Withholding Tax Rates: India to China Under DTAA

India to China Withholding Tax Rates Under DTAA

When an Indian resident makes payments to a Chinese resident — whether for dividends, interest, royalties, or technical services — the Indian payer is required to deduct tax at source (TDS) under Section 195 of the Income Tax Act. The India-China Double Taxation Avoidance Agreement (DTAA), signed on 18 July 1994 and amended by the 2018 Protocol, provides reduced withholding tax rates that are significantly lower than India's domestic rates.

The DTAA operates on a simple principle: where the treaty rate is lower than the domestic rate, the taxpayer may apply the more beneficial rate, provided all documentation requirements are met. Under the India-China DTAA, a uniform rate of 10% applies across dividends, interest, royalties, and fees for technical services — making it one of the most straightforward treaties in India's network of over 90 DTAAs.

For Chinese companies operating in India or Indian companies making payments to Chinese counterparts, understanding these rates and the compliance process is essential for proper cross-border payment management and avoiding penalties.

Dividend Withholding Rates

Under Article 10 of the India-China DTAA, dividends paid by an Indian company to a Chinese resident are subject to the following withholding rates:

Key points about dividend withholding under the India-China DTAA:

• Unlike many other Indian treaties (such as the India-Singapore DTAA, which differentiates between substantial and portfolio holdings), the India-China treaty applies a flat 10% rate regardless of the level of shareholding
• The domestic rate of 20% is further increased by surcharge (applicable rates based on dividend amount) and 4% health and education cess, making the effective domestic rate approximately 20.8% to 21.84%
• Dividends paid by Chinese companies to Indian residents are also capped at 10% under China's Enterprise Income Tax law and the DTAA
• Since the Finance Act 2020, dividends are taxable in the hands of the recipient in India (classical system), making treaty relief even more critical for cross-border dividend flows

Interest Withholding Rates

Article 11 governs the taxation of interest income. The India-China DTAA provides two distinct rates based on the nature of the recipient:

Important considerations for interest withholding:

• The exemption for government and central bank interest is particularly significant for sovereign lending, bilateral development finance, and government-backed credit lines between India and China; it also covers interest on loans guaranteed or insured by these government entities
• "Interest" under the treaty means income from debt-claims of every kind, including government securities, bonds, and debentures, but excludes penalty charges for late payment
• Where interest is connected to a permanent establishment in the source country, the interest is taxed as business profits under Article 7 rather than under the interest article
• Indian companies borrowing from Chinese banks should ensure proper Form 15CA/15CB compliance when remitting interest payments

Royalty and FTS Withholding Rates

Article 12 of the India-China DTAA covers both royalties and fees for technical services (FTS) under a single provision — a feature common to many of India's tax treaties:

The term "royalties" under the treaty includes payments for:

• Use of or the right to use copyrights of literary, artistic, or scientific works (including films and software)
• Patents, trademarks, designs, models, plans, and secret formulas or processes
• Information concerning industrial, commercial, or scientific experience (know-how)
• Use of or the right to use industrial, commercial, or scientific equipment

Fees for technical services cover payments for managerial, technical, or consultancy services, including services provided by technical or other personnel. This is broader than OECD-model treaties, which do not include a separate FTS article. Companies engaged in technology transfers should also review transfer pricing implications.

Capital Gains Treatment

Capital gains under the India-China DTAA (Article 13) are treated differently based on the type of asset:

• Immovable property: Gains from alienation of immovable property may be taxed in the country where the property is located
• Shares deriving value from immovable property: If the value of shares is primarily derived from immovable property in a contracting state, the gains may be taxed in that state
• PE business assets: Gains from alienation of movable property that is part of a permanent establishment's business assets may be taxed in the PE's country
• Ships and aircraft: Gains from ships or aircraft operated in international traffic are taxable only in the state of which the alienator is a resident
• Other property, including other shares: Under the residual rule in Article 13(5), gains from any other property — including shares not covered by the immovable-property rule — arising in a contracting state may be taxed in that state; the India-China treaty preserves source-country taxing rights over these residual gains, unlike OECD-model treaties

There is no specific withholding rate prescribed for capital gains in the treaty, as the taxation follows the allocation rules described above. Indian payers making payments for share transfers to Chinese residents should obtain appropriate documentation and consult a tax advisor for correct TDS computation.

