrangements.

Tax Residency

The recipient must be a tax resident of Italy as defined under Article 4 of the treaty. A valid Tax Residency Certificate (TRC) issued by the Agenzia delle Entrate (Italian Revenue Agency) is mandatory to establish this status for claiming treaty benefits under Section 90(4) of the Income Tax Act.

No PE Connection

The royalty must not be effectively connected with a permanent establishment that the Italian entity has in India. If the royalty-generating IP is effectively connected with an Indian PE, the income is taxed as business profits under Article 7, not under the royalty article.

Royalty-Specific Treaty Provisions

Article 13 of the India-Italy DTAA contains detailed provisions governing the taxation of royalties:

Definition of Royalties

Under Article 13(3), the term "royalties" means payments of any kind received as a 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 radio or television broadcasting
• 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 broad and covers both traditional IP licensing (patents, copyrights, trademarks) and know-how transfers. The inclusion of equipment rentals (use of industrial, commercial, or scientific equipment) is particularly relevant for Italian manufacturing companies leasing equipment to Indian subsidiaries or joint ventures.

No "Make Available" Clause

Unlike some other Indian DTAAs (such as those with the USA and UK), the India-Italy DTAA does not contain a "make available" clause for royalties. This means any payment falling within the definition of royalties under Article 13(3) is taxable at the treaty rate, regardless of whether technical knowledge is "made available" to the recipient. This broader scope means more types of payments are captured as royalties under this treaty compared to treaties with the make available clause.

Source Rule

Under Article 13(6), royalties are deemed to arise in a Contracting State when the payer is a resident of that State, or when the royalty is borne by a PE situated in that State. This means royalties paid by an Indian company to an Italian licensor arise in India and are subject to Indian withholding tax.

Documentation Required

Italian residents claiming the 20% treaty rate on Indian royalties must furnish the following documents to the Indian payer:

Tax Residency Certificate (TRC)

A valid TRC from the Agenzia delle Entrate confirming that the recipient is a tax resident of Italy for the relevant Indian financial year (April to March). This is the primary document for claiming treaty benefits under Section 90(4) of the Income Tax Act.

Form 10F

If the TRC does not contain all prescribed particulars (name, status, nationality, tax identification number, period of residency, and address), the recipient must file Form 10F electronically on the Indian Income Tax portal to supplement the TRC. An Indian PAN is required to file Form 10F electronically.

Self-Declaration

A self-declaration confirming that the Italian entity is the beneficial owner of the royalty income, does not have a PE in India to which the royalty is attributable, and that the arrangement is not primarily motivated by tax avoidance.

No-PE Certificate

If the Italian entity does not have a PE in India, a declaration to that effect should be provided. If a PE exists but the royalty is not connected to it, a statement clarifying the lack of effective connection is advisable.

Withholding Procedure for Indian Payers

Indian companies paying royalties to Italian entities must follow the compliance procedure under Section 195 of the Income Tax Act:

Step 1: Verify Treaty Eligibility

Before applying the 20% treaty rate, verify that the Italian recipient has provided a valid TRC from the Agenzia delle Entrate, Form 10F, and beneficial ownership declaration. The payer bears responsibility for ensuring all conditions are met.

Step 2: Deduct TDS at 20%

Deduct tax at source at 20% on the gross royalty amount. Under the treaty, this rate applies without the addition of surcharge and cess. The TDS must be deposited with the government within 7 days of the end of the month in which the deduction is made.

Step 3: File Form 15CA/15CB

For remitting the royalty to Italy, the payer must file Form 15CA electronically. If the remittance exceeds INR 5 lakh in a financial year, a Chartered Accountant's certificate in Form 15CB is required, certifying the nature of remittance, applicable TDS rate, and treaty provisions relied upon.

Step 4: Issue TDS Certificate

Issue a TDS certificate in Form 16A to the Italian licensor within 15 days from the due date of furnishing the quarterly TDS return (Form 27Q).

For end-to-end compliance support, our FEMA and RBI compliance team handles the entire process from documentation to remittance.

Common Disputes and Judicial Precedents

Several recurring issues arise in the context of royalty taxation under the India-Italy DTAA:

Software Payments: Royalty or Business Income?

The characterization of payments for software licenses has been extensively litigated in India. In the landmark case of Engineering Analysis Centre of Excellence Pvt. Ltd. v. CIT, the Supreme Court held that payments for copyrighted software (not the copyright itself) do not constitute royalties under the Copyright Act or the Income Tax Act. However, this ruling primarily addressed domestic law provisions, and the treaty definition of royalties may differ. For the India-Italy DTAA, the broad definition under Article 13(3) could still capture certain software-related payments as royalties.

