Royalty Tax Rate Between India and Saudi Arabia Under DTAA

Royalty Tax Rate Between India and Saudi Arabia

Under Article 12(2) of the India-Saudi Arabia 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 are taxable at a maximum rate of 10% of the gross amount. This represents a 50% reduction from India's domestic withholding rate of 20% under Section 115A of the Income Tax Act, 1961.

The India-Saudi Arabia DTAA was signed at New Delhi on 25 January 2006 and entered into force on 1 November 2006. The treaty follows a structure influenced by the UN Model Tax Convention. Both countries have signed and ratified the Multilateral Instrument (MLI), with India's MLI entering into force on 1 October 2019 and Saudi Arabia's on 1 May 2020.

A distinctive feature of the India-Saudi Arabia tax corridor is that Saudi Arabia does not levy personal income tax on individuals. For NRIs in Saudi Arabia licensing IP to Indian entities, the 10% Indian withholding is effectively the only tax on royalty income, making this one of the most tax-efficient IP licensing corridors globally. For structuring advice, our tax advisory team specializes in India-Gulf transactions.

Treaty Rate vs Domestic Rate: Detailed Comparison

India's domestic withholding tax on royalty payments to non-residents is 20% under Section 115A (plus applicable surcharge and health and education cess). The treaty rate of 10% provides substantial savings:

The effective domestic rate, after surcharge and cess, can reach approximately 20.8% to 21.84%. The treaty rate of 10% therefore saves more than 10 percentage points on every royalty payment. For a Saudi resident receiving INR 1 crore in royalties from India, the treaty saves approximately INR 10.8 to 11.84 lakh compared to the full domestic rate.

Under Section 90(2) of the Income Tax Act, a non-resident can choose the more beneficial rate between domestic law and the DTAA. The 10% treaty rate is clearly more favorable for all royalty payments to Saudi residents.

Impact of Zero Saudi Personal Income Tax

Saudi Arabia does not impose personal income tax on individuals. For NRIs receiving royalty income from India, the total tax burden is limited to the 10% Indian withholding -- no further tax in Saudi Arabia. For Saudi companies (subject to 20% corporate income tax on foreign entities' income, or Zakat for Saudi-owned entities), the Indian withholding tax can be claimed as a foreign tax credit against Saudi tax liability.

Who Qualifies for the Reduced Rate

To claim the 10% treaty rate on royalties, the recipient must satisfy these conditions:

Beneficial Ownership Requirement

The recipient must be the beneficial owner of the royalties. With the MLI in force for both countries, the Principal Purpose Test (PPT) applies. Treaty benefits can be denied if one of the principal purposes of an arrangement was to obtain the treaty benefit. Saudi holding companies or SPVs without genuine economic substance may face challenges. The growing PIF (Public Investment Fund) portfolio investments in India make this test particularly relevant for sovereign-linked entities.

Tax Residency in Saudi Arabia

The recipient must be a tax resident of Saudi Arabia as certified by ZATCA (Zakat, Tax and Customs Authority). A valid Tax Residency Certificate (TRC) is mandatory. For individuals, residency requires a valid iqama and physical presence in Saudi Arabia for at least 183 days. For companies, a valid Commercial Registration (CR) and Saudi tax registration are needed.

No PE Connection

The royalty must not be effectively connected with a permanent establishment that the Saudi entity maintains in India. If the IP is connected with an Indian PE, the income is taxed as business profits under Article 7 at regular corporate rates.

Absence of FTS Article: A Unique Feature

The India-Saudi Arabia DTAA does not contain a separate article on Fees for Technical Services. This is unusual among Indian DTAAs. When royalties are mixed with service elements, the characterization becomes critical: if the payment qualifies as royalty under Article 12, the 10% rate applies; if it is FTS-like but there is no FTS article, the payment may fall under business profits (Article 7, taxable only with PE) or under domestic law.

Royalty-Specific Treaty Provisions

Article 12 of the India-Saudi Arabia DTAA governs royalty taxation:

Definition of Royalties

Under Article 12(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 covers the full spectrum of intellectual property licensing, know-how transfers, and equipment rentals. It is broadly aligned with the UN Model Convention definition.

Source Rule

Under Article 12(5), royalties are deemed to arise in a Contracting State when the payer is a resident of that State. Where the royalty is connected with a PE in a State and is borne by that PE, the royalty is deemed to arise in the State where the PE is situated. This establishes India's right to tax royalties paid by Indian companies to Saudi licensors.

