Royalty Tax Rate Between India and Malaysia Under DTAA

Quick answer: Under the India-Malaysia DTAA, royalties are capped at 10% under Article 12(2), versus India's domestic rate of 20% under section 207(2) (Table, Sl. No. 1) of the Income-tax Act, 2025 (section 115A of the Income-tax Act, 1961) -- a 50% reduction. Article 12(3) defines royalties to cover copyright, patents, trademarks, designs, secret formulas, industrial/commercial/scientific equipment, and know-how -- but does not name computer software, so standard software payments are generally not royalties following the Supreme Court's Engineering Analysis ruling. The treaty was signed 9 May 2012, entered into force 26 December 2012, and became effective in India from 1 April 2013.

Key takeaways:

• Flat 10% DTAA royalty rate vs 20% domestic rate -- a 50% reduction
• Article 12(3)'s definition of royalties is a closed list: copyright, patents, trademarks, designs, models, plans, secret formulas or processes, industrial/commercial/scientific equipment, and know-how -- software is not named
• Royalties effectively connected with a permanent establishment or fixed base fall outside the 10% cap and are taxed as business profits instead
• Article 12(6) caps the treaty rate at the arm's length amount -- any excess paid because of a special relationship between payer and recipient is taxed under domestic law
• The MLI's Principal Purpose Test applies to this treaty in India from 1 April 2022, and Labuan entities lose treaty benefits unless they elect into ordinary Malaysian income tax

Royalty Tax Rate Between India and Malaysia

Article 12 of the India-Malaysia DTAA -- signed 9 May 2012 at Putrajaya, in force from 26 December 2012, and effective in India from 1 April 2013 -- caps the withholding tax on royalty payments at 10% of the gross amount, compared to the Indian domestic rate of 20% under section 207(2) (Table, Sl. No. 1) of the Income-tax Act, 2025 (section 115A of the Income-tax Act, 1961).

This rate applies to Malaysian companies licensing patents, trademarks, or industrial know-how to Indian licensees, and to Indian companies licensing intellectual property to Malaysian entities. It is one of the more common ways cross-border groups structure intra-group charges for the use of brand names, manufacturing processes, and equipment between the two countries.

Treaty Rate vs Domestic Rate: Detailed Comparison

Domestic Rate (Without DTAA)

Under Indian domestic law, royalties paid to a non-resident are taxed at 20% (plus applicable surcharge and cess) under section 207(2) (Table, Sl. No. 1) of the Income-tax Act, 2025 (section 115A of the Income-tax Act, 1961) -- a rate that doubled from 10% following the Finance Act 2023.

DTAA Rate (With Treaty)

Article 12(2) of the India-Malaysia DTAA provides that "the tax so charged shall not exceed 10 per cent of the gross amount of the royalties," provided the recipient is the beneficial owner. This is a 50% reduction from the domestic rate, applied uniformly across every category of royalty the treaty covers -- there is no separate, lower tier for any specific type of royalty.

Effective Tax Savings

For a Malaysian licensor receiving INR 40 lakh in royalties from an Indian licensee for the use of a patented manufacturing process, the treaty reduces withholding from INR 8 lakh (at 20%) to INR 4 lakh (at 10%) -- a saving of INR 4 lakh, provided the licensor holds valid treaty documentation.

Article 12(3): Definition of Royalties

Article 12(3) defines "royalties" as "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 television or radio broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for the use of, or the right to use, industrial, commercial or scientific equipment, or for information (know-how) concerning industrial, commercial or scientific experience." This is a closed, enumerated list -- it does not separately name computer software or software licences.

Software Payments

Because software is not named in Article 12(3)'s definition, payments for the supply of standard (shrink-wrapped) software are generally not treated as royalties following the Supreme Court's ruling in Engineering Analysis Centre of Excellence v. CIT (2021), which held that such payments do not constitute royalty income where no copyright rights are transferred to the end user. Customised software development, or a licence that transfers rights in the underlying copyright (rather than merely a right to use a copy), may still be analysed as royalty income depending on the specific terms of the arrangement -- this is a fact-specific determination, not a blanket rule either way.

