India-South Korea DTAA: Royalty Tax Rate Under Article 12

Royalty Tax Rate Between India and South Korea

The India-South Korea Double Taxation Avoidance Agreement (DTAA) was comprehensively revised and re-signed on 18 May 2015, replacing the earlier 1985 treaty. The revised agreement entered into force on 12 September 2016 and applies in India from FY 2017-18 onwards. Under Article 12 of the revised treaty, royalties arising in one Contracting State and paid to a beneficial owner resident in the other Contracting State are subject to a maximum withholding tax rate of 10% of the gross amount.

This represents a significant reduction from the old treaty's royalty rate of 15%. The revised rate of 10% was introduced specifically to encourage cross-border technology transfer, IP licensing, and investment flows between India and South Korea. Combined with the Finance Act 2023 increase of India's domestic royalty rate to 20% 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 treaty rate now delivers savings exceeding 10% on every royalty payment.

South Korea's advanced technology sector — spanning semiconductors, automotive, consumer electronics, and shipbuilding — generates substantial royalty flows to India. The reduced rate under the revised DTAA is particularly significant for Korean conglomerates (chaebols) licensing technology to Indian subsidiaries and joint ventures.

Treaty Rate vs Domestic Rate: Detailed Comparison

The combined effect of the treaty revision and the domestic rate increase has dramatically amplified the value of treaty benefits:

Under the old 1985 treaty, the royalty rate was 15%. Under section 115A of the Income-tax Act, 1961 (pre-2023), the domestic rate was 10% plus surcharge and cess (~10.4%). This meant that the old treaty rate of 15% was actually higher than the domestic rate, making the treaty disadvantageous for royalties. Taxpayers would simply apply the lower domestic rate under section 90(2) of the Income-tax Act, 1961 (from 1 April 2026, section 159(4) of the Income-tax Act, 2025).

The revised treaty corrected this by reducing the rate to 10%. Post-Finance Act 2023, with the domestic rate at 20% plus surcharge and cess (~21.216% to 21.84%), the revised treaty rate of 10% is now significantly more beneficial — a saving of roughly 11.2 percentage points for a foreign company whose Indian income falls between INR 1 crore and INR 10 crore (2% surcharge) and about 11.84 percentage points above INR 10 crore (5% surcharge). Treaty rates are inclusive of surcharge and cess; the domestic rate is not.

On South Korea's side, domestic withholding tax on royalties paid to non-residents is 20% (plus 2% local income tax, totalling 22%). Indian entities receiving royalties from Korean payers therefore also benefit substantially from the 10% DTAA rate.

For IP licensing strategy between India and South Korea, consult our tax advisory and transfer pricing services.

Who Qualifies for the Reduced Rate

Accessing the 10% treaty rate on royalties under the revised India-South Korea DTAA requires satisfying specific conditions:

Beneficial Ownership Requirement

Article 12(2) restricts the reduced rate to royalties where the beneficial owner is a resident of the other Contracting State. The beneficial owner must have genuine economic ownership of the royalty income — the right to use and enjoy the income without being obligated to pass it through to another entity. Conduit IP licensing structures, where a Korean entity interposes itself to access the treaty rate on behalf of a third-country parent, will be denied benefits.

No Permanent Establishment Connection

If the beneficial owner carries on business through a permanent establishment (PE) in the source state, and the right or property generating the royalties is effectively connected with that PE, the royalties are taxed as business profits under Article 7. Major Korean companies (Samsung, Hyundai, LG, SK) with significant Indian operations must carefully assess PE exposure before claiming the 10% rate on intercompany royalties.

Anti-Abuse Provisions

The revised treaty incorporates anti-abuse measures aligned with OECD BEPS standards. India's domestic GAAR provisions (effective from 1 April 2017) can independently deny treaty benefits for arrangements lacking commercial substance. The MLI, signed by both India and South Korea, adds additional anti-abuse filters through the Principal Purpose Test (PPT), targeting IP licensing arrangements where the principal purpose is to obtain the treaty benefit.