How to Apply Reduced Rates

To apply the reduced DTAA rates instead of domestic rates, the following steps must be followed:

Documentation Requirements

1. Tax Residency Certificate (TRC): The Chinese recipient must obtain a TRC from China's State Taxation Administration, valid for the relevant financial year
2. Form 10F: Filed electronically on the Indian Income Tax portal, containing the non-resident's name, status, nationality, tax identification number, period of residential status, and address
3. Beneficial ownership declaration: A self-declaration that the recipient is the beneficial owner of the income and not a conduit or agent for treaty shopping
4. No PE declaration: Confirmation that the income is not attributable to a permanent establishment in India

Remittance Compliance

The Indian payer must complete:

• Form 15CB: Chartered accountant's certificate certifying the nature of remittance, applicable DTAA provisions, and TDS rate applied
• Form 15CA: Online information form filed on the Income Tax portal before making the remittance through an authorised dealer bank

Beacon Filing provides end-to-end assistance with cross-border payment compliance, including Form 15CA/15CB preparation and DTAA documentation.

Domestic Rates vs Treaty Rates Comparison

The following comparison illustrates the tax savings available under the India-China DTAA:

*Effective domestic rate includes 20% base rate + surcharge at applicable rate + 4% health and education cess. Actual rates may vary based on the quantum of payment and applicable surcharge slabs.

For a payment of INR 1 crore (approximately CNY 860,000), the DTAA saves approximately INR 11.84 lakhs compared to domestic rates — a substantial benefit that underscores the importance of proper treaty compliance.

Common Mistakes and Compliance Tips

Based on common issues observed in India-China cross-border transactions, here are key compliance tips:

Mistake 1: Not Obtaining TRC Before Payment

Many Indian payers deduct TDS at domestic rates because the Chinese recipient has not provided a TRC in advance. Ensure TRC and Form 10F are collected before the payment date, not after. Retroactive treaty claims require filing a revised TDS return.

Mistake 2: Ignoring Beneficial Ownership Requirements

Simply being a Chinese tax resident is not sufficient. The recipient must be the beneficial owner of the income. Conduit structures — where a Chinese entity receives payments but is obligated to pass them through to a third-country entity — do not qualify for treaty benefits. India's General Anti-Avoidance Rules (GAAR) can override treaty benefits in abuse cases.

Mistake 3: Applying Treaty Rates When PE Exists

If a Chinese company has a permanent establishment in India and the income is attributable to that PE, the reduced withholding rates for dividends, interest, royalties, and FTS do not apply. Instead, the income is taxed as business profits under Article 7 at applicable corporate tax rates.

Mistake 4: Incorrect Form 15CA/15CB Filing

Form 15CA must be filed before the remittance is made, not after. Late filing attracts penalties under Section 271-I of the Income Tax Act. For payments exceeding INR 5 lakhs, a chartered accountant's certificate in Form 15CB is mandatory.

Mistake 5: Not Considering the 2018 Protocol Changes

The 2018 Protocol introduced an 'Entitlement to Benefits' article (Article 27A) with a Principal Purpose Test. Arrangements entered into primarily to obtain treaty benefits may be denied. Companies should ensure their cross-border structures have genuine commercial substance beyond tax benefits.

For expert guidance on withholding tax compliance and DTAA claims, reach out to Beacon Filing's tax advisory team or explore our FEMA/RBI compliance services for comprehensive cross-border support.

Frequently Asked Questions