Royalty Tax Rate Between India and Turkey Under DTAA

Quick answer: Article 12(2) of the India-Turkey DTAA caps withholding tax on royalties at 15% of the gross amount, against India's domestic rate of 20% under section 207(2) (Table, Sl. No. 1) of the Income-tax Act, 2025 (section 115A of the Income-tax Act, 1961). The definition in Article 12(3) is broad: copyright, patent, trademark, design, secret formula or process, plus equipment rental and industrial/commercial/scientific know-how. The treaty was signed 31 January 1995 and took effect from 1 February 1997; Turkey has signed but not ratified the MLI, so the Principal Purpose Test does not yet apply.

Key takeaways:

• Flat 15% royalty cap under Article 12(2) vs 20% domestic rate under section 207(2)
• Royalties and fees for technical services share the same combined Article 12, with the same 15% cap
• Article 12(3)'s definition expressly includes equipment rental (use of industrial, commercial or scientific equipment)
• No 'make available' limitation restricts the scope of technical service fees taxed alongside royalties
• Turkey has signed but not ratified the MLI, so the Principal Purpose Test does not yet apply to this treaty

Royalty Tax Rate Between India and Turkey

The India-Turkey DTAA, signed on 31 January 1995 and in force from 1 February 1997, caps the withholding tax on royalty payments at 15% under Article 12(2) -- a single combined article that also governs fees for technical services. Turkish engineering, manufacturing and technology licensors receiving royalty payments from Indian licensees, and Indian companies licensing technology into Turkey, both rely on this cap to keep cross-border licensing tax-efficient.

The definition of royalties in Article 12(3) is broad, covering payments for the use of or right to use any copyright of literary, artistic or scientific work, any patent, trademark, design or model, plan, secret formula or process, and -- distinctively -- payments for the use of or right to use industrial, commercial or scientific equipment. This equipment-rental limb means cross-border leasing of machinery between India and Turkey is taxed as a royalty under this treaty, not left outside Article 12 as it is in some other Indian treaties. For the treaty's full framework, see our India-Turkey DTAA complete guide.

Treaty Rate vs Domestic Rate: Detailed Comparison

Domestic Rate (Without DTAA)

Royalties paid to a non-resident are taxed at 20% (plus surcharge and cess) under section 207(2) (Table, Sl. No. 1) of the Income-tax Act, 2025 (section 115A of the Income-tax Act, 1961), the rate having been doubled from 10% by the Finance Act 2023 with effect from 1 April 2023.

DTAA Rate (With Treaty)

Article 12(2) of the India-Turkey DTAA restricts India's right to tax royalties paid to a Turkish beneficial owner to 15% of the gross amount. This flat rate applies uniformly whether the payment is for a patent licence, a trademark, know-how, or equipment rental -- the definition in Article 12(3) does not create separate rates for different categories of royalty.

Effective Tax Savings

For a Turkish manufacturer licensing a patented industrial process to its Indian subsidiary for EUR 800,000 a year, the treaty saves EUR 40,000 annually: EUR 120,000 withheld at 15% against EUR 160,000 at the 20% domestic rate.

Who Qualifies for the Reduced Rate

Beneficial Ownership Requirement

The 15% cap applies only where the Turkish recipient is the beneficial owner of the royalty -- the genuine economic owner of the underlying right, not a licensing conduit holding IP on behalf of a third-country entity.

Tax Residency Requirement

The Turkish licensor must be a tax resident of Turkey under Article 4 and must hold a Tax Residency Certificate from the Gelir Idaresi Baskanligi (Turkish Revenue Administration) for the relevant financial year.

Anti-Abuse Rules: MLI Signed But Not Ratified by Turkey

Both India and Turkey signed the MLI on 7 June 2017. India has ratified it and listed this treaty as a Covered Tax Agreement, but Turkey has not deposited its instrument of ratification, so the Principal Purpose Test does not currently modify royalty taxation under this treaty. India's domestic GAAR, applicable under section 159(6) of the Income-tax Act, 2025 (section 90(2A) of the Income-tax Act, 1961), remains available to challenge conduit licensing arrangements lacking commercial substance.

