Royalty Tax Rate Between India and UAE Under DTAA

Royalty Tax Rate Between India and UAE

Under Article 12 of the India-UAE Double Taxation Avoidance Agreement (DTAA), royalties arising in one Contracting State and paid to a resident of the other Contracting State may be taxed in the state of source, but the rate is capped at 10% of the gross amount of such royalties if the recipient is the beneficial owner. This represents a significant reduction from India's domestic withholding tax rate of 20% (plus applicable surcharge and health and education cess) under Section 195 read with Section 115A of the Income Tax Act, 1961.

The India-UAE DTAA was originally signed on 29 April 1992 and came into force on 22 September 1993. A protocol was signed on 26 March 2007 amending the treaty to align with OECD standards and address capital gains taxation. The protocol's provisions became effective from 1 April 2008 following Notification No. 282/2007. Both countries have signed the Multilateral Instrument (MLI), and the CBDT has released the synthesised text reflecting the combined effect of the original treaty, the 2007 protocol, and MLI provisions.

India and the UAE share one of the most significant bilateral economic relationships in the Middle East. With a large Indian diaspora in the UAE and substantial cross-border trade and investment, the DTAA's royalty provisions are crucial for businesses engaged in technology licensing, franchise agreements, and intellectual property transactions between the two countries.

Treaty Rate vs Domestic Rate: Detailed Comparison

Indian tax law imposes a domestic withholding tax rate of 20% (plus surcharge and health and education cess) on royalty payments to non-residents under Section 195 read with Section 115A of the Income Tax Act. This rate was increased from 10% to 20% effective 1 April 2023 by the Finance Act, 2023. Under Section 90(2), a non-resident can opt for the more beneficial rate available under the applicable DTAA.

Unlike some other Indian DTAAs that differentiate between IP royalties and equipment royalties (such as the India-Australia treaty), the India-UAE DTAA applies a uniform 10% rate across all categories of royalties. This single-rate structure simplifies compliance for UAE residents receiving royalty income from India. The effective domestic rate, inclusive of surcharge and cess, can reach approximately 20.8% to 21.84%, making the treaty rate of 10% a saving of roughly 10-12 percentage points.

It is important to note that prior to the Finance Act 2023, the domestic rate under Section 115A was also 10%, which meant the treaty provided no additional benefit. However, with the doubling of the domestic rate to 20%, the treaty rate has become considerably more valuable for UAE residents receiving royalty payments from India.

Who Qualifies for the Reduced Rate

To claim the reduced 10% royalty rate under the India-UAE DTAA, the recipient must satisfy several conditions:

Beneficial Ownership Requirement

The recipient must be the beneficial owner of the royalties. This means the recipient must have the right to use and enjoy the royalty income without any contractual or legal obligation to pass it on to another person. Post-MLI, this requirement has been strengthened through the Principal Purpose Test (PPT), which can deny treaty benefits if one of the principal purposes of an arrangement was to obtain the treaty benefit.

Tax Residency Requirement

The recipient must be a tax resident of the UAE as defined under Article 4 of the treaty. A valid Tax Residency Certificate (TRC) issued by the UAE Federal Tax Authority (FTA) is mandatory. Since the UAE introduced corporate tax effective 1 June 2023, the residency determination has become more structured, with TRCs now issued based on substantive economic presence tests.

No Permanent Establishment Connection

The reduced rate does not apply if the beneficial owner carries on business through a permanent establishment (PE) in India and the royalty-generating right or property is effectively connected with that PE. In such cases, the royalties are taxed as business profits under Article 7.

Arm's Length Principle

Article 12(5) of the treaty provides that where the amount of royalties exceeds the amount that would have been agreed upon by the payer and the beneficial owner in the absence of a special relationship, the provisions of Article 12 apply only to the arm's length amount. The excess is taxable according to the domestic law of each Contracting State.

Royalty-Specific Treaty Provisions

Article 12 of the India-UAE DTAA contains several important provisions specific to royalty taxation:

Broad Definition of Royalties

Under Article 12(3), the term "royalties" is defined broadly to include 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 for radio or television broadcasting
• The use of, or the right to use, any patent, trademark, design or model, plan, secret formula or process
• The use of, or the right to use, industrial, commercial, or scientific equipment
• The supply of information concerning industrial, commercial, or scientific experience (know-how)

No Separate FTS Clause

A critical feature of the India-UAE DTAA is that it does not contain a separate clause for Fees for Technical Services (FTS). This is a deliberate design of the treaty, not an accidental omission. The absence means that payments for technical, managerial, or consultancy services to a UAE resident are not taxable in India under the treaty unless the UAE entity has a PE in India, in which case they may be taxed as business profits under Article 7. For more details, see our FTS tax rate page for India-UAE.