Equipment Rental vs Service Fees

Payments for the use of industrial, commercial, or scientific equipment fall within the royalty definition under the India-Italy DTAA. Italian companies leasing equipment to Indian entities should ensure the payments are correctly classified. If the arrangement involves both equipment use and associated services, the allocation between royalty and FTS components becomes critical, as both are taxed at 20% under this treaty.

Know-How Transfers vs Consultancy

The distinction between payments for information concerning industrial, commercial, or scientific experience (royalties) and payments for consultancy services (FTS) can be contentious. Where an Italian entity provides technical know-how documentation along with consultancy support, the characterization of the composite payment requires careful analysis of the dominant nature of the transaction.

Transfer Pricing Implications

Royalty payments between associated enterprises are subject to transfer pricing scrutiny under Sections 92-92F of the Income Tax Act. Indian transfer pricing officers have increasingly challenged royalty rates exceeding industry benchmarks, arguing that excessive royalties constitute profit shifting. Italian parent companies paying royalties to or receiving royalties from Indian subsidiaries should maintain robust arm's length documentation.

Practical Examples and Calculations

Example 1: Patent License

An Italian pharmaceutical company licenses a drug patent to its Indian subsidiary. The annual royalty is INR 1,00,00,000 (INR 1 crore). Under the treaty, the Indian subsidiary withholds TDS at 20%, resulting in a tax of INR 20,00,000. Under domestic law with surcharge and cess, the effective rate would be approximately 20.8%, or INR 20,80,000. The treaty saves approximately INR 80,000.

Example 2: Trademark License

An Italian fashion house licenses its trademark to an Indian retailer for INR 50,00,000 per year. TDS at 20% under the treaty amounts to INR 10,00,000. The Italian company claims credit for this Indian tax against its IRES (Italian corporate income tax) liability, eliminating double taxation.

Example 3: Equipment Lease

An Italian engineering firm leases specialized machinery to an Indian construction company for INR 2,00,00,000 per year. The lease rental falls within the royalty definition (use of industrial equipment). TDS at 20% amounts to INR 40,00,000. The Indian payer must file Form 15CA/15CB before remitting the net amount of INR 1,60,00,000 to Italy.

Example 4: Software License

An Italian software company provides an enterprise license to an Indian IT firm for INR 75,00,000. If characterized as a royalty (use of copyright), TDS at 20% applies, resulting in INR 15,00,000 tax. However, if the payment is for a copyrighted article (shrink-wrap license) and not the copyright itself, it may not be taxable as royalty following the Supreme Court's Engineering Analysis Centre ruling. The classification requires careful legal analysis.

Frequently Asked Questions

What is the royalty withholding tax rate under the India-Italy DTAA?

The maximum withholding tax rate on royalties under Article 13(2) of the India-Italy DTAA is 20% of the gross amount. This rate applies when the recipient is the beneficial owner and is a tax resident of Italy. The rate matches the domestic withholding rate, but the treaty rate excludes surcharge and cess, providing a marginal saving.

Does the India-Italy DTAA provide any royalty tax saving over domestic rates?

The treaty rate of 20% equals the base domestic rate. However, since the treaty rate does not attract surcharge (currently 2-5% depending on income) or health and education cess (4%), the effective saving is approximately 0.8 to 1.84 percentage points. This makes claiming the treaty rate slightly more beneficial than the domestic rate.

Is the proposed Second Protocol reducing royalty rates in effect?

The Second Protocol to the India-Italy DTAA proposes reducing the royalty withholding rate to 10%. However, as of March 2026, this Protocol has not yet entered into force. Italian taxpayers should continue applying the existing 20% rate until the Protocol is ratified and effective.

Are software license payments taxable as royalties under this DTAA?

It depends on the nature of the payment. Payments for the right to use a copyright (such as software source code) are royalties under Article 13. Payments for copyrighted software as an end-user (shrink-wrap licenses) may not constitute royalties following the Supreme Court's ruling in Engineering Analysis Centre v. CIT. Each arrangement requires individual analysis.

Does the India-Italy DTAA have a make available clause for royalties?

No. The India-Italy DTAA does not contain a "make available" clause. All payments falling within the broad definition of royalties under Article 13(3) are subject to the 20% withholding rate, regardless of whether technical knowledge is transferred to or made available to the payer.

What documents does an Italian company need to claim the treaty rate?

The Italian company needs a Tax Residency Certificate from the Agenzia delle Entrate, Form 10F filed electronically on the Indian income tax portal, and a self-declaration confirming beneficial ownership and no PE connection. An Indian PAN is required for e-filing Form 10F.

How does the Italian company claim credit for Indian tax on royalties?

The Italian company claims a foreign tax credit for Indian withholding tax against its Italian IRES liability. Under Italian tax law, the credit is limited to the Italian tax attributable to the foreign-source income, preventing over-crediting. The TDS certificate (Form 16A) issued by the Indian payer serves as proof of Indian tax paid.