Royalty Tax Rate Between India and Vietnam Under DTAA

Quick answer: Under Article 12(2) of the India-Vietnam DTAA, royalties are capped at 10% withholding, versus 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). A distinctive feature of this treaty is that fees for technical, managerial, or consultancy services are not part of the royalty article at all — they sit in a wholly separate Article 13 ("Technical Fees"), also capped at 10% but governed by its own definition. The treaty was signed 7 September 1994, in force from 2 February 1995, effective in India from 1 April 1996.

Key takeaways:

• Royalty withholding capped at 10% under Article 12(2), versus a 20% domestic rate.
• Article 12(3)'s definition of royalties expressly includes payments for the use of, or the right to use, industrial, commercial, or scientific equipment.
• Fees for technical, managerial, or consultancy services are governed by a separate Article 13, not Article 12 — do not cite Article 12 for a pure services payment.
• No most-favoured-nation clause and no shareholding-style tiers; the 10% cap is flat.
• Vietnam is a Covered Tax Agreement under the MLI; the Principal Purpose Test applies to India-source royalty payments from 1 April 2024.

Royalty Tax Rate Between India and Vietnam

The India-Vietnam Double Taxation Avoidance Agreement (DTAA), signed 7 September 1994 in Hanoi and in force from 2 February 1995, provides significant relief on royalty payments flowing between the two countries. Under Article 12(2) of the treaty, the maximum withholding tax rate on royalties is capped at 10% of the gross amount, compared 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).

The India-Vietnam treaty has an unusual drafting feature that matters a great deal for correctly characterising a cross-border payment: royalties (Article 12) and fees for technical services (Article 13, headed simply "Technical Fees") are governed by two entirely separate articles, each with its own definition, rather than being combined — as many of India's other treaties do — into a single "Royalties and Fees for Technical Services" article. Getting the characterisation right affects which article's definition, source rule, and PE-exception language applies to a given payment, even though both articles currently cap the rate at the same 10%.

With Indian IT, pharmaceutical, and manufacturing licensors increasingly active in Vietnam, correctly distinguishing royalty payments from technical-fee payments is a recurring compliance issue. Beacon Filing's tax advisory services assist licensors and licensees on both sides of the corridor with this characterisation.

Treaty Rate vs Domestic Rate: Detailed Comparison

Domestic Rate (Without DTAA)

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

DTAA Rate (With Treaty)

Article 12(2) of the India-Vietnam DTAA restricts the source country's right to tax royalties to a maximum of 10% of the gross amount, provided the recipient is the beneficial owner. This flat rate has no shareholding-style tiers and applies uniformly to all categories of royalty defined in Article 12(3).

Effective Tax Savings

For a Vietnamese licensor receiving INR 1 crore in royalties from an Indian licensee, the DTAA saves INR 10 lakh in withholding tax (10% instead of 20%). The Vietnamese licensor can then claim a foreign tax credit in Vietnam for the Indian tax paid, under Article 24's relief mechanism.

Who Qualifies for the Reduced Rate

Beneficial Ownership Requirement

The Vietnamese recipient must be the beneficial owner of the royalty income — entitled to use and enjoy it independently, not obligated to pass it to a third party. IP-holding structures inserted purely to access the treaty rate, without independent economic substance, risk failing this test.

Tax Residency

The recipient must be a tax resident of Vietnam under Article 4 — for companies, by incorporation or place of effective management; for individuals, by presence, habitual residence, or leased-dwelling tests under Vietnamese domestic law, with Article 4's tie-breaker sequence resolving dual residence.

Anti-Abuse Rules: MLI Principal Purpose Test

The India-Vietnam DTAA is a matched Covered Tax Agreement under the MLI. The Principal Purpose Test applies to India-source royalty payments from 1 April 2024 (Vietnam's MLI ratification took effect 1 September 2023, and the taxable-period rules run from that date). A licensing arrangement whose principal purpose is to access the 10% cap, rather than to license genuine intellectual property for commercial use, can be denied treaty benefit under the PPT. The treaty has no Limitation of Benefits clause and no MFN clause, so the PPT and India's domestic GAAR (effective April 2017) are the operative anti-abuse tools.

No Permanent Establishment Connection

Where the royalty is effectively connected with a PE the Vietnamese beneficial owner has in India, the 10% cap does not apply; the royalty is instead taxed as business profits under Article 7.