No FTS Article: Royalty vs Service Characterization

The absence of an FTS article creates a unique dynamic. Payments that in other treaties would be split between royalties (Article 12/13) and FTS (separate article) must be fully characterized under the India-Saudi Arabia DTAA. If a payment is for the use of IP, it is a royalty at 10%. If it is for services that do not involve IP use, it falls under business profits (Article 7, taxable only with PE) or potentially under India's domestic FTS provisions at 10% under Section 115A. This creates both opportunities and risks.

Interaction with Capital Gains

Outright sale of IP (transfer of ownership) is not a royalty but a capital gain under Article 13. The distinction between ongoing royalty payments (periodic payments for use) and lump-sum payments for complete IP transfer requires careful analysis, especially in technology acquisition transactions between Indian and Saudi entities.

Documentation Required

Saudi residents claiming the 10% treaty rate must provide:

Tax Residency Certificate (TRC)

A valid TRC from ZATCA (Zakat, Tax and Customs Authority) confirming Saudi tax residency. For individuals, this requires a valid iqama and 183-day presence test. For companies, Commercial Registration and ZATCA tax registration are required. Processing time: 2-4 weeks. Documents in Arabic must be accompanied by a certified English translation.

Form 10F

Form 10F filed electronically on the Indian Income Tax portal with prescribed particulars. An Indian PAN is required for electronic filing. The form includes the taxpayer's Saudi TIN (tax identification number issued by ZATCA).

Self-Declaration

A self-declaration confirming beneficial ownership of the royalty income, no PE in India, and genuine commercial purpose. With the MLI's PPT applicable, the declaration should address the business rationale for the IP licensing arrangement.

License Agreement

A copy of the IP license agreement detailing the nature of the IP, scope of rights granted, territory, duration, and royalty calculation methodology. This supports both the royalty characterization and transfer pricing compliance for related-party transactions.

Withholding Procedure for Indian Payers

Indian entities paying royalties to Saudi licensors must follow Section 195 procedures:

Step 1: Verify Treaty Eligibility

Collect and verify the TRC from ZATCA, Form 10F, and self-declaration. Confirm that the Saudi entity is the beneficial owner and has no PE in India connected with the royalty.

Step 2: Deduct TDS at 10%

Deduct tax at 10% on the gross royalty amount. The treaty rate does not attract surcharge or cess. Deposit TDS within 7 days of the end of the month in which the deduction is made.

Step 3: File Form 15CA/15CB

File Form 15CA electronically before the remittance. For amounts exceeding INR 5 lakh, obtain Form 15CB from a Chartered Accountant citing Article 12(2) of the India-Saudi Arabia DTAA as the basis for the 10% rate.

Step 4: Quarterly Returns and Certificates

File quarterly TDS return in Form 27Q and issue Form 16A to the Saudi licensor within 15 days of the quarterly return due date.

For Saudi companies and NRIs establishing operations in India, our FEMA and RBI compliance team handles end-to-end cross-border payment compliance.

Common Disputes and Judicial Precedents

Key disputes in royalty taxation under the India-Saudi Arabia corridor:

Royalty vs FTS: The Classification Challenge

With no FTS article in the treaty, the classification of payments becomes critical. Indian tax authorities may attempt to characterize service-related payments as royalties under Article 12 to apply the 10% source tax. Conversely, Saudi service providers may argue that their income is business profits under Article 7 (not taxable without PE). Key judicial precedents from other treaty contexts provide guidance:

• Payments for standard software (shrink-wrap licenses) may not constitute royalties following the Supreme Court's Engineering Analysis Centre ruling
• Payments for equipment use with operator services require apportionment between royalty and service elements
• Know-how documentation transfers are royalties; ongoing technical support services are not

Transfer Pricing on Related-Party Royalties

Royalty payments between Saudi parent companies and Indian subsidiaries are subject to transfer pricing scrutiny under Sections 92-92F. The Indian Transfer Pricing Officer may benchmark the royalty rate against comparable uncontrolled transactions and challenge rates that exceed industry norms. Saudi companies with significant Indian operations through PIF investments or joint ventures should maintain robust arm's length documentation.

Equipment Rental Characterization

Saudi construction and engineering companies deploying equipment to Indian infrastructure projects face the question of whether equipment rental payments constitute royalties (10% tax under Article 12) or business income (Article 7, taxable only with PE). Given the 182-day construction PE threshold in this treaty, equipment deployments for shorter periods may benefit from the 10% royalty rate rather than triggering a PE.

