Royalty Tax Rate Between India and Sweden Under DTAA

Royalty Tax Rate Between India and Sweden

The Double Taxation Avoidance Agreement (DTAA) between India and Sweden provides substantial relief on royalty taxation for cross-border technology transfers, licensing arrangements, and intellectual property payments between the two countries. Signed on June 24, 1997, in force from December 25, 1997, and effective in India from April 1, 1998, this treaty caps the withholding tax on royalties at a reduced rate of 10%, compared to the standard domestic rate of 20% under Indian tax law.

Royalty payments represent a critical component of India-Sweden business relations, particularly given Sweden's strength in technology, engineering, and innovation. Swedish companies like Ericsson, Volvo, and IKEA, as well as numerous smaller technology firms, routinely license intellectual property to Indian entities, making the royalty provisions of this treaty commercially significant. This article provides a detailed analysis of the royalty tax rate, eligibility criteria, documentation requirements, and practical compliance guidance under the India-Sweden DTAA.

Treaty Rate vs Domestic Rate: Detailed Comparison

Under Article 12(2) of the India-Sweden DTAA, royalties arising in one Contracting State and paid to a resident of the other Contracting State may be taxed in both states. However, the tax charged in the source country shall not exceed 10% of the gross amount of the royalties, provided the beneficial owner is a resident of the other Contracting State.

Under Indian domestic law, royalties paid to non-residents are subject to TDS under section 393(2) of the Income-tax Act, 2025 (Table, Sl. No. 17; section 195 of the Income-tax Act, 1961) at the 20% rate set by section 207(2) (Table, Sl. No. 1) of that Act (section 115A of the Income-tax Act, 1961), plus applicable surcharge and 4% health and education cess. The effective domestic rate ranges from approximately 20.8% to 21.84%, depending on the quantum of the payment and the applicable foreign-company surcharge (2% where income exceeds INR 1 crore, 5% where it exceeds INR 10 crore). The DTAA rate of 10% is a flat rate with no additional surcharge or cess, providing a direct saving of more than 50% on the withholding tax burden.

For Swedish companies receiving royalties from Indian licensees, this translates to a significant increase in net post-tax receipts. For example, on a royalty payment of INR 1 crore, the treaty saves approximately INR 10.8 lakh to INR 11.84 lakh compared to the domestic rate, directly improving the return on intellectual property deployed in India.

Who Qualifies for the Reduced Rate

To claim the reduced 10% rate on royalties under the India-Sweden DTAA, the recipient must satisfy several conditions established under the treaty and Indian tax law:

Beneficial Ownership Requirement

The recipient must be the beneficial owner of the royalties. Under Article 12 and evolving international jurisprudence, beneficial ownership requires that the recipient has the right to use and enjoy the royalty income and is not legally or contractually obligated to pass it on to another person. Conduit arrangements where a Swedish entity merely receives royalties to forward them to a third-country entity will not qualify for the reduced rate.

Indian tax authorities have increasingly scrutinized beneficial ownership claims in royalty cases, particularly where the licensor is part of a multinational group with complex IP holding structures. The ITAT has consistently held that the "beneficial owner" must have the real right to the income, not merely a contractual right to receive it on behalf of another.

Tax Residency in Sweden

The recipient must be a tax resident of Sweden under Article 4 of the treaty. This is established through a Tax Residency Certificate (TRC) issued by the Swedish Tax Agency (Skatteverket). The TRC must confirm that the entity or individual is a resident of Sweden for the purposes of the India-Sweden DTAA.

No PE Connection

Under Article 12(4) of the treaty, if the royalty income is effectively connected with a permanent establishment (PE) that the Swedish resident maintains in India, the reduced 10% rate does not apply. Instead, the royalty income is treated as business profits taxable under Article 7, subject to Indian corporate tax rates on a net income basis.

Limitation on Benefits (LOB) and MLI Impact

With the Multilateral Instrument (MLI) in effect for the India-Sweden DTAA from April 1, 2020, the Principal Purpose Test (PPT) has been incorporated. Treaty benefits on royalties can be denied if one of the principal purposes of an arrangement or transaction was to obtain the reduced rate. Both India and Sweden have adopted the PPT provision under Article 7 of the MLI. Genuine commercial licensing arrangements with economic substance are not affected by the PPT.