No Permanent Establishment Attribution

Where the right or property generating the royalty is effectively connected with a permanent establishment the Turkish licensor has in India, the 15% cap does not apply; the royalty is instead taxed as business profits under Article 7 of the treaty.

Royalty-Specific Treaty Provisions Under Article 12

Definition of Royalties (Article 12(3))

The treaty defines royalties as payments of any kind received for the use of, or the right to use, any copyright of literary, artistic or scientific work, any patent, trademark, design or model, plan, secret formula or process, or for the use of, or the right to use, industrial, commercial or scientific equipment, or for information concerning industrial, commercial or scientific experience. Notably, the treaty's own English text reads "scientific experiment" in this know-how limb rather than the more usual "scientific experience" found in the OECD Model and most other Indian treaties -- an unusual but narrow textual quirk in the definition rather than a substantive difference in scope.

Article 12(1): Residence State Taxation

Royalties arising in one Contracting State and paid to a resident of the other may be taxed in that other (residence) State, establishing the primary taxing right of the licensor's home country.

Article 12(2): Source State Taxation (15% Cap)

The source State also has the right to tax the royalty, but where the recipient is the beneficial owner, the tax charged shall not exceed 15% of the gross amount -- the same ceiling that applies to fees for technical services under the same paragraph.

Equipment Rental as Royalty

Because Article 12(3) expressly covers "the use of, or the right to use, industrial, commercial or scientific equipment," cross-border equipment leasing between India and Turkey -- for example, Turkish construction machinery leased to an Indian contractor -- is taxed as a royalty at 15%, not as ordinary business income or rent under a different article.

Documentation Required to Claim the Reduced Rate

Tax Residency Certificate (TRC)

The Turkish licensor must provide a TRC from the Gelir Idaresi Baskanligi confirming residency, required under section 159(8) of the Income-tax Act, 2025 (section 90(4) of the Income-tax Act, 1961). Without a valid TRC, the Indian payer must withhold at the domestic 20% rate.

Form 41 (formerly Form 10F)

If the TRC lacks the prescribed particulars, Form 41 must be filed electronically on the Indian income tax e-filing portal.

Self-Declaration and Licence Agreement

A self-declaration confirming beneficial ownership and no Indian PE, together with the underlying licence or equipment-rental agreement and the royalty computation methodology, should be retained -- particularly for related-party arrangements subject to transfer pricing documentation.

Withholding Procedure for Indian Payers

Section 393(2): TDS Obligation

Under section 393(2) of the Income-tax Act, 2025 (Table, Sl. No. 17; section 195 of the Income-tax Act, 1961), the Indian licensee must deduct TDS at the time of credit or payment, whichever is earlier -- 15% with valid treaty documentation, or 20% under domestic law without it.

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

Before remitting the royalty, the Indian payer must file Form 145 electronically, and obtain Form 146 from a Chartered Accountant for remittances exceeding INR 5 lakh, referencing the specific treaty article and TRC details relied upon.

Section 395(1): Lower Withholding Certificate

A Turkish licensor expecting a lower actual liability may apply to the Assessing Officer for a certificate under section 395(1) of the Income-tax Act, 2025 (section 197 of the Income-tax Act, 1961).

RBI and FEMA Compliance

Royalty and equipment-rental payments to Turkey must comply with FEMA regulations governing technology transfer and cross-border leasing, generally permitted under the automatic route but reportable through the authorised dealer bank.

Software Payments and the Royalty Definition

A recurring characterisation question for any India royalty article is whether a software payment is a royalty at all. In Engineering Analysis Centre of Excellence (2021), the Supreme Court of India held that payments by Indian end-users and distributors to non-resident software suppliers for the resale or use of shrink-wrapped or off-the-shelf software are not royalty, because no copyright in the software is transferred. The decision turned on treaty primacy rather than on the domestic definition: the Court held that the narrower royalty definition in India's tax treaties prevails over the wider domestic definition by virtue of section 90(2) of the Income-tax Act, 1961 (now section 159(4) of the Income-tax Act, 2025), and that the later expansion of the domestic definition cannot be read into a treaty. That reasoning applies directly to Article 12 of the India-Turkey DTAA, whose royalty definition follows the same treaty formulation: a standard software licence sold by a Turkish vendor to an Indian customer without any transfer of the underlying copyright is not a royalty and attracts no withholding under Article 12, whereas a licence granting access to source code, or the right to reproduce or modify the software, is more likely to fall within the Article 12(3) definition and be taxed at 15%.