Who Qualifies for the Reduced Rate

Beneficial Ownership

The 10% cap is available only where the recipient is the beneficial owner of the royalty -- a conduit or nominee licensing arrangement does not qualify. Genuine economic substance in the licensing entity is essential, particularly given the MLI's Principal Purpose Test discussed below.

Article 12(4): Permanent Establishment Exception

Article 12(4) removes the 10% cap where the beneficial owner carries on business in the state where the royalty arises through a permanent establishment, or performs independent personal services from a fixed base there, and the right or property generating the royalty is effectively connected with that PE or fixed base. In that case the royalty is taxed as business profits under Article 7 (or under Article 15) on a net basis at ordinary rates, rather than at the 10% capped rate on the gross amount.

Article 12(5): Source Rule

Article 12(5) provides that "royalties shall be deemed to arise in a Contracting State when the payer is a resident of that State" -- a straightforward payer-residence source rule that determines which country's 10% cap (or domestic law, absent the treaty) governs a given royalty payment.

Article 12(6): Arm's Length Rule

Where a special relationship between the payer and the beneficial owner (for example, in an intra-group licence) inflates the royalty above what independent parties would have agreed, Article 12(6) limits the treaty's 10% cap to the arm's length portion. The excess amount remains taxable under each state's domestic law and, on the Indian side, can also trigger transfer pricing scrutiny and a disallowance of the excess as a deduction for the Indian licensee.

Anti-Abuse Rules: MLI PPT and the Labuan Carve-Out

Both India and Malaysia list this treaty as a Covered Tax Agreement under the Multilateral Instrument (MLI). Because of India's Article 35 substitution, the MLI's Principal Purpose Test (PPT) applies in India from 1 April 2022 for this treaty -- the 10% cap can be denied where obtaining the reduced rate was one of the principal purposes of a licensing arrangement lacking genuine economic substance. Separately, clause 2 of the Protocol signed alongside the Agreement denies treaty benefits to Malaysian entities taxed under the Labuan Business Activity Tax Act 1990, unless they irrevocably elect into the ordinary Malaysian Income Tax Act 1967 -- relevant wherever IP-holding structures are routed through Labuan.

Documentation Required to Claim the Reduced Rate

Tax Residency Certificate (TRC)

A Tax Residency Certificate from the Inland Revenue Board of Malaysia (LHDN), covering the relevant year, is the foundational document for a Malaysian licensor claiming the 10% rate.

Form 41 (formerly Form 10F)

Form 41 must be filed electronically on the Indian Income Tax e-filing portal, stating the licensor's name, status, Malaysian tax identification number, period of residence, and the nature of the royalty income.

Self-Declaration, No-PE Certificate, and Licence Agreement

A self-declaration of beneficial ownership, confirmation that the licence is not effectively connected with a permanent establishment in India, and a copy of the underlying licence or technology-transfer agreement round out the standard documentation, and support the arm's length analysis under Article 12(6) if the payment is later questioned.

Withholding Procedure for Indian Payers

Section 393(2): TDS Obligation

The Indian licensee must deduct tax at source under section 393(2) of the Income-tax Act, 2025 (Table, Sl. No. 17; section 195 of the Income-tax Act, 1961), applying the 10% treaty rate once the licensor's documentation is on file.

Forms 145 and 146

The Indian payer must file Form 145 (formerly Form 15CA) electronically before remittance, and obtain Form 146 (formerly Form 15CB) from a chartered accountant where the remittance exceeds INR 5 lakh.

Section 395(1): Lower Withholding Certificate

Where the payer cannot apply the treaty rate directly, the Malaysian licensor can apply to the Indian Assessing Officer under section 395(1) of the Income-tax Act, 2025 (section 197 of the Income-tax Act, 1961) for a certificate authorising withholding at the certified lower or nil rate.