Royalty-Specific Treaty Provisions

Article 12 of the India-Sweden DTAA contains specific provisions governing the taxation of royalties and fees for technical services:

Definition of Royalties

Under Article 12(3)(a), 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, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience.

Two limits on that definition matter in practice. The India-Sweden text has no separate limb for films or tapes used for radio or television broadcasting, and — unlike many of India's other treaties — no limb for the use of industrial, commercial or scientific equipment. Within those bounds the definition follows the OECD Model and covers a wide range of intellectual property payments. Key categories include:

• Technology licensing fees for patents, designs, and processes
• Software licensing payments for the use of copyrighted software
• Trademark and brand licensing fees
• Know-how payments for industrial, commercial, or scientific information
• Copyright payments for literary, artistic, or scientific works

Royalties vs Business Profits

A critical distinction exists between royalties taxable under Article 12 and business profits taxable under Article 7. If the Swedish licensor has a PE in India and the right or property giving rise to royalties is effectively connected with that PE, the royalties are taxed as business profits rather than under Article 12. This means the income is taxed on a net basis (after deducting expenses) under Article 7, which may be more favorable in certain situations.

Source Rule

Under Article 12(5), royalties are deemed to arise in a Contracting State when the payer is a resident of that state, or when the royalty obligation was incurred in connection with a PE situated in that state. This source rule determines which state has the right to tax the royalties at the treaty rate.

Documentation Required

Indian payers making royalty payments to Swedish residents must ensure proper documentation to apply the reduced 10% treaty rate:

Tax Residency Certificate (TRC)

A valid TRC issued by the Swedish Tax Agency (Skatteverket) is the primary document required under section 159(8) of the Income-tax Act, 2025 (section 90(4) of the Income-tax Act, 1961). The TRC must confirm that the Swedish entity is a tax resident of Sweden for the relevant financial year.

Form 41 (formerly Form 10F)

The non-resident must submit Form 41 containing prescribed information including the tax identification number, residential status, nationality, and the period of residency. If the Swedish TRC does not contain all the information required under Rule 21AB, a separate Form 41 must be filed electronically.

Self-Declaration and No PE Certificate

A self-declaration confirming that the Swedish entity is the beneficial owner of the royalties, that the income is not attributable to a PE in India, and that the arrangement does not have as one of its principal purposes the obtaining of treaty benefits.

Copy of the Licensing Agreement

The licensing or technology transfer agreement between the Indian licensee and the Swedish licensor, establishing the basis for the royalty payment and confirming the nature of the intellectual property being licensed.

Withholding Procedure for Indian Payers

Indian entities paying royalties to Swedish residents must comply with a structured withholding and remittance process:

Section 393(2) TDS

All royalty payments to non-residents are subject to TDS under section 393(2) (Table, Sl. No. 17) of the Income-tax Act, 2025. The payer must deduct tax at the treaty rate of 10% (if conditions are satisfied) at the time of credit to the account of the payee or at the time of payment, whichever is earlier.

Forms 145 and 146 (formerly Forms 15CA and 15CB)

Before remitting royalty payments to Sweden, the Indian payer must:

• Obtain a Form 146 certificate from a Chartered Accountant certifying the nature of the payment, applicable treaty provisions, rate of tax, and TDS compliance
• File Form 145 online with the Income Tax Department as a remittance declaration

Banks require the Form 145 acknowledgment before processing the outward remittance under FEMA regulations. For royalty payments below INR 5 lakh in a financial year, a simplified Form 145 (Part A) may suffice without requiring a CA certificate in Form 146.

Lower Withholding Certificate (Section 395(1))

If the Swedish recipient believes the actual tax liability will be lower than the amount deductible under the treaty rate (for example, due to deductible expenses against the royalty income), they may apply for a lower or nil withholding certificate under section 395(1) of the Income-tax Act, 2025 (section 197 of the Income-tax Act, 1961) from the Assessing Officer.

