Royalty Tax Rate Between India and the Netherlands Under DTAA

Royalty Tax Rate Between India and the Netherlands

Under Article 12(2) of the India-Netherlands Double Taxation Avoidance Agreement (DTAA), royalties arising in India and paid to a resident of the Netherlands are subject to a maximum withholding tax of 10% of the gross amount, provided the recipient is the beneficial owner. This represents a significant saving over the domestic rate of 20% (plus surcharge and health and education cess, effectively approximately 21.84%) under section 207(2) (Table, Sl. Nos. 1 and 2) of the Income-tax Act, 2025 (section 115A of the Income-tax Act, 1961).

The India-Netherlands DTAA (see our India-Netherlands DTAA overview for the full rate summary) was signed on 30 July 1988 and entered into force on 21 January 1989, taking effect in India for fiscal years beginning on or after 1 April 1989. The uniform 10% rate now found in Article 12 is not the rate originally agreed in 1988 (which was tiered at 20%/15%): it was introduced by Notification S.O. 693(E) dated 30 August 1999, implementing the Protocol's most-favoured-nation clause with effect from 1 April 1997. A further Protocol signed in 2012 updated the exchange-of-information provisions, and the treaty is now further modified by the Multilateral Instrument (MLI), with MLI provisions effective from FY 2020-21. For cross-border royalty payments involving Indian payers and Dutch recipients, this treaty remains one of the most relevant instruments for reducing source-country withholding tax.

Notably, Article 12 of the India-Netherlands DTAA covers both royalties and fees for technical services (FTS) within the same article, which departs from both the OECD and the UN Model, neither of which places fees for technical services in the royalties article. The definition of royalties sits in Article 12(4) and covers payments for the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematograph films, any patent, trade mark, design or model, plan, secret formula or process, and information concerning industrial, commercial or scientific experience. Unlike many of India's other treaties, it does not extend to payments for the use of industrial, commercial or scientific equipment.

Treaty Rate vs Domestic Rate: Detailed Comparison

India's domestic withholding tax on royalties paid to non-residents is 20% under section 393(2) (Table, Sl. No. 17; section 195 of the Income-tax Act, 1961) read with section 207(2) (Table, Sl. Nos. 1 and 2) of the Income-tax Act, 2025. When surcharge and health and education cess are added, the effective rate reaches approximately 21.84% for non-resident companies.

The treaty benefit amounts to a reduction of approximately 11.84 percentage points on every royalty payment. For technology-driven industries where royalty payments are substantial, this translates into significant cost savings. Indian companies licensing IP from Dutch entities, or paying for the use of patented processes, can save considerably by availing the treaty rate.

Definition of Royalties Under Article 12(4)

Article 12(4) of the India-Netherlands DTAA 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, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience. The list is exhaustive, and its boundary matters: equipment hire is absent from it, so payments for the use of industrial, commercial or scientific equipment are not royalties under this treaty even though Indian domestic law treats them as such. Article 12(3) leaves the mode of application of the 10% cap to be settled by mutual agreement between the competent authorities.

Who Qualifies for the Reduced Rate

To claim the 10% treaty rate on royalties, the Dutch recipient must satisfy the following requirements:

• Tax Residency: The royalty recipient must be a tax resident of the Netherlands, evidenced by a valid Tax Residency Certificate (TRC) issued by the Belastingdienst (Dutch Tax Authority). The TRC must cover the period during which the royalty payments are made.
• Beneficial Ownership: The recipient must be the beneficial owner of the royalties. In substance, this means the recipient must have the genuine right to use and enjoy the royalty income without any obligation to pass it on to a third party. Conduit arrangements where a Dutch entity merely receives royalties and onward-pays them to a parent in another jurisdiction are susceptible to challenge.
• No PE Connection: The right or property in respect of which the royalties are paid must not be effectively connected with a permanent establishment (PE) that the Dutch resident has in India. If the IP is attributable to an Indian PE, the royalties are taxed as business profits under Article 7 at regular corporate tax rates.
• Limitation on Benefits (LOB): Post-MLI, the Principal Purpose Test (PPT) applies. If one of the principal purposes of any arrangement was to obtain treaty benefits, those benefits may be denied under Article 7 of the MLI.