Common Compliance Points

Because Article 12(3)'s equipment-rental limb sits inside the royalty definition rather than in a separate rule, Indian payers sometimes misclassify cross-border equipment leases as ordinary rent or business income and apply the wrong withholding treatment -- the correct starting point for any industrial, commercial or scientific equipment lease from a Turkish counterparty is the 15% royalty cap, not a different rate. Payers should also confirm the beneficial owner is genuinely a Turkish tax resident holding the IP or equipment in its own right, since a mere collection agent for a third-country owner does not qualify for the treaty rate regardless of where invoices are issued from.

Practical Examples and Calculations

Example 1: Patent Licence for a Manufacturing Process

Bosphorus Muhendislik A.S., a Turkish engineering company, licenses a patented process to an Indian steel producer for EUR 1 million a year.

• Without DTAA: TDS at 20% = EUR 200,000. Net royalty received = EUR 800,000.
• With DTAA: TDS at 15% = EUR 150,000. Net royalty received = EUR 850,000.
• Annual saving: EUR 50,000.

Example 2: Equipment Rental Under Article 12(3)

A Turkish construction firm leases specialised tunnelling equipment to an Indian infrastructure contractor for INR 2 crore a year. Because equipment rental falls within the Article 12(3) royalty definition, the payment is taxed at 15% (INR 30 lakh) rather than at a different rate applicable to ordinary business income.

Example 3: Trademark Licence with a Transfer Pricing Adjustment

Anadolu Marka A.S. licenses its brand to its Indian subsidiary for INR 8 crore annually. The Indian transfer pricing officer determines the arm's length royalty is INR 3 crore. Only the arm's length portion qualifies for treaty-rate scrutiny; the excess INR 5 crore may be disallowed as a deduction for the Indian subsidiary under transfer pricing rules, independent of the 15% treaty cap on the royalty itself.

For structuring cross-border licensing arrangements, see our tax advisory and transfer pricing services, and our guide to registering a company in India from Turkey.

Frequently Asked Questions

What is the royalty tax rate under the India-Turkey DTAA?

Article 12(2) of the India-Turkey DTAA caps withholding tax on royalties at 15% of the gross amount, provided the recipient is the beneficial owner. This compares to India's domestic rate of 20% under section 207(2) (Table, Sl. No. 1) of the Income-tax Act, 2025 (section 115A of the Income-tax Act, 1961).

Does the royalty definition cover equipment rental?

Yes. Article 12(3) expressly includes payments for the use of, or the right to use, industrial, commercial or scientific equipment within the definition of royalties, alongside copyright, patent, trademark, design, and secret-formula payments -- so equipment-leasing fees are taxed as royalties at 15%, not left to a separate rental-income rule.

Are royalties and fees for technical services covered by the same article?

Yes. Unlike treaties that place fees for technical services in a separate article, the India-Turkey DTAA combines both under Article 12, with a single 15% rate cap in Article 12(2) applying to royalties (defined in 12(3)) and fees for technical services (defined in 12(4)) alike.

What documents does a Turkish licensor need to claim the reduced rate?

A Tax Residency Certificate from the Gelir Idaresi Baskanligi, electronically filed Form 41 (formerly Form 10F), a self-declaration of beneficial ownership and no Indian permanent establishment, and a copy of the licence agreement. The Indian payer must file Form 145 and, for remittances above INR 5 lakh, obtain Form 146.

Does the MLI Principal Purpose Test apply to India-Turkey royalties?

Not yet. Both countries signed the MLI on 7 June 2017 and India has ratified it, listing this treaty as a Covered Tax Agreement, but Turkey has not deposited its instrument of ratification. Until it does, the PPT does not modify royalty taxation under this treaty; India's domestic GAAR remains the applicable safeguard.

Is there an unusual wording in the India-Turkey royalty definition?

Yes. Article 12(3)'s know-how limb refers to information concerning industrial, commercial or 'scientific experiment', where most Indian treaties (following the OECD Model) use the phrase 'scientific experience'. The substance -- payments for know-how -- is the same; only the treaty's own English wording is unusual.