TDS Return Filing

The Indian payer must file quarterly TDS returns in Form 144 (formerly Form 27Q) reflecting the tax deducted on royalty payments to the Swedish non-resident. Form 144 must be filed within the prescribed due date for each quarter.

Common Disputes and Judicial Precedents

The taxation of royalties under the India-Sweden DTAA has generated significant judicial activity, particularly around the characterization of payments and the scope of the royalty definition:

Software Payments: Royalty or Business Income

One of the most litigated issues in Indian international tax law is whether payments for the use of software constitute "royalties" under tax treaties. The Supreme Court of India, in its landmark decision in Engineering Analysis Centre of Excellence Pvt. Ltd. vs. CIT (2021), held that payments for copyrighted software (not for the copyright itself) do not constitute royalties under most DTAAs. This ruling significantly impacts Swedish software companies licensing products to Indian customers, as such payments may not be taxable in India under Article 12 if they are for shrink-wrapped or off-the-shelf software.

Royalty or Fees for Technical Services

Article 12 of the India-Sweden treaty covers royalties and fees for technical services in a single article at the same 10% cap, so the characterisation between the two rarely changes the withholding rate. It still matters for scope: FTS under Article 12(3)(b) means managerial, technical or consultancy services, including the provision of services by technical or other personnel, with no "make available" condition in the treaty text. Disputes under this treaty therefore turn on whether a payment falls within Article 12 at all, rather than on which limb of it applies.

Equipment Hire Falls Outside Article 12

Because the India-Sweden royalty definition carries no equipment limb, payments to a Swedish lessor for the use of industrial, commercial or scientific equipment are not treaty royalties. They are business profits under Article 7, taxable in India only if the Swedish enterprise has a permanent establishment here. This diverges from Indian domestic law, where equipment-hire charges are treated as royalty under section 9(6)(b)(v) of the Income-tax Act, 2025 (Explanation 2 to section 9(1)(vi) of the Income-tax Act, 1961), so the treaty position must be claimed with the usual TRC and Form 41 support.

Protocol and the MFN Clause

The original 1997 Protocol to the India-Sweden DTAA contains a most favoured nation (MFN) clause covering dividends, interest, royalties and fees for technical services. Taxpayers have argued that it imports a narrower royalty/FTS scope — for example the "make available" requirement in India's treaty with Portugal — into the Sweden treaty. That argument no longer succeeds. In Assessing Officer vs Nestle SA (Supreme Court, 19 October 2023) the Court held that an MFN clause is not self-operative: the benefit arises only once India issues a notification under section 159(1) of the Income-tax Act, 2025 (section 90(1) of the Income-tax Act, 1961). No such notification has been issued for Sweden. The 10% cap in Article 12(2) therefore applies on the treaty's own terms, and no "make available" condition can be read into the India-Sweden Article 12.

The only later protocol is the Amending Protocol signed on 7 February 2013 (in force 16 August 2013), which replaced the exchange-of-information article; it did not touch the royalty rate or definition.

Transfer Pricing Adjustments

Indian transfer pricing authorities may challenge the quantum of royalty payments between associated Swedish and Indian enterprises under Section 161 of the Income-tax Act, 2025 (section 92 of the Income-tax Act, 1961). Even if the 10% treaty rate applies, the transfer pricing officer may adjust the royalty amount itself if it exceeds the arm's length price, potentially leading to disallowance of the excess payment as a deductible expense for the Indian licensee.

Practical Examples and Calculations

The following examples demonstrate how the India-Sweden DTAA royalty provisions apply in practice:

Example 1: Patent License Fee

A Swedish technology company licenses a patented manufacturing process to an Indian manufacturer for an annual royalty of INR 50,00,000 (INR 50 lakh).

• Without DTAA: TDS at 20% + surcharge + 4% cess. Effective rate approximately 20.8%. Tax deducted: INR 10,40,000
• With DTAA: TDS at 10% flat (no surcharge or cess). Tax deducted: INR 5,00,000
• Savings: INR 5,40,000 per annum on a single licensing arrangement

Example 2: Trademark Licensing

A Swedish consumer goods brand licenses its trademark to an Indian distributor for 3% of net sales. Annual royalty: INR 2,00,00,000 (INR 2 crore).