RBI and FEMA Compliance for Royalty Remittances

Royalty and technical-know-how payments from an Indian company to a foreign licensor -- including a Malaysian licensor -- are remitted under the automatic route for current-account transactions, and do not require prior Reserve Bank of India approval provided the payment is genuinely for the use of intellectual property or know-how under a bona fide licence or technology-transfer agreement. The Indian authorised dealer bank processing the remittance will typically require the licence agreement, a certificate under section 393(2) confirming the applicable withholding, and Forms 145 and 146 (formerly Forms 15CA and 15CB) before releasing funds. Where the royalty is paid to a related party (common in intra-group technology-licensing arrangements), the arm's length requirement under Article 12(6) and India's domestic transfer pricing rules both apply, and supporting benchmarking documentation is prudent even where the payment appears reasonable on its face.

How Malaysia's Royalty Article Compares

The 10% cap under the India-Malaysia treaty sits toward the lower end of India's royalty rates, alongside treaties such as Germany's, and below the higher rates found in some older agreements that have not been renegotiated. Where the India-Malaysia treaty differs structurally is in keeping fees for technical services entirely separate, under Article 13, rather than folding them into the same article and rate as royalties -- some of India's treaties combine the two into a single provision. Because both are capped at the same 10%, the practical rate outcome is often similar, but the separate article matters for classification disputes: a payment that fails the royalty definition in Article 12(3) may still be caught by the broader managerial/technical/consultancy definition in Article 13(3), since Malaysia's FTS article, unlike some other treaties, carries no 'make available' requirement.

Practical Example

An Indian manufacturer pays a Malaysian licensor INR 25 lakh per year for the right to use a patented industrial process. With a valid TRC and Form 41 on file, and no PE connecting the licence to India, withholding is capped at 10% under Article 12(2): INR 2.5 lakh, instead of the 20% domestic rate (INR 5 lakh) -- a saving of INR 2.5 lakh. If the same payment were instead for a standard, off-the-shelf software licence with no copyright rights transferred, it would likely fall outside the definition of royalty altogether under the Engineering Analysis line of cases, and be analysed instead as business income taxable only if the Malaysian licensor has a permanent establishment in India.

For the full treaty text and every other income category, see our India-Malaysia DTAA complete guide and the withholding tax rates summary for India to Malaysia.

Frequently Asked Questions

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

Article 12(2) caps the withholding tax on royalties at 10% of the gross amount, provided the recipient is the beneficial owner. The domestic Indian rate without the treaty is 20% under section 207(2) (Table, Sl. No. 1) of the Income-tax Act, 2025.

Are software payments covered as royalties under Article 12?

Article 12(3) does not name computer software in its definition. Following the Supreme Court's Engineering Analysis ruling, payments for standard software where no copyright rights are transferred are generally not treated as royalty. Customised software or licences transferring underlying copyright rights may be assessed differently on their specific facts.

What happens if the royalty is connected to a permanent establishment in India?

Article 12(4) removes the 10% cap where the royalty is effectively connected with a permanent establishment or fixed base the Malaysian licensor has in India. The royalty is then taxed as business profits under Article 7 on a net basis at ordinary corporate rates.

Can the Indian tax authority challenge an inflated royalty rate?

Yes. Article 12(6) limits the 10% treaty cap to the arm's length amount where a special relationship between payer and recipient has inflated the royalty. The excess is taxable under domestic law and may also trigger transfer pricing adjustment.

What documentation does a Malaysian licensor need?

A Tax Residency Certificate from the Inland Revenue Board of Malaysia (LHDN), Form 41 (formerly Form 10F) filed electronically, a self-declaration of beneficial ownership and no PE in India, and a copy of the licence agreement.

How does the MLI affect royalty taxation under this treaty?

Since 1 April 2022, the MLI's Principal Purpose Test applies to this treaty in India and can deny the 10% rate where obtaining the benefit was a principal purpose of a licensing arrangement lacking genuine economic substance.