Royalty-Specific Treaty Provisions Under Article 12

Definition of Royalties — Article 12(3)

Article 12(3) defines "royalties" as 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 or films or tapes used for radio or television broadcasting — any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial, or scientific experience. Critically, the definition also expressly covers payments for the use of, or the right to use, industrial, commercial, or scientific equipment. This equipment limb means lease and hire payments for machinery, vessels, containers, and similar assets used in India can fall within the royalty article rather than being treated purely as business income, even where no intellectual property is licensed.

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 (recipient's) state.

Article 12(2): Source-State Taxation, 10% Cap

The source state may also tax the royalty, at a rate not exceeding 10% of the gross amount, provided the recipient is the beneficial owner.

Article 12(4): Permanent Establishment Exception

Where the beneficial owner of the royalty carries on business in the source state through a PE, and the right or property giving rise to the royalty is effectively connected with that PE, Articles 12(1) and 12(2) do not apply; the royalty is instead taxed as business profits under Article 7.

Article 12(5): Source Rule

Royalties are deemed to arise in a Contracting State where the payer is a resident of that state, or, where the payer has a PE in connection with which the liability to pay the royalty was incurred and which bears the cost, in the state where that PE is situated.

Article 12(6): Arm's-Length Adjustment

Where a special relationship between payer and recipient causes the royalty paid to exceed an arm's-length amount, the treaty's 10% cap applies only to the arm's-length portion; the excess remains taxable under each state's domestic law, and is frequently disallowed as a deduction for the Indian payer under transfer pricing rules.

Royalties vs Technical Fees: Why the Distinction Matters

Because Article 12 (Royalties) and Article 13 (Technical Fees) are separate articles in this treaty, a payment must be tested against the correct definition. Article 12(3) covers IP licensing, know-how, and industrial/commercial/scientific equipment use. Article 13(3) instead covers "payments of any kind to any person, other than to an employee of the person making the payments, in consideration for any services of a technical, managerial or consultancy nature" — a pure-services concept with no equipment or IP element. A software licence, patent licence, or equipment lease is analysed under Article 12; a consultancy, engineering-supervision, or management-fee arrangement is analysed under Article 13. Both articles currently cap the rate at 10%, so the practical stakes today are mainly about which definition, PE-exception wording, and source rule apply — not about a rate difference — but a future protocol amending only one article would change that.

Documentation Required to Claim the Reduced Rate

Tax Residency Certificate (TRC)

The Vietnamese licensor must obtain a Tax Residency Certificate from Vietnam's General Department of Taxation, required under section 159(8) of the Income-tax Act, 2025 (section 90(4) of the Income-tax Act, 1961).

Form 41 (formerly Form 10F)

Where the TRC lacks prescribed particulars, Form 41 must be filed electronically on the Indian Income Tax portal; a PAN is not mandatory for this filing.

Self-Declaration and Licence Documentation

A self-declaration of beneficial ownership and no-PE status, together with a copy of the licence or equipment-lease agreement identifying what is actually being licensed, should be kept to support the Article 12 characterisation.

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 tax at source on royalty payments at the time of payment or credit, whichever is earlier.

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

Before remitting the royalty, the Indian payer must file Form 145 electronically; for remittances above INR 5 lakh, a Chartered Accountant's certificate in Form 146 is also required.

Lower Withholding Certificate (Section 395(1))

Where the actual liability on the royalty is expected to be lower than the deduction that would otherwise apply, the Vietnamese licensor can apply under section 395(1) of the Income-tax Act, 2025 (section 197 of the Income-tax Act, 1961) for a lower or nil withholding certificate.

Common Disputes and Interpretive Notes

Software Payments: Characterisation Matters

The taxation of cross-border software payments has been the subject of significant Indian litigation independent of any particular treaty. The Supreme Court's ruling in Engineering Analysis Centre of Excellence Pvt Ltd v CIT (2021) held that payments for the resale or use of shrink-wrapped, off-the-shelf software do not constitute "royalty" for copyright purposes, because no right in the copyright itself is transferred. Customised software, source-code licensing, or arrangements granting a right to reproduce or commercially exploit the software can still be analysed as royalty depending on the facts, so each licensing arrangement should be tested on its own terms.