Limitation of Benefits — Article 28

The revised India-South Korea DTAA does contain a standalone Limitation of Benefits article, Article 28. Article 28(1) preserves each State's domestic anti-avoidance law; Article 28(2) denies the benefits of the Agreement to any person whose affairs were arranged so that the main purpose, or one of the main purposes, was to avoid the taxes the Agreement covers; and Article 28(3) restricts the benefits of Articles 10, 11, 12, 13 and 22 specifically, where the resident claiming them is controlled directly or indirectly by persons who are not residents of that State, or where the creation or assignment of the right generating the income had obtaining those benefits as a main purpose. It is not the objective ownership-and-activity test found in the India-USA DTAA, but for royalties it bites directly — and it sits alongside the PPT under the MLI, India's GAAR, and the beneficial ownership requirement. Korean entities must be able to demonstrate genuine economic substance and a commercial rationale for the IP licensing arrangement.

Royalty-Specific Treaty Provisions Under Article 12

Article 12 of the revised India-South Korea DTAA contains detailed provisions governing both royalties and FTS: see the FTS tax rate under Article 12 for the fees-for-technical-services side of this article.

Article 12(1): Primary Taxing Right

Royalties arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. This establishes the residence state's primary right to tax royalty income.

Article 12(2): Source State Rate Cap

The source state may also tax royalties, but the tax shall not exceed 10% of the gross amount if the beneficial owner is a resident of the other Contracting State. This is a significant reduction from the 15% rate under the old 1985 treaty and reflects both countries' commitment to facilitating cross-border technology transfer and investment.

Article 12(3): Definition of Royalties

The term "royalties" 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 and films or tapes used for radio or television broadcasting
• Any patent, trademark, design or model, plan, secret formula, or process
• Industrial, commercial, or scientific equipment (equipment royalties)
• Information concerning industrial, commercial, or scientific experience (know-how)

The revised treaty retains the broad royalty definition including cinematograph films, films or tapes for television or radio broadcasting, equipment royalties, and know-how. This is particularly relevant for Korean automotive, semiconductor, and electronics companies licensing manufacturing technology, proprietary processes, and specialised equipment to Indian operations.

Article 12(3)(b) separately defines fees for technical services as payments in consideration for managerial, technical or consultancy services, other than payments falling under Article 14 (independent personal services) or Article 15 (dependent personal services). Both limbs share the single 10% cap in Article 12(2) — there is no separate FTS article and no make-available restriction in this treaty.

Article 12(4): PE and Fixed-Base Exception

If the beneficial owner has a PE in the source state, or a fixed base there from which independent personal services are performed, and the right or property generating the royalties is effectively connected with it, paragraphs 1 and 2 do not apply. The royalties are instead taxed under Article 7 or Article 14 as the case may be — on a net basis at the applicable rates rather than at the 10% gross cap.

Article 12(5): Source Rule

Royalties and fees for technical services are deemed to arise in a Contracting State when the payer is that State itself, a political sub-division, a local authority, or a resident of that State — or, where the liability to pay was incurred in connection with a PE or fixed base in that State, wherever the payer resides.

Article 12(6): Special Relationships

Where a special relationship between payer and beneficial owner inflates the royalty above what would have been agreed at arm's length, the 10% cap applies only to the arm's length portion; the excess remains taxable under each State's domestic law.

Documentation Required for Claiming the Reduced Rate

Indian entities paying royalties to South Korean residents must maintain complete documentation:

Tax Residency Certificate (TRC)

The South Korean licensor must provide a valid Tax Residency Certificate (TRC) from the National Tax Service of South Korea confirming tax residency for the relevant financial year. The TRC must cover the period during which royalty payments are made or credited.

Form 41 (formerly Form 10F)

The Korean licensor must also furnish Form 41 to the Indian payer. This self-declaration carries the supplementary particulars the TRC does not — the Korean entity's status, nationality, PAN (if available), address in Korea, and the period for which residential status is claimed.

Self-Declaration and No-PE Certificate

A self-declaration from the Korean licensor confirming that: (a) the entity is the beneficial owner of the royalty income; (b) the IP generating the royalties is not effectively connected with a PE in India; and (c) the licensing arrangement has genuine commercial substance and is not primarily designed to access treaty benefits.

IP Licensing Agreement and Technology Transfer Documentation

The underlying IP license agreement, technology transfer agreement, or know-how agreement must be available. For Korean technology transfers to India, documentation should specify the type of IP (patents, trademarks, trade secrets, know-how), territory of use, royalty rate and calculation methodology, and payment terms. For FEMA compliance, technology transfer agreements may require filing with the designated AD bank.

