Royalty Tax Rate Between India and Spain Under DTAA

Royalty Tax Rate Between India and Spain

Under Article 13(2) of the India-Spain 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 now taxable at a maximum rate of 10% of the gross amount. This rate was reduced from the original 20% through a landmark MFN (Most Favoured Nation) clause invocation by the Indian government via Notification No. 33/2024 dated 19 March 2024.

The India-Spain DTAA was signed on 8 February 1993 and entered into force on 12 January 1995. The treaty is based on the OECD Model Tax Convention. The MFN clause in the Protocol to the treaty allows Spain to benefit from lower rates that India has agreed with any other OECD member country in a treaty that entered into force after 1 January 1990. Since the India-Germany DTAA (effective 26 October 1996) provides a 10% rate on royalties, this lower rate was imported to benefit Spanish taxpayers.

This 50% reduction in withholding tax is a significant development for Spanish companies licensing technology, trademarks, and intellectual property to Indian entities. For comprehensive structuring advice, our tax advisory and transfer pricing teams specialize in cross-border IP arrangements.

Treaty Rate vs Domestic Rate: Detailed Comparison

India's domestic withholding tax on royalty payments to non-residents is 20% under Section 115A of the Income Tax Act (plus applicable surcharge and health and education cess). The current treaty rate of 10% represents a substantial saving:

The effective domestic rate, including surcharge and cess, can reach approximately 20.8% to 21.84%. The treaty rate of 10% therefore provides a saving of more than 10 percentage points, effectively halving the withholding tax burden on royalty payments to Spanish residents.

For a Spanish company 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, the non-resident can choose the more beneficial rate between the DTAA and domestic law.

MFN Clause Background

The Protocol to the India-Spain DTAA states that if India limits its taxation at source on royalties or FTS to a lower rate in any subsequent convention with an OECD member country (post 1 January 1990), the same lower rate shall apply under the India-Spain DTAA. The India-Germany DTAA, which entered into force on 26 October 1996 and provides a 10% rate, triggered this clause. The Supreme Court of India in Nestle SA v. ACIT (2023) ruled that a separate government notification is required to give effect to MFN clauses, which the government duly issued on 19 March 2024.

Who Qualifies for the Reduced Rate

To claim the 10% treaty rate on royalties under the India-Spain DTAA, the recipient must satisfy these conditions:

Beneficial Ownership Requirement

The recipient must be the beneficial owner of the royalties. The concept has been strengthened by the MLI's Principal Purpose Test (PPT), which applies to this treaty since both India and Spain have ratified the MLI. Under the PPT, treaty benefits can be denied if one of the principal purposes of an arrangement was to obtain the treaty benefit, unless granting the benefit aligns with the treaty's object and purpose.

Tax Residency in Spain

The recipient must be a tax resident of Spain as certified by the Agencia Estatal de Administracion Tributaria (AEAT). A valid Tax Residency Certificate (TRC) for the relevant Indian financial year is mandatory under Section 90(4) of the Income Tax Act.

No PE Connection

The royalty must not be effectively connected with a permanent establishment that the Spanish entity maintains in India. If the IP generating the royalty is effectively connected with an Indian PE, the income is taxed as business profits under Article 7 rather than under the royalty article.

Limitation on Benefits

With the MLI in force for both countries, the PPT serves as the primary anti-abuse provision. Additionally, India's domestic GAAR provisions (Sections 95-102) provide another layer of anti-avoidance. Spanish companies must demonstrate genuine economic substance and a valid business purpose for their IP licensing arrangements.

Royalty-Specific Treaty Provisions

Article 13 of the India-Spain DTAA governs the taxation of royalties and fees for technical services:

Definition of Royalties

Under Article 13(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

Original vs Current Rate Structure

The original India-Spain DTAA provided a split rate structure for royalties: 10% for payments related to the use of industrial, commercial, or scientific equipment, and 20% for all other royalties. The MFN notification has unified this to a flat 10% rate for all types of royalties, eliminating the previous distinction and simplifying compliance.

