Royalty Tax Rate Between India and UK Under DTAA

Royalty Tax Rate Between India and UK

The India-UK Double Taxation Avoidance Agreement (DTAA), originally signed on January 25, 1993, and amended by the Protocol signed on October 30, 2012 (effective December 27, 2013), governs the taxation of royalty income between the two countries under Article 13. The treaty has been further modified by the Multilateral Instrument (MLI), which both countries have signed and ratified, introducing the Principal Purpose Test (PPT) as an additional anti-avoidance measure.

Article 13 establishes two tiers of withholding tax on royalties: 15% for intellectual property royalties and 10% for equipment royalties. Both rates represent meaningful savings compared to India's domestic withholding rate of 20% (plus surcharge and 4% health and education cess) under Section 115A read with Section 195 of the Income Tax Act, 1961. The India-UK economic relationship -- with the UK being one of the largest foreign investors in India across financial services, technology, pharmaceuticals, and manufacturing -- makes these royalty provisions commercially significant for hundreds of cross-border licensing arrangements.

Treaty Rate vs Domestic Rate: Detailed Comparison

Article 13(2) of the India-UK DTAA establishes different withholding rates depending on the nature of the royalty payment:

15% Rate for Intellectual Property Royalties (Article 13(2)(a)(ii))

Under Article 13(2)(a)(ii), royalties paid for the use of, or the right to use, intellectual property are taxed at a maximum rate of 15% of the gross amount. This category covers a wide range of IP licensing arrangements:

• Copyright of literary, artistic, or scientific works (including cinematograph films, tapes, and broadcasting)
• Patents and patent applications
• Trademarks, trade names, and brand licences
• Designs, models, plans, and secret formulas
• Industrial, commercial, or scientific know-how and experience
• Process licences and technology transfer agreements

Prior to the Finance Act 2023, India's domestic withholding rate on royalties was 10%, meaning the domestic rate was lower than the treaty rate of 15%. In that scenario, Section 90(2) of the Income Tax Act ensured the taxpayer paid only 10% (the lower rate). However, since April 1, 2023, with the domestic rate doubled to 20% (plus surcharge and cess), the 15% treaty rate now provides a genuine saving of at least 5 percentage points on IP royalties.

10% Rate for Equipment Royalties (Article 13(2)(b))

Under Article 13(2)(b), royalties paid for the use of, or the right to use, industrial, commercial, or scientific equipment are taxed at a lower rate of 10% of the gross amount. This covers lease rentals, hire charges, and similar payments for tangible equipment used in manufacturing, research, commercial operations, and other business activities.

The 10% equipment royalty rate provides a 10 percentage point saving compared to the 20% domestic rate, making it one of the most beneficial provisions of the treaty for companies leasing industrial equipment across borders.

Who Qualifies for the Reduced Rate

Claiming the reduced DTAA rates on royalties under the India-UK treaty requires satisfying several conditions:

Beneficial Ownership Test

The reduced rates under Article 13(2) are available only to the beneficial owner of the royalties. The beneficial owner must have the right to use, enjoy, and dispose of the royalty income without being a mere agent, nominee, or conduit. In multi-tier corporate structures, Indian tax authorities may challenge whether the immediate UK recipient is the true beneficial owner.

MLI Principal Purpose Test (PPT)

Since the India-UK DTAA is modified by the MLI, the Principal Purpose Test under Article 7 of the MLI applies. Treaty benefits on royalties can be denied if it is reasonable to conclude that one of the principal purposes of an arrangement or transaction was to obtain the treaty benefit. This anti-avoidance rule targets conduit structures and treaty shopping through UK entities established primarily for tax purposes.

However, benefits may still be granted under the PPT if it is established that granting them would be in accordance with the object and purpose of the relevant treaty provisions. The PPT involves a subjective assessment by tax authorities, making it important for UK companies to maintain genuine economic substance in the UK.

Tax Residency Requirement

The recipient must be a tax resident of the UK, holding a valid Tax Residency Certificate (TRC) issued by His Majesty's Revenue and Customs (HMRC). The TRC must cover the period during which the royalty payment is made.

General Anti-Avoidance Rule (GAAR)

India's domestic GAAR provisions (Chapter X-A of the Income Tax Act), effective from April 1, 2017, provide an additional layer of scrutiny. If a royalty arrangement is classified as an impermissible avoidance arrangement, treaty benefits may be denied regardless of the DTAA and MLI provisions.

No PE Attribution

Under Article 13(5), if the beneficial owner has a permanent establishment in the source country and the royalty-generating right or property is effectively connected with that PE, the royalties are taxed as business profits under Article 7 at the applicable corporate tax rate (35% for foreign companies in India), not under the reduced Article 13 rates.