Equipment Royalties Are Real Under This Treaty

Because Article 12(3) expressly extends to industrial, commercial, or scientific equipment, Indian payers sometimes wrongly assume equipment lease payments to a Vietnamese lessor fall outside the royalty article entirely and are simply business profits. Under this treaty they are not: absent an effective PE connection, such payments are royalties capped at 10% under Article 12(2), not payments requiring no withholding at all.

Arm's-Length and Transfer Pricing Overlap

Intra-group royalty rates between Indian subsidiaries and Vietnamese parents (or vice versa) are commonly tested both under Article 12(6)'s arm's-length rule and under India's domestic transfer pricing regime (sections 161–173 of the Income-tax Act, 2025, corresponding to sections 92–92F of the 1961 Act). A rate above arm's length can be challenged on both fronts simultaneously.

Practical Examples and Calculations

Example 1: Patent Licence for Manufacturing Technology

A Vietnamese engineering firm licenses a patented manufacturing process to its Indian joint venture for a royalty of INR 80 lakh per year.

• Without DTAA: TDS at 20% = INR 16 lakh.
• With DTAA: TDS at 10% under Article 12(2) = INR 8 lakh.
• Saving: INR 8 lakh per year, plus a Vietnam-side credit for the Indian tax withheld.

Example 2: Equipment Lease Payment

An Indian textile manufacturer leases specialised weaving equipment from a Vietnamese owner for USD 200,000 per year.

• Characterisation: Falls within Article 12(3)'s equipment limb, so it is a royalty, not ordinary business income.
• Treaty rate: 10% under Article 12(2), assuming beneficial ownership and no PE connection = USD 20,000 withheld.

Example 3: Standard Software Licence

An Indian company pays a Vietnamese software vendor for a standard, off-the-shelf enterprise software licence with no source-code access or reproduction rights.

• Characterisation: Following Engineering Analysis Centre of Excellence, this is not royalty income, so Article 12 does not apply on this ground alone; the payment is analysed instead as business profits under Article 7 (taxable in India only if attributable to an Indian PE).
• Practical note: Each licence agreement must be reviewed on its actual terms, since a licence granting broader reproduction or modification rights could still be royalty.

For the complete rate picture across all income categories, see Beacon Filing's withholding tax rates page and the India-Vietnam DTAA guide, and for the related fees-for-technical-services rules, see the FTS tax rate page.

Frequently Asked Questions

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

Under Article 12(2), the maximum withholding tax on royalties is 10% of the gross amount, provided the recipient is the beneficial owner. The domestic Indian rate without treaty benefit is 20% under section 207(2) (Table, Sl. No. 1) of the Income-tax Act, 2025 (section 115A of the Income-tax Act, 1961).

Are fees for technical services covered by Article 12?

No. This treaty places fees for technical, managerial, or consultancy services in a separate Article 13 ("Technical Fees"), with its own definition, not within Article 12's definition of royalties. Both articles currently cap the rate at 10%, but the applicable definition, PE-exception wording, and source rule differ.

Does Article 12 cover equipment lease payments?

Yes. Article 12(3) expressly defines royalties to include payments for the use of, or the right to use, industrial, commercial, or scientific equipment, so equipment lease and hire payments between India and Vietnam are generally royalties under this treaty, not ordinary business income.

Are software payments treated as royalty under this treaty?

It depends on the transaction. Following the Supreme Court's ruling in Engineering Analysis Centre of Excellence, payments for standard, shrink-wrapped software are not royalty because no copyright right is transferred. Customised software or arrangements granting reproduction or modification rights may still qualify as royalty depending on the licence terms.

What documentation does a Vietnamese licensor need to claim the reduced rate?

A Tax Residency Certificate from Vietnam's General Department of Taxation, Form 41 filed electronically, a self-declaration of beneficial ownership and no-PE status, and a copy of the licence or lease agreement. The Indian payer must file Form 145 (and Form 146 for amounts exceeding INR 5 lakh).

How does the MLI affect royalty taxation under this treaty?

The India-Vietnam DTAA is a Covered Tax Agreement, so the Principal Purpose Test applies — to India-source royalty payments from 1 April 2024. Licensing structures with no genuine commercial substance, set up mainly to access the 10% cap, can be denied treaty benefit under the PPT or India's domestic GAAR.