Source Country Taxation

The treaty explicitly allows the source country (where the payer is resident) to tax royalties, but limits the rate to 10% of the gross amount. The residence country must then provide relief from double taxation. Under Article 25, the UAE eliminates double taxation by allowing a credit for taxes paid in India against UAE tax liability on the same income.

Documentation Required

UAE residents claiming the reduced 10% royalty rate on payments from India must furnish the following documents to the Indian payer:

Tax Residency Certificate (TRC)

A valid TRC from the UAE Federal Tax Authority (FTA) confirming that the recipient is a tax resident of the UAE for the relevant financial year. This is the primary document for claiming treaty benefits under Section 90(4) of the Income Tax Act. With the introduction of UAE corporate tax in 2023, TRCs have become more standardised and easier to obtain for entities with genuine economic substance in the UAE.

Form 10F

If the TRC does not contain all the prescribed particulars (name, status, nationality, tax identification number, period of residency, and address), the recipient must file Form 10F electronically on the Indian Income Tax portal. Since 2022, electronic filing of Form 10F is mandatory for non-residents who have an Indian PAN.

Self-Declaration

A self-declaration confirming that the recipient is the beneficial owner of the royalty income, does not have a PE in India to which the income is attributable, and that the arrangement is not primarily motivated by tax avoidance.

PAN Considerations

While having an Indian PAN is not mandatory for claiming treaty benefits, Section 206AA may trigger higher withholding at 20% if the recipient does not furnish a PAN. However, per CBDT Notification No. 53/2016, treaty rates prevail over Section 206AA rates for non-residents who furnish the prescribed documents (TRC, Form 10F, and self-declaration).

Withholding Procedure for Indian Payers

Indian companies or individuals paying royalties to UAE residents must follow specific compliance procedures under Section 195 of the Income Tax Act:

Step 1: Classify the Payment

Determine whether the payment constitutes a royalty under Article 12(3) of the treaty. Payments for software licences, patent rights, trademark licences, equipment rentals, and know-how transfers all qualify. However, following the Supreme Court ruling in Engineering Analysis Centre of Excellence Pvt. Ltd. v. CIT (2021), payments for copyrighted software (as opposed to payments for the copyright itself) may not constitute royalties.

Step 2: Verify Documentation

Before applying the reduced treaty rate of 10%, verify the TRC, Form 10F, and beneficial ownership declaration from the UAE recipient. The payer bears responsibility for ensuring all conditions are met.

Step 3: Deduct TDS at Treaty Rate

Deduct TDS at 10% on the gross royalty amount. The TDS must be deposited with the government within 7 days of the following month.

Step 4: File Form 15CA/15CB

For remitting the royalty to the UAE, the payer must file Form 15CA electronically. If the remittance exceeds INR 5 lakh in a financial year, a Chartered Accountant's certificate in Form 15CB is also required, certifying the nature of remittance, applicable TDS rate, and treaty provisions relied upon.

Step 5: Issue TDS Certificate

The payer must issue a TDS certificate in Form 16A to the UAE recipient within 15 days from the due date of furnishing the quarterly TDS return.

Common Disputes and Judicial Precedents

Several key issues have arisen in the interpretation of royalty taxation under the India-UAE DTAA:

Software Payments as Royalties

The Supreme Court of India in Engineering Analysis Centre of Excellence Pvt. Ltd. v. CIT (2021) held that payments for copyrighted software (shrink-wrapped or off-the-shelf licences) do not constitute royalties under DTAAs that follow the OECD model. This landmark ruling benefits UAE software companies selling standard licences to Indian customers, as such payments would be classified as business profits -- not taxable in India without a PE.

Consultancy Fees and the Absent FTS Clause

Since the India-UAE DTAA lacks an FTS clause, numerous disputes have arisen over whether consultancy and management fees paid to UAE entities are taxable in India. Courts have consistently held that in the absence of an FTS article, such payments can only be taxed as business profits under Article 7, and only if the UAE entity has a PE in India. The Delhi ITAT in several rulings has confirmed that the deliberate exclusion of FTS from the treaty is a sovereign agreement between the two nations and cannot be overridden by domestic law.