Beneficial Ownership and Substance Requirements

Indian tax authorities have increasingly scrutinized beneficial ownership claims in royalty structures involving Dutch entities. The key question is whether the Dutch entity has the requisite economic substance and genuine decision-making authority over the IP. Shell companies or entities that merely sub-license IP from a parent in a third country are at risk of having their treaty benefits denied. The ITAT has held in several cases that the beneficial owner must be the entity that bears the economic risk and reward associated with the IP, not merely the legal owner or licensor.

Royalty-Specific Treaty Provisions

Article 12(1): Residence Country Taxation

Royalties arising in India and paid to a resident of the Netherlands may be taxed in the Netherlands. This ensures the residence country retains the right to include the royalty in the Dutch entity's taxable income.

Article 12(2): Source Country Cap at 10%

Such royalties may also be taxed in India, but if the beneficial owner is a resident of the Netherlands, the tax shall not exceed 10% of the gross amount. This is the primary rate-limiting provision that delivers the treaty benefit.

Article 12(4): Definition of Royalties

This paragraph provides the exhaustive definition of "royalties", covering copyright (including cinematograph films), patent, trade mark, design, model, plan, secret formula or process, and information concerning industrial, commercial or scientific experience. Equipment hire is deliberately absent from the list.

Article 12(7): PE Exception

If the beneficial owner carries on business in India through a PE, or performs independent personal services from a fixed base in India, and the right or property generating the royalty is effectively connected with that PE or fixed base, Article 12 does not apply. Instead, the royalty income is dealt with under Article 7 or Article 14, taxable as business profits, typically at the 35% rate applicable to foreign companies in India.

Article 12(9): Special Relationship (Arm's Length) Provision

Where a special relationship between the payer and beneficial owner (or between both of them and a third person) causes the royalty to exceed the arm's length amount, the treaty cap of 10% applies only to the arm's length amount. The excess is taxable according to the domestic law of each country. This provision works in tandem with India's transfer pricing rules in sections 161 to 173 of the Income-tax Act, 2025 (sections 92 to 92F of the Income-tax Act, 1961).

Documentation Required

Claiming the 10% treaty rate on royalties requires the following documentation:

1. Tax Residency Certificate (TRC): Issued by the Belastingdienst, confirming the Dutch entity's tax residency for the relevant period. Must contain the name, incorporation details, TIN, period of residency, and address.
2. Form 41 (formerly Form 10F): An electronic self-declaration filed by the non-resident on the Indian income tax portal. It captures details such as the basis of tax residency (incorporation, place of management) and confirms that the recipient's income is subject to tax in the Netherlands.
3. Beneficial Ownership Declaration: A self-declaration confirming that the Dutch entity is the beneficial owner of the royalty income, has the right to use and enjoy it, and is not acting as a conduit, agent, or nominee.
4. No PE Declaration: A declaration that the IP or right generating the royalty is not effectively connected with any PE the Dutch entity maintains in India.
5. Royalty/License Agreement: The underlying agreement evidencing the nature of the IP, the payment terms, the royalty rate, and the territory covered. Indian tax authorities may examine the agreement to verify that the payment genuinely qualifies as a "royalty" under Article 12(4).

Withholding Procedure for Indian Payers

Indian entities paying royalties to Dutch residents must comply with the following obligations under section 393(2) (Table, Sl. No. 17):

Step 1: Collect Treaty Documentation

Before making the royalty payment, the Indian payer must obtain the TRC, Form 41, beneficial ownership declaration, and no-PE declaration from the Dutch recipient. Without these documents, the payer must withhold at the domestic rate of 20% plus surcharge and cess.

Step 2: Determine Applicable Rate

If the documentation is complete, TDS is deducted at 10% on the gross royalty amount. Under section 159(4) of the Income-tax Act, 2025 (section 90(2) of the Income-tax Act, 1961), the taxpayer is entitled to apply the treaty rate or the domestic rate, whichever is lower. Since the treaty rate (10%) is lower than the domestic rate (~21.84%), the treaty rate applies.