Withholding Procedure for Indian Payers

The withholding compliance process for royalty payments to South Korean residents under section 393(2) of the Income-tax Act, 2025 (Table, Sl. No. 17; section 195 of the Income-tax Act, 1961):

Step 1: Verify Treaty Eligibility

Confirm the Korean licensor's tax residency through the TRC, verify beneficial ownership, and ensure the IP is not PE-connected. For major Korean companies with Indian subsidiaries, branches, or liaison offices, the PE assessment is critical — the 10% rate cannot be claimed on royalties connected to an Indian PE.

Step 2: Deduct TDS at the Treaty Rate

Deduct TDS at 10% of the gross royalty amount. No surcharge or cess applies when deducting at the treaty rate. If documentation is incomplete or the Korean licensor fails to provide TRC/Form 41, apply the full domestic rate of 20% plus surcharge and cess (~21.216% to 21.84%).

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

For remittances exceeding INR 5 lakh, file Form 145 online after uploading the CA's certificate in Form 146. The CA must reference Article 12(2) and the 10% rate in the certificate. For FEMA compliance on technology transfer payments, concurrent RBI reporting may be required. See our FEMA-RBI compliance services.

Step 4: Deposit TDS and File Returns

Deposit TDS by the 7th of the following month (30 April for March). File quarterly TDS returns in Form 144 (formerly Form 27Q). Maintain documentation for a minimum of six years. For end-to-end compliance support, consult our tax advisory services.

Common Disputes and Judicial Precedents

Key areas of dispute and relevant judicial precedents for royalty taxation under the India-South Korea DTAA:

Intercompany Royalty Rates and Transfer Pricing

A royalty paid by an Indian subsidiary to its Korean parent is an international transaction with an associated enterprise and must be benchmarked under India's transfer pricing rules. The recurring dispute is not the treaty rate but the quantum: Transfer Pricing Officers have repeatedly sought to re-rate or wholly disallow intra-group royalties on the view that the Indian entity derived no commensurate benefit. Indian appellate authorities have consistently held that the officer's mandate is to test whether the price is at arm's length, not to second-guess the commercial expediency of entering the licence at all — so a contemporaneous benchmarking study and documented evidence of the benefit received are the practical defence. The withholding position under Article 12(2) is unaffected by a quantum adjustment; the disallowance bites on the Indian payer's own taxable profit.

Transition from Old Treaty Rate (15%) to New Rate (10%)

The revised treaty reduced royalty rates from 15% to 10%, effective from FY 2017-18. Disputes have arisen regarding royalties accrued before but paid after 1 April 2017 — whether the old 15% rate or the new 10% rate applies. The prevailing view is that the date of credit or payment determines the applicable rate, meaning royalties paid from FY 2017-18 onwards qualify for the 10% rate regardless of when the underlying IP license was entered into.

Software Payments — Royalty Classification

Following the Supreme Court's Engineering Analysis Centre of Excellence decision (2021), payments for off-the-shelf software are not considered royalties. However, payments for customised software development, source code licensing, or software-as-a-service involving IP rights may still qualify as royalties under Article 12. Korean software companies licensing enterprise solutions to Indian entities should carefully analyse the nature of the transaction.

Equipment Royalties vs Service Contracts

The inclusion of "industrial, commercial, or scientific equipment" in the royalty definition means that equipment lease payments to Korean entities may be characterised as royalties. Disputes arise over whether the arrangement constitutes a genuine equipment royalty (right to use) or a service contract (provision of a service using the equipment). The characterisation depends on whether the Indian payer acquires possession and control of the equipment.

Guarantee Fees — Characterisation

A fee charged by a Korean parent for guaranteeing the borrowings of its Indian subsidiary does not fit the Article 12(3)(a) royalty definition — nothing is used or licensed — and is not consideration for managerial, technical or consultancy services under Article 12(3)(b). Indian tribunals have accordingly treated such fees as falling outside Article 12 and into Article 22 (Other Income) of the India-South Korea DTAA. Article 22(1) makes items of income not dealt with in the other Articles taxable only in the recipient's State of residence, and Article 22(2) displaces that rule only where the income is effectively connected with an Indian PE or fixed base — so a Korean guarantor without a PE in India is taxable on the fee in Korea alone. The characterisation is fact-dependent, and the arm's length pricing of the guarantee fee remains a separate transfer pricing question.