Treaty Shopping Concerns

Given the UAE's position as a business hub, Indian tax authorities have scrutinised arrangements where entities route royalty payments through UAE intermediaries to claim the beneficial 10% rate. Post-MLI, the Principal Purpose Test (PPT) provides a robust anti-abuse mechanism, and India's domestic GAAR provisions (effective April 2017) can override treaty benefits if the arrangement lacks commercial substance.

Equipment Royalties vs Service Fees

Disputes sometimes arise over whether payments for the use of sophisticated equipment should be classified as royalties (10% treaty rate) or as FTS (not covered under the treaty). The characterisation depends on whether the payment is primarily for the equipment itself or for associated technical services provided alongside the equipment.

Practical Examples and Calculations

Example 1: Technology Licence

A UAE-based technology company licences its proprietary software platform to an Indian enterprise for INR 1,00,00,000 per annum. Under domestic law, the Indian company would withhold TDS at approximately 20.8% (20% + cess), resulting in a tax of INR 20,80,000. Under the India-UAE DTAA, the withholding is limited to 10%, i.e., INR 10,00,000 -- a saving of INR 10,80,000.

Example 2: Trademark Franchise

A UAE-based restaurant chain grants a trademark licence to an Indian franchisee for INR 50,00,000. At the domestic rate, TDS would be approximately INR 10,40,000. Under the treaty, TDS is capped at 10%, i.e., INR 5,00,000. The franchisee saves INR 5,40,000 in withholding costs.

Example 3: Equipment Lease

A UAE construction company leases specialised machinery to an Indian infrastructure firm for INR 2,00,00,000. Since the India-UAE DTAA applies a uniform 10% rate to all royalties (including equipment royalties), the treaty rate of 10% applies. The tax is INR 20,00,000 compared to INR 41,60,000 at the domestic rate. The saving is INR 21,60,000.

Example 4: Know-How Transfer

A UAE petrochemical company transfers process know-how to an Indian refinery for INR 75,00,000. Under the treaty, the withholding is limited to 10% (INR 7,50,000) versus 20.8% domestically (INR 15,60,000). The saving is INR 8,10,000.

Frequently Asked Questions

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

Under Article 12(2) of the India-UAE DTAA, the royalty withholding tax rate is capped at 10% of the gross amount of royalties, provided the recipient is the beneficial owner and a tax resident of the UAE. This is a flat rate that applies uniformly to all categories of royalties, including IP licences, equipment rentals, and know-how payments.

Does the 10% treaty rate include surcharge and cess?

Yes. The 10% rate prescribed under the DTAA is the maximum rate of tax, inclusive of all surcharges and cess. Indian tax authorities cannot levy surcharge or health and education cess over and above the 10% treaty rate. Multiple tribunal rulings have confirmed this position.

How does the UAE's corporate tax introduction affect DTAA benefits?

The UAE introduced corporate tax at 9% effective 1 June 2023. This has strengthened the substance requirements for UAE entities claiming treaty benefits, as the UAE Federal Tax Authority now issues TRCs based on substantive economic presence. The DTAA benefits themselves remain unchanged, but entities must demonstrate genuine residency in the UAE to claim the 10% royalty rate.

What documentation does a UAE company need to claim the reduced rate?

A UAE company must provide: (1) a valid Tax Residency Certificate from the UAE Federal Tax Authority, (2) Form 10F filed electronically on the Indian IT portal if the TRC lacks prescribed particulars, and (3) a self-declaration confirming beneficial ownership and absence of PE in India.

Are software payments classified as royalties under the India-UAE DTAA?

Following the Supreme Court's 2021 ruling in Engineering Analysis Centre of Excellence, payments for standard software licences (copyrighted articles) are generally not classified as royalties. However, payments for customised software involving transfer of copyright rights may still qualify as royalties under Article 12.

What is the impact of the 2007 protocol on royalty taxation?

The 2007 protocol primarily addressed capital gains taxation (Article 13) and did not modify the royalty provisions under Article 12. The 10% royalty rate has remained unchanged since the original treaty was signed in 1992. The protocol introduced source-based taxation for capital gains on shares, which was the primary area of amendment.

Can a UAE company apply for a lower withholding certificate?

Yes. Under Section 197 of the Income Tax Act, a UAE company can apply to the Assessing Officer for a certificate authorising the Indian payer to deduct tax at a rate lower than the prescribed 10% treaty rate. This is useful when the actual tax liability is expected to be lower due to deductions, expenses, or tax credits available to the UAE entity.