Royalty Tax Rate Between India and South Korea Under DTAA

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 115A, 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 (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).

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 (~20.8% to 21.84%), the revised treaty rate of 10% is now significantly more beneficial — delivering savings exceeding 10.8% for non-corporate non-residents and 11.84% for foreign companies.

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 on Benefits

While the revised India-South Korea DTAA does not contain a standalone Limitation on Benefits (LOB) article as rigid as the India-USA DTAA, the combination of the PPT under the MLI, India's GAAR, and the beneficial ownership requirement provides a robust anti-abuse framework. Korean entities must demonstrate genuine economic substance and 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:

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 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(5): PE Exception

If the beneficial owner has a PE in the source state and the right or property generating royalties is effectively connected with that PE, Article 12 does not apply. The royalties are instead taxed as business profits under Article 7 at regular corporate rates.

Article 12(6): Source Rule

Royalties are deemed to arise in a Contracting State when the payer is a resident of that state, or when the obligation to pay royalties was incurred in connection with a PE in that state.

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 10F

Under Section 90(5) of the Income Tax Act read with Rule 21AB, the non-resident must furnish Form 10F to the Indian payer. This self-declaration provides supplementary information including the Korean entity's status, nationality, PAN (if available), and period of residential status.

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 195 of the Income Tax Act:

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 10F, apply the full domestic rate of 20% plus surcharge and cess (~20.8% to 21.84%).

Step 3: File Form 15CA/15CB

For remittances exceeding INR 5 lakh, file Form 15CA online after uploading the CA's certificate in Form 15CB. 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 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:

Samsung Electronics — Transfer Pricing and Royalty Disputes

The Delhi High Court issued significant rulings in July 2024 on Samsung Electronics' transfer pricing disputes involving royalty payments between Samsung Korea and its Indian subsidiary. The court held that royalty payments made at arm's length rates should not be disturbed by the Transfer Pricing Officer merely because the tax authorities consider the rate excessive. This precedent is important for all Korean companies paying or receiving intercompany royalties with Indian affiliates.

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.

Korean Guarantee Fee Cases

In an ITAT ruling from October 2024, guarantee fees received by a Korean company from Indian subsidiaries were held to constitute "Other Income" under Article 22 of the India-Korea DTAA, not royalties or FTS. Since the Korean company had no PE in India, the income was taxable exclusively in Korea. This ruling clarifies that guarantee fees do not fall within the royalty or FTS definitions.

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 ~20.8% = INR 3,49,44,000 withheld
• With DTAA (Article 12(2)): TDS at 10% = INR 1,68,00,000 withheld
• Tax saving: INR 1,81,44,000 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 ~20.8% = INR 1,04,00,000 withheld
• With DTAA (Article 12(2)): TDS at 10% = INR 50,00,000 withheld
• Tax saving: INR 54,00,000 on the lump-sum payment

Frequently Asked Questions

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

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 reduced 10% royalty rate come into 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 this compare to the old treaty rate?

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 10.8%.

Does the 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 10F, and a beneficial ownership and no-PE declaration. The Indian payer must file Form 15CA/15CB for remittances exceeding INR 5 lakh.

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.

What is the impact of Samsung Electronics rulings on royalty disputes?

The Delhi High Court's 2024 rulings on Samsung Electronics' transfer pricing disputes confirmed that royalty payments at arm's length rates should not be disturbed. This is a significant precedent for Korean companies with intercompany royalty arrangements involving Indian subsidiaries.