Withholding Tax Rates: India to Cyprus Under DTAA

India to Cyprus Withholding Tax Rates Under DTAA

When an Indian entity pays a Cyprus resident — whether dividends, interest, royalties, or fees for technical services (FTS) — tax must be deducted at source under section 393(2) of the Income-tax Act, 2025 (Table, Sl. No. 17; section 195 of the Income-tax Act, 1961). The India-Cyprus DTAA, signed 18 November 2016 and in force from 14 December 2016 (effective in India from 1 April 2017), reduces most of these payments to a uniform 10%, well below the domestic rate of 20%.

Under section 159(4) of the Income-tax Act, 2025 (section 90(2) of the Income-tax Act, 1961), a taxpayer may apply whichever rate is more beneficial — since every treaty rate here undercuts the domestic rate, the 10% cap (or the Article 11(3) exemption) will ordinarily apply once the procedural conditions in this guide are met. This page works through each income head article by article, with the exact conditions and exemption limbs the treaty actually contains.

Dividend Withholding Rates

Article 10(2) sets a single 10% ceiling with no reduced rate for substantial or controlling shareholdings — unlike some Indian treaties, there is no 5% or 15% split by ownership percentage. Note also that Protocol paragraph 1, which once stated there would be "no withholding tax from dividends paid by an Indian company to its shareholders," was tied expressly to the pre-2020 regime under which dividends were exempt in shareholders' hands under section 10(34) of the 1961 Act. That regime — and with it, the clarification — ended from 1 April 2020, so the Article 10(2) 10% cap is now the operative rate.

Interest Withholding Rates

Article 11(2) caps ordinary interest at 10% — a 50% reduction against the 20% domestic rate under section 207(1) (Table, Sl. No. 3) of the Income-tax Act, 2025 (section 115A of the Income-tax Act, 1961) for foreign-currency interest. There is no separate, lower rate for banks or financial institutions generally; the flat 10% is the only tier for ordinary lending.

Article 11(3) then exempts interest entirely, but the exemption is recipient-side only and structured asymmetrically. It applies where the interest "is derived and beneficially owned by" (a) the Government, a political subdivision, or a local authority of either Contracting State; (b) — in a clause that opens "in the case of India" with no Cyprus equivalent — the Reserve Bank of India, the Export-Import Bank of India, or the National Housing Bank; or (c) any other institution the two competent authorities agree to add by an exchange of letters. There is no sub-paragraph beyond (c), and critically, there is no payer-side leg: unlike some of India's other treaties, nothing exempts interest merely because a government entity is making the payment. A Cyprus lender receiving interest from the Government of India is not automatically exempt — the exemption turns entirely on who receives and beneficially owns the interest. For a payment out of India, limb (a) is the one that operates: the Reserve Bank of India, the Export-Import Bank of India and the National Housing Bank are Indian residents, so limb (b) can only reach interest arising in Cyprus.

One further quirk sits outside Article 11 altogether: Article 8(4) provides that "interest on funds connected directly with the operation of ships or aircraft in international traffic shall be regarded as profits derived from the operation of such ships or aircraft, and the provisions of Article 11 shall not apply" to it. That interest is taxed (or exempted) as Article 8 shipping profits, not withheld under Article 11 at all.

Where the Cyprus lender has a PE in India and the debt-claim is effectively connected with it, Article 11(5) routes the interest to Article 7 business-profits treatment at the standard foreign-company rate of 35%, plus applicable surcharge and cess.

Royalty and FTS Withholding Rates

Cyprus uses the combined-article structure: royalties and FTS sit in the same Article 12, capped by the same 10% rate in the same paragraph (Article 12(2)). This is a 50% reduction against the domestic rate of 20% for royalties under section 207(2) (Table, Sl. No. 1) of the Income-tax Act, 2025 (section 115A of the Income-tax Act, 1961), and for FTS under section 207(2) (Table, Sl. No. 2).

The royalty definition in Article 12(3)(a) follows the familiar list — copyrights (including films and broadcasting recordings), patents, trademarks, designs, secret formulas or processes, industrial/commercial/scientific equipment, and information concerning industrial, commercial or scientific experience — but expressly states that royalties "will not include income for the use of, or the right to use aircraft and ships that falls under Article 8." Aircraft and ship leasing is therefore Article 8 shipping-and-air-transport profit, not a 10% royalty.

The FTS definition in Article 12(3)(b) covers "payments of any kind ... as consideration for managerial or technical or consultancy services, including the provision of services of technical or other personnel," excluding only amounts already covered by Article 14