Practical Examples and Calculations

Example 1: Korean Electronics Company Licensing Technology to Indian Subsidiary

A Korean electronics conglomerate licenses semiconductor manufacturing technology to its Indian subsidiary. Annual royalty at 3% of net sales of INR 500 crore: INR 15,00,00,000.

• Without DTAA: TDS at 20% + surcharge (5%) + cess (4%) = ~21.84% = INR 3,27,60,000 withheld
• With DTAA (Article 12(2)): TDS at 10% = INR 1,50,00,000 withheld
• Tax saving: INR 1,77,60,000 per year

Example 2: Korean Automotive Company Licensing to Indian JV

A Korean automotive manufacturer licenses vehicle platform technology and design patents to an Indian joint venture. Annual royalty: USD 2 million (approximately INR 16,80,00,000 at INR 84/USD).

• Without DTAA: TDS at 20% + surcharge (5%, income above INR 10 crore) + cess (4%) = ~21.84% = INR 3,66,91,200 withheld
• With DTAA (Article 12(2)): TDS at 10% = INR 1,68,00,000 withheld
• Tax saving: INR 1,98,91,200 per year

Example 3: Know-How Transfer for Pharmaceutical Manufacturing

A Korean pharmaceutical company transfers manufacturing know-how for a biosimilar drug to an Indian pharma company. Lump-sum know-how fee: INR 5,00,00,000.

• Without DTAA: TDS at 20% + surcharge (2%) + cess (4%) = ~21.216% = INR 1,06,08,000 withheld
• With DTAA (Article 12(2)): TDS at 10% = INR 50,00,000 withheld
• Tax saving: INR 56,08,000 on the lump-sum payment

Frequently Asked Questions

What is the India-South Korea DTAA royalty tax rate?

Under Article 12(2) of the revised India-South Korea DTAA (effective from FY 2017-18), the maximum withholding tax rate on royalties is 10% of the gross amount when the beneficial owner is a resident of the other Contracting State. This was reduced from 15% under the old 1985 treaty.

When did the India-South Korea DTAA's 10% royalty rate take effect?

The revised DTAA was signed on 18 May 2015 and entered into force on 12 September 2016. In India, it applies to income derived in fiscal years beginning on or after 1 April 2017 (FY 2017-18). Royalty payments from that fiscal year onwards benefit from the reduced 10% rate.

How does the India-South Korea DTAA royalty rate compare to the old 1985 treaty?

Under the old 1985 treaty, the royalty rate was 15%. The revised treaty reduced this to 10%, a 5 percentage point decrease. Combined with the increase in India's domestic rate from 10% to 20% (Finance Act 2023), the treaty savings have increased dramatically from negligible to over 11 percentage points.

Does the India-South Korea DTAA's 10% rate apply to software license payments?

It depends on the nature of the software transaction. Customised software licensing and source code transfers may qualify as royalties under Article 12. Off-the-shelf software payments may not qualify as royalties following the Supreme Court's Engineering Analysis ruling (2021).

What documentation is required to claim the treaty rate?

The Korean licensor must provide a valid TRC from the National Tax Service of South Korea, Form 41, and a beneficial ownership and no-PE declaration. The Indian payer must file Form 145, supported by a chartered accountant's certificate in Form 146, for taxable remittances exceeding INR 5 lakh in a financial year.

Are equipment lease payments considered royalties under this treaty?

Yes. The revised India-South Korea DTAA includes payments for the use of industrial, commercial, or scientific equipment within the royalty definition under Article 12(3). Such payments qualify for the 10% treaty rate.

Can the Transfer Pricing Officer disallow a royalty paid to a Korean parent?

Not merely because the rate looks high. The royalty is an international transaction that must be benchmarked under India's transfer pricing rules, but Indian appellate authorities have consistently held that the Transfer Pricing Officer tests whether the price is at arm's length — he does not sit in judgment on whether the Indian entity should have taken the licence at all. A contemporaneous benchmarking study and documented evidence of the benefit received are the practical defence, and any quantum adjustment affects the Indian payer's deduction, not the 10% Article 12(2) withholding.