Source Rule

Under Article 13(6), royalties are deemed to arise in a Contracting State when the payer is a resident of that State, or when the royalty is borne by a PE in that State. Royalties paid by an Indian company to a Spanish licensor therefore arise in India and are subject to Indian withholding tax.

MLI Modifications

The MLI has introduced the PPT as an overlay to the original treaty text. The synthesised text of the India-Spain DTAA incorporating MLI modifications is published on the Indian Income Tax Department website. Key MLI modifications affecting royalty taxation include anti-abuse provisions and potential changes to PE definitions that may impact whether royalty income is connected with a PE.

Documentation Required

Spanish residents claiming the 10% treaty rate on Indian royalties must furnish the following:

Tax Residency Certificate (TRC)

A valid TRC from the AEAT (Spanish Tax Agency) confirming Spanish tax residency for the relevant Indian financial year. This must be obtained before the first royalty payment from which the reduced rate is claimed.

Form 10F

Form 10F must be filed electronically on the Indian Income Tax portal, providing name, status, nationality, Spanish tax identification number (NIF/CIF), period of residential status, and address in Spain. An Indian PAN is required for electronic filing.

Self-Declaration

A self-declaration confirming beneficial ownership of the royalty income, that the royalty is not connected with any PE in India, and that the arrangement has genuine commercial purpose and is not designed for treaty shopping.

MFN Notification Reference

While not a statutory document requirement, it is advisable for the Indian payer to reference Notification No. 33/2024 dated 19 March 2024 in the Form 15CB certificate to support the application of the 10% rate rather than the original 20% rate.

Withholding Procedure for Indian Payers

Indian companies paying royalties to Spanish entities must follow the Section 195 compliance procedure:

Step 1: Verify Treaty Eligibility

Collect the TRC, Form 10F, and self-declarations from the Spanish licensor. Confirm that the entity is a genuine tax resident of Spain and the beneficial owner of the royalty income.

Step 2: Apply the 10% Rate

Deduct TDS at 10% on the gross royalty amount. This rate applies following the MFN notification and is effective from Assessment Year 2024-25 onwards. The 10% rate is applied without surcharge and cess under the treaty.

Step 3: File Form 15CA/15CB

File Form 15CA electronically before the remittance. For remittances exceeding INR 5 lakh, obtain Form 15CB from a Chartered Accountant referencing Article 13(2) and Notification 33/2024.

Step 4: Issue TDS Certificate

Issue Form 16A to the Spanish licensor within 15 days from the due date of the quarterly TDS return in Form 27Q.

For Spanish companies establishing operations in India, our FEMA and RBI compliance team handles the entire remittance process.

Common Disputes and Judicial Precedents

Key dispute areas relevant to royalty taxation under the India-Spain DTAA:

MFN Clause Applicability Timeline

A significant dispute has been whether the MFN clause applies automatically or requires a government notification. The Supreme Court in Nestle SA v. ACIT (2023) ruled that a separate notification under Section 90 is mandatory. The government's subsequent Notification 33/2024 resolved this issue prospectively, but taxpayers who claimed the 10% rate in earlier years face uncertainty. Some ITAT decisions had allowed the automatic application of MFN clauses, creating a divergence between judicial and executive positions.

Software Payments Classification

Whether payments for software licenses constitute royalties continues to be litigated. Following the Supreme Court's ruling in Engineering Analysis Centre v. CIT, payments for copyrighted software (as distinct from the copyright itself) may not constitute royalties under domestic law. However, the treaty definition may still capture such payments, particularly where the software involves customization or source code access.

Composite Arrangements

Spanish companies often provide technology packages combining IP licensing (royalties at 10%) with implementation services (FTS, also at 10% post-MFN). While the identical rates reduce the withholding impact, proper allocation remains important for transfer pricing documentation and Spanish tax credit claims.