Step 3: File Forms 145 and 146 (formerly Forms 15CA and 15CB)

For remittance of royalties to the Netherlands, the Indian payer must electronically file Form 145 as a declaration to the income tax department. If the remittance exceeds INR 5 lakh, a Chartered Accountant's certificate in Form 146 is mandatory, certifying the nature of the payment, applicable tax rate, and the treaty provisions relied upon.

Step 4: TDS Deposit and Return Filing

The deducted TDS must be deposited with the government by the 7th of the following month (30 April for March payments). Quarterly TDS returns must be filed in Form 144 (formerly Form 27Q), reporting all payments made to non-residents and the TDS deducted thereon.

Step 5: Issue TDS Certificate

Form 16A (TDS certificate) must be issued to the Dutch recipient within 15 days from the due date of filing the quarterly TDS return. This certificate is essential for the Dutch entity to claim foreign tax credit in the Netherlands.

Common Disputes and Judicial Precedents

Software Payments: Royalty or Business Profits?

The characterization of payments for software licenses has been one of the most contentious issues under the India-Netherlands DTAA. Indian tax authorities have frequently treated software license fees as "royalties" under Article 12, particularly when the payment involves the use of copyrighted software. However, the Supreme Court's landmark decision in Engineering Analysis Centre of Excellence Pvt. Ltd. v. CIT (2021) decided a batch of appeals spanning several of India's tax treaties and held that payments for shrink-wrap and off-the-shelf software are not royalties, because the distributor or end-user acquires only a limited licence to use the program and no part of the copyright is parted with. The reasoning turns on treaty royalty definitions worded like Article 12(4) here, so it applies directly to software payments made to Dutch licensors.

Equipment Rentals Are Outside the Royalty Article

Payments for the use of industrial, commercial or scientific equipment do not fall within the Article 12(4) royalty definition in this treaty. Equipment hire charges paid to a Dutch lessor are therefore business profits under Article 7, taxable in India only if the Dutch enterprise has a permanent establishment here to which the income is attributable. That is a real divergence from domestic law, where the domestic royalty definition in section 9(6)(b)(v) of the Income-tax Act, 2025 (Explanation 2(iva) to section 9(1)(vi) of the Income-tax Act, 1961) expressly treats consideration for the use of industrial, commercial or scientific equipment as a royalty chargeable under section 207(2) at 20% plus surcharge and cess. A Dutch lessor without an Indian PE can rely on section 159(4) to displace that domestic charge altogether, subject to the usual TRC, Form 41 and beneficial-ownership documentation and to the MLI principal purpose test. Where equipment is supplied together with operators and the Dutch entity retains operational risk, the payment is in any event a service fee rather than a rental, and must be tested against the Article 12(5) make-available standard for fees for technical services.

Transfer Pricing Adjustments on Royalties

Royalty payments to related Dutch entities are frequently subject to transfer pricing scrutiny by the Indian Transfer Pricing Officer (TPO). The TPO may benchmark the royalty rate against comparable uncontrolled transactions (CUP method) or examine whether the royalty payment is justified given the actual benefit derived by the Indian entity. If the royalty rate exceeds the arm's length rate, Article 12(9) withdraws the 10% treaty cap from the excess, and the excess may be disallowed under the domestic transfer pricing provisions.

MFN Clause and Its Implications

Clause IV of the Protocol signed alongside the 1988 convention contains a Most Favoured Nation (MFN) clause: if India later limits its source taxation of dividends, interest, royalties or fees for technical services to a lower rate or a more restricted scope in a treaty with another OECD member, the same treatment is to be extended to Dutch residents. India acted on that clause once. Notification S.O. 693(E) dated 30 August 1999 is what brought the Article 12 rate down to a uniform 10% with effect from 1 April 1997, and the present royalty definition and the make-available test for fees for technical services have applied from 1 April 1998. Taxpayers later argued that benefits in treaties with states that joined the OECD only after 1988 should flow through automatically as well, but the Supreme Court in Assessing Officer (International Taxation) v. Nestle SA (19 October 2023) held that an MFN clause is not self-executing: a separate notification under section 159(1) of the Income-tax Act, 2025 (section 90(1) of the Income-tax Act, 1961) is required, and the third State must have been an OECD member when India concluded the treaty being relied on. No notification beyond the 1999 one has been issued, so 10% remains the royalty rate.