Royalty-Specific Treaty Provisions

Definition of Royalties (Article 13(3))

Article 13(3) defines royalties in two sub-paragraphs:

• Article 13(3)(a): Payments for the use of, or the right to use, any copyright of literary, artistic, or scientific work (including films, tapes, and broadcasting), any patent, trademark, design or model, plan, secret formula or process, or for information concerning industrial, commercial, or scientific experience.
• Article 13(3)(b): Payments for the use of, or the right to use, any industrial, commercial, or scientific equipment (other than income from operation of ships or aircraft in international traffic).

Source Country Taxation

Article 13(1) allows royalties arising in one contracting state and paid to a resident of the other state to be taxed in the state of residence. Article 13(2) preserves the source country's right to tax, subject to the rate caps. India retains the right to withhold tax on royalties paid by Indian entities to UK residents, but at the reduced treaty rate.

First Year vs Subsequent Years

The original treaty text contained a distinction between the first year of a royalty agreement (Article 13(2)(a)(i)) and subsequent years (Article 13(2)(a)(ii)). During the first year of an agreement, a higher transitional rate could apply. In practice, the 15% rate under Article 13(2)(a)(ii) is the standard applicable rate for ongoing royalty arrangements.

Impact of the 2012 Protocol

The Protocol signed on October 30, 2012, made several amendments to the original 1993 treaty, including modifications to the exchange of information provisions and other articles. The protocol entered into force on December 27, 2013.

Documentation Required

To claim the reduced DTAA rate on royalties, the following documentation is mandatory:

Tax Residency Certificate (TRC)

A valid TRC from HMRC is the foundational document. The TRC must confirm that the recipient is a tax resident of the UK under the terms of the DTAA and must cover the period during which the royalty payment is made.

Form 10F

Form 10F must be filed electronically on India's income tax e-filing portal, providing the recipient's status (individual, company, partnership, etc.), nationality, UK Unique Taxpayer Reference (UTR), and period of residential status.

No-PE Declaration

A declaration confirming that the UK recipient does not have a permanent establishment in India and that the royalty income is not attributable to any PE in India.

Beneficial Ownership Declaration

A declaration confirming that the UK recipient is the beneficial owner of the royalties and not acting as an agent, nominee, or conduit for a third party. Given the MLI PPT, this declaration should also address the commercial rationale for the royalty arrangement.

Withholding Procedure for Indian Payers

Indian entities paying royalties to UK residents must comply with Section 195 withholding procedures:

TDS Deduction

The Indian payer deducts TDS at 15% (for IP royalties) or 10% (for equipment royalties) on the gross amount at the time of credit or payment, whichever is earlier. When applying DTAA rates, surcharge and health and education cess are not added to the treaty rate -- the rate is a flat 15% or 10% of the gross amount.

Form 15CA and Form 15CB

For royalty remittances exceeding INR 5 lakh in a financial year:

• Form 15CB: A Chartered Accountant files Form 15CB certifying that TDS has been deducted at the correct DTAA rate and that treaty conditions are satisfied.
• Form 15CA Part C: The remitter files Form 15CA Part C online, referencing the Form 15CB acknowledgement number.

For remittances up to INR 5 lakh, only Form 15CA Part A is required.

Quarterly TDS Return (Form 27Q)

The Indian payer must file quarterly TDS returns in Form 27Q, correctly reflecting the treaty rate applied and the relevant DTAA article number (Article 13).

Common Disputes and Judicial Precedents

Software Royalty Characterisation

One of the most litigated areas under the India-UK DTAA involves whether payments for software licences constitute royalties under Article 13. The Supreme Court of India's 2021 ruling in Engineering Analysis Centre of Excellence established that payments for copyrighted software (shrink-wrapped, off-the-shelf) are not royalties because the end-user does not acquire rights in the copyright. This ruling applies equally to payments under the India-UK treaty.

Subscription Income as Royalty

In a notable case involving a UK-based financial data provider, the Authority for Advance Rulings (AAR) held that subscription income from a deal-matching system for foreign exchange dealing constituted royalty under Article 13 because it involved providing "information concerning industrial, commercial or scientific work." This ruling illustrates the broad interpretation that Indian authorities sometimes apply to the royalty definition.

Make-Available Test for FTS

While primarily relevant to FTS taxation, the make-available test under Article 13(4)(c) has implications for borderline cases where payments could be characterised as either royalties or FTS. A 2024 Mumbai ITAT ruling held that management services do not constitute FTS under Article 13 of the India-UK DTAA because the make-available condition was not satisfied. The scope of FTS under Article 13 is narrower than under Section 9(1)(vii) of the Act, which includes managerial services.