PE vs Royalty: Dual Exposure Risk

If a Saudi entity both licenses IP to an Indian entity and provides services that create a PE in India, the tax authority may argue that the royalty is "effectively connected" with the PE, removing it from Article 12 and subjecting it to higher business profit taxation under Article 7. Saudi entities should ensure clear separation between their IP licensing and service provision activities in India.

Practical Examples and Calculations

Example 1: Technology Patent License

A Saudi technology company licenses a patented manufacturing process to an Indian chemical company for INR 2,00,00,000 annually. Under the treaty, TDS at 10% is INR 20,00,000. Under domestic law (approximately 20.8% with surcharge and cess), the tax would be INR 41,60,000. The treaty saves INR 21,60,000. Since Saudi Arabia has no personal income tax, an individual Saudi licensor pays only 10% total tax on this income.

Example 2: Franchise Agreement

A Saudi restaurant chain licenses its brand, trademarks, and operational know-how to an Indian franchisee. The annual royalty is 5% of net sales, amounting to INR 75,00,000. TDS at 10% is INR 7,50,000. The payment covers trademark use (clearly royalty) and operational support (potentially services). Since there is no FTS article, the entire payment characterized as royalty benefits from the 10% rate.

Example 3: Oil and Gas Technology

A Saudi petrochemical company licenses proprietary drilling technology to an Indian energy company. The lump-sum license fee is INR 5,00,00,000. TDS at 10% is INR 50,00,000. If the Saudi company also provides ongoing technical support personnel in India for more than 182 days, a service PE may be triggered, potentially reclassifying the royalty as PE-connected income taxable at corporate rates.

Example 4: NRI IP Licensing

An NRI residing in Saudi Arabia owns a patent registered in India. They license the patent to an Indian company for INR 30,00,000 per year. TDS at 10% is INR 3,00,000. Since Saudi Arabia charges no personal income tax, the NRI's total tax on this income is INR 3,00,000 (effective rate: 10%). Under domestic law without the treaty, the NRI would have paid approximately INR 6,24,000 (20.8%).

Frequently Asked Questions

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

The maximum withholding tax rate on royalties under Article 12(2) of the India-Saudi Arabia DTAA is 10% of the gross amount. This applies when the recipient is the beneficial owner and is a tax resident of Saudi Arabia as certified by ZATCA.

Does the absence of FTS article affect royalty taxation?

Yes, significantly. Since there is no separate FTS article, payments that combine IP licensing and service elements must be carefully characterized. If the payment qualifies as a royalty under Article 12, the 10% rate applies. If it is a pure service fee, it falls under business profits (Article 7, taxable only with PE) or domestic law provisions.

How does Saudi Arabia's zero personal income tax affect the effective rate?

For individuals (including NRIs) in Saudi Arabia, the 10% Indian withholding is the only tax on royalty income. The total effective tax rate is just 10%, making this one of the most tax-efficient IP licensing corridors globally. Saudi companies pay corporate income tax at 20% but can claim the Indian withholding as a foreign tax credit.

What documents are needed from ZATCA for claiming treaty benefits?

A Tax Residency Certificate from ZATCA confirming Saudi residency. Individuals need a valid iqama and 183-day presence evidence. Companies need Commercial Registration and ZATCA tax registration. Processing takes 2-4 weeks. Arabic documents require certified English translations.

Does the MLI affect royalty taxation under this treaty?

Yes. Both India and Saudi Arabia have ratified the MLI. The Principal Purpose Test applies, meaning treaty benefits can be denied for arrangements primarily designed to access the 10% rate without genuine commercial purpose. Saudi entities must demonstrate real economic substance.

Can equipment rental payments qualify for the 10% royalty rate?

Yes. Payments for the use of industrial, commercial, or scientific equipment fall within the royalty definition under Article 12(3). Saudi construction and engineering companies leasing equipment to Indian projects can benefit from the 10% rate, provided no service PE is triggered.

Is the 10% rate better than the domestic rate under Section 115A?

Yes. Section 115A prescribes a domestic rate of 20% on royalties (10% for agreements approved before 1 June 2005, but most current agreements are at 20%). The treaty rate of 10% is substantially lower, saving at least 10 percentage points. Additionally, surcharge and cess do not apply to the treaty rate.