Practical Examples and Calculations

Example 1: Patent Licensing

A Dutch pharmaceutical company licenses a patented drug formulation to an Indian manufacturer at a royalty rate of 5% of net sales. Annual net sales of the product in India are INR 50 crore, resulting in royalty payable of INR 2.5 crore.

Example 2: Software License

An Indian IT company pays EUR 500,000 annually to a Dutch software company for an enterprise software license. Assuming EUR 1 = INR 90, the royalty is INR 4.5 crore.

Example 3: Related-Party Royalty with TP Adjustment

A Dutch parent company licenses its brand name to its Indian subsidiary at a royalty rate of 8% of revenue. The Indian TPO determines that the arm's length rate is 3%. On revenue of INR 200 crore, the contracted royalty is INR 16 crore, while the arm's length royalty is INR 6 crore. Under Article 12(9) the 10% treaty cap applies only to the arm's length amount (INR 6 crore); the excess of INR 10 crore is taxed according to the domestic law of each State. In India that means the excess is disallowed as a deduction in computing the Indian subsidiary's income, and if the corresponding funds are not repatriated to India within the prescribed period, a secondary adjustment under Section 170 of the Income-tax Act, 2025 (section 92CE of the Income-tax Act, 1961) deems the excess an advance to the associated enterprise on which imputed interest is charged.

Frequently Asked Questions

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

The royalty withholding tax rate is capped at 10% of the gross amount under Article 12(2) of the India-Netherlands DTAA, compared to the domestic rate of approximately 21.84% (20% plus surcharge and cess) under section 207(2) of the Income-tax Act, 2025 (section 115A of the Income-tax Act, 1961).

Does the India-Netherlands DTAA contain a "make available" clause for royalties?

No. The "make available" clause in the India-Netherlands DTAA applies specifically to fees for technical services under Article 12(5), not to royalties. Royalty payments are governed by the 10% cap in Article 12(2) and the definition in Article 12(4), without any "make available" requirement.

Are software license payments considered royalties under this treaty?

It depends on the nature of the payment. Following the Supreme Court's 2021 ruling in Engineering Analysis Centre, payments for off-the-shelf software licenses are generally not considered royalties. However, payments involving the transfer or grant of copyright in software (such as the right to modify, reproduce or distribute the source code) may still qualify as royalties under Article 12(4).

What happens if the royalty rate in a related-party transaction exceeds arm's length?

Under Article 12(9), the treaty rate of 10% applies only to the arm's length amount. The excess is taxable according to domestic law and may also be disallowed as a deduction for the Indian payer under transfer pricing provisions.

Can the MFN clause reduce the royalty rate below 10%?

Following the Supreme Court's October 2023 ruling, the MFN clause does not operate automatically. A separate notification under section 159(1) of the Income-tax Act, 2025 (section 90(1) of the Income-tax Act, 1961) is required to extend lower rates from other treaties. No such notification has been issued for royalties, so the 10% rate remains applicable.

What is the difference between royalties and FTS under the India-Netherlands DTAA?

Royalties under Article 12(4) cover payments for the use of IP rights such as copyrights, patents, trade marks, designs and secret formulas or processes, and payments for information concerning industrial, commercial or scientific experience; equipment hire is not covered by this treaty's definition. FTS under Article 12(5) covers payments for services that "make available" technical knowledge, experience, skill, or know-how. Both are taxed at 10%, but the definitional requirements differ significantly. The "make available" test for FTS is more restrictive, requiring the service recipient to be able to independently use the transferred knowledge.

Do I need to file Forms 145 and 146 for royalty remittances to the Netherlands?

Yes. For all remittances of royalties to the Netherlands, the Indian payer must file Form 145 electronically. If the remittance exceeds INR 5 lakh, Form 146 (a Chartered Accountant's certificate) is also mandatory.