Transfer Pricing and Arm's Length Royalty Rates

For royalties paid between associated enterprises, Indian transfer pricing provisions under Chapter X of the Income Tax Act apply in addition to the DTAA. The royalty rate must be at arm's length -- even if the DTAA permits a 15% or 10% withholding rate, the quantum of the royalty itself must be commercially justified. Transfer pricing adjustments to the royalty base are separate from the DTAA rate cap.

Practical Examples and Calculations

Example 1: UK Pharmaceutical Company Licensing Patent to Indian Manufacturer

A UK pharmaceutical company licenses a patented drug formula to its Indian manufacturing subsidiary. The annual royalty is INR 10,00,00,000 (INR 10 crores).

• Domestic rate: 20% = INR 2,00,00,000 (plus surcharge and cess, effective ~INR 2,18,40,000)
• DTAA rate (Article 13(2)(a)(ii)): 15% = INR 1,50,00,000
• Tax saving under DTAA: INR 68,40,000 per year (including surcharge and cess savings)

The UK company provides a valid HMRC TRC, Form 10F, and beneficial ownership declaration. The Indian subsidiary deducts TDS at 15%.

Example 2: UK Company Leasing Manufacturing Equipment to Indian Factory

A UK engineering firm leases specialised manufacturing equipment to an Indian automotive company. The annual lease rental is INR 3,00,00,000 (INR 3 crores).

• Domestic rate: 20% = INR 60,00,000 (plus surcharge and cess, effective ~INR 65,52,000)
• DTAA rate (Article 13(2)(b)): 10% = INR 30,00,000
• Tax saving under DTAA: INR 35,52,000 per year (including surcharge and cess savings)

Example 3: UK Brand Licensing Trademark to Indian Retailer

A UK fashion brand licenses its trademark to an Indian retail company. The annual trademark royalty is INR 1,50,00,000 (INR 1.5 crores).

• Domestic rate: 20% = INR 30,00,000 (plus surcharge and cess)
• DTAA rate (Article 13(2)(a)(ii)): 15% = INR 22,50,000
• Tax saving under DTAA: INR 10,26,000 per year

Trademark licensing is a common arrangement between UK parent companies and Indian licensees, particularly in retail, hospitality, and FMCG sectors.

Frequently Asked Questions

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

The India-UK DTAA provides two rates under Article 13: 15% for intellectual property royalties (copyright, patent, trademark, know-how) under Article 13(2)(a)(ii), and 10% for equipment royalties (industrial, commercial, scientific equipment) under Article 13(2)(b). Both are lower than the domestic rate of 20% plus surcharge and cess.

How does the MLI affect royalty taxation under the India-UK DTAA?

Both India and the UK have signed and ratified the MLI. The Principal Purpose Test (PPT) now applies, meaning treaty benefits on royalties can be denied if obtaining the benefit was a principal purpose of the arrangement. UK companies should maintain genuine economic substance to withstand PPT scrutiny.

Is the 10% equipment royalty rate available for all types of equipment?

Yes, the 10% rate applies to payments for the use of any industrial, commercial, or scientific equipment, provided the equipment is not used in connection with the operation of ships or aircraft in international traffic (which is excluded). This covers manufacturing machinery, laboratory equipment, IT hardware, and similar tangible assets.

How does the India-UK DTAA compare with the India-USA DTAA on royalties?

Both treaties provide the same basic rate structure: 15% for IP royalties and 10% for equipment royalties. However, the India-UK DTAA is modified by the MLI (PPT applies), while the India-USA DTAA is not (USA has not signed the MLI). The India-USA DTAA has a more robust LOB clause under Article 24, while the India-UK DTAA relies on the MLI PPT for anti-avoidance.

What documents does a UK company need to claim the reduced royalty rate?

A UK company needs: (1) a valid Tax Residency Certificate from HMRC; (2) Form 10F filed on India's e-filing portal; (3) a no-PE declaration; and (4) a beneficial ownership declaration. For remittances exceeding INR 5 lakh, Form 15CA and Form 15CB are also required.

Can GAAR override DTAA royalty benefits?

Yes. India's General Anti-Avoidance Rule (GAAR), effective from April 1, 2017, can deny treaty benefits if a royalty arrangement is classified as an impermissible avoidance arrangement. GAAR applies in addition to the MLI's Principal Purpose Test, creating two layers of anti-avoidance scrutiny.

Are software licence fees considered royalties under the India-UK DTAA?

Following the Supreme Court's 2021 ruling, payments for off-the-shelf or shrink-wrapped software are generally not considered royalties. However, customised software, source code transfers, and copyright assignments may still qualify. The characterisation depends on whether the payment is for the use of copyright or merely for a user licence.