• Without DTAA: TDS at 20% + 2% surcharge + 4% cess = 21.22%. Tax: INR 42,43,200
• With DTAA: TDS at 10% flat. Tax: INR 20,00,000
• Savings: INR 22,43,200 annually

The Swedish company can claim a foreign tax credit in Sweden for the 10% Indian withholding tax under Article 24 of the DTAA (elimination of double taxation), effectively eliminating double taxation on the same royalty income.

Example 3: Software Licensing

A Swedish software company licenses enterprise software to 50 Indian corporate customers through a standard end-user license agreement (EULA). Total annual payments: INR 5,00,00,000 (INR 5 crore).

• Following the Supreme Court's ruling in Engineering Analysis Centre (2021), payments for copyrighted software under a standard EULA do not constitute royalties under the DTAA
• No TDS may be required under Article 12 if the payments are for a "copyrighted article" rather than the "copyright" itself
• The Swedish company should obtain a nil withholding certificate under section 395(1) to avoid TDS at the time of payment

Frequently Asked Questions

What is the royalty tax rate between India and Sweden under the DTAA?

The India-Sweden DTAA caps the withholding tax on royalties at 10% of the gross royalty amount under Article 12(2). This is significantly lower than the domestic rate of 20% plus surcharge and health and education cess that would otherwise apply to royalty payments to non-residents under Indian tax law. The 10% rate applies as a flat rate with no additional surcharge or cess.

What payments qualify as royalties under the India-Sweden DTAA?

Royalties under Article 12 include payments for the use of, or the right to use, any copyright, patent, trademark, design, model, plan, secret formula or process, or for information concerning industrial, commercial, or scientific experience. This covers technology licensing fees, brand licensing, know-how payments, and copyright payments. However, following the Supreme Court's 2021 ruling, payments for copyrighted software under standard end-user licenses may not qualify as royalties.

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

No. Article 12 of the India-Sweden DTAA contains no "make available" condition, for royalties or for fees for technical services. The 1997 Protocol does carry an MFN clause, and taxpayers once argued it imported the narrower "make available" scope from India's treaty with Portugal. Following the Supreme Court's ruling in Assessing Officer vs Nestle SA (October 2023), an MFN clause takes effect only once India notifies it under section 159(1) of the Income-tax Act, 2025 (section 90(1) of the Income-tax Act, 1961), and no such notification has been issued for Sweden. Royalties and FTS are both capped at 10% under Article 12(2) on the treaty's own terms.

How does a Swedish company claim the reduced royalty rate in India?

The Swedish company must provide its Indian licensee with a valid Tax Residency Certificate from the Swedish Tax Agency (Skatteverket), Form 41 with prescribed details, and a self-declaration confirming beneficial ownership and no PE connection. The Indian payer then deducts TDS at 10% and files Forms 145 and 146 before remitting the payment.

Can transfer pricing rules override the 10% DTAA royalty rate?

Transfer pricing rules do not change the 10% withholding rate, but they can reduce the deductible royalty amount for the Indian licensee. If the transfer pricing officer determines that the arm's length royalty is lower than the amount actually paid, the excess is disallowed as a deduction for the Indian entity. The 10% TDS still applies on the full payment amount, but the Indian licensee bears the tax cost of the non-deductible portion.

What happens if the Swedish licensor also has a PE in India?

If the royalty income is effectively connected with a permanent establishment that the Swedish company maintains in India, Article 12 does not apply. Instead, the royalty income is treated as business profits under Article 7 and taxed on a net basis in India. This means the Swedish company files an Indian tax return, claims deductions against the royalty income, and pays tax at applicable corporate rates on the net profit.

Does the MLI impact royalty taxation under the India-Sweden DTAA?

The MLI provisions took effect for the India-Sweden DTAA from FY 2020-21 onwards. While the MLI does not change the 10% royalty rate itself, it introduces the Principal Purpose Test under Article 7 of the MLI. This anti-abuse provision can deny treaty benefits if obtaining the reduced rate was one of the principal purposes of an arrangement. Genuine commercial licensing arrangements with economic substance are not affected by the PPT.