Equipment Rental Payments

Payments for the use of industrial, commercial, or scientific equipment historically qualified for the lower 10% rate even before the MFN notification. Post-MFN, all royalty categories are at 10%, but disputes may arise regarding the characterization of payments that combine equipment rental with operator services.

Practical Examples and Calculations

Example 1: Technology License

A Spanish technology company licenses its patented process to an Indian manufacturer for INR 2,00,00,000 per year. Under the current 10% treaty rate, TDS is INR 20,00,000. Under the domestic rate (approximately 20.8%), the tax would be INR 41,60,000. The treaty saves INR 21,60,000 annually -- more than 50% of the tax amount.

Example 2: Trademark Royalty

A Spanish fashion brand licenses its trademark to an Indian retail chain for 5% of net sales, amounting to INR 75,00,000. TDS at 10% is INR 7,50,000. The Spanish brand claims credit for this against Spanish corporate tax (Impuesto sobre Sociedades). The Indian retailer files Form 15CA/15CB before remitting INR 67,50,000 to Spain.

Example 3: Know-How Transfer

A Spanish automotive components company transfers manufacturing know-how to its Indian joint venture for a lump sum payment of INR 5,00,00,000. This falls within the royalty definition (information concerning industrial experience). TDS at 10% is INR 50,00,000, saving INR 54,20,000 compared to the domestic rate of approximately 20.84%.

Example 4: Equipment Rental

A Spanish construction company leases specialized drilling equipment to an Indian infrastructure firm for INR 1,00,00,000 per year. Equipment rental falls within the royalty definition. TDS at 10% is INR 10,00,000. Before the MFN notification, this already qualified for 10% under the original split-rate structure.

Frequently Asked Questions

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

Following the Indian government's Notification No. 33/2024 dated 19 March 2024, the royalty withholding tax rate under the India-Spain DTAA is 10% of the gross amount. This was reduced from the original 20% by invoking the MFN clause in the Protocol, importing the lower rate from the India-Germany DTAA.

When did the 10% royalty rate become effective?

The 10% rate is effective from Assessment Year 2024-25 onwards (financial year 2023-24). However, the retrospective applicability of the MFN clause for years prior to the notification remains disputed following the Supreme Court's Nestle SA ruling that required a specific notification.

Does the India-Spain DTAA have a make available clause for royalties?

The India-Spain DTAA does not contain a separate "make available" clause for royalties. All payments falling within the definition of royalties under Article 13(3) are subject to the 10% rate, regardless of whether technical knowledge is transferred to the Indian payer.

How does the MFN clause work in this treaty?

The Protocol to the India-Spain DTAA contains an MFN clause providing that if India agrees to a lower royalty or FTS rate with any OECD member country in a treaty entering into force after 1 January 1990, the same lower rate applies to Spain. The India-Germany DTAA (effective 1996) provides 10%, which was imported via Notification 33/2024.

What documents are needed to claim the 10% rate?

A Tax Residency Certificate from AEAT, Form 10F filed electronically on the Indian income tax portal, and a self-declaration confirming beneficial ownership and no PE connection. The Indian payer should reference Notification 33/2024 in the Form 15CB certificate.

Does the MLI affect royalty taxation under this treaty?

Yes. Both India and Spain have ratified the MLI, and the India-Spain DTAA is a Covered Tax Agreement. The MLI's Principal Purpose Test applies as an overlay, meaning treaty benefits can be denied if the arrangement was primarily designed to obtain the benefit without genuine commercial purpose.

Can the 10% rate apply to equipment rental payments?

Yes. Equipment rental payments (use of industrial, commercial, or scientific equipment) fall within the royalty definition. Even before the MFN notification, equipment royalties qualified for 10% under the original split-rate structure. Post-MFN, all royalty categories are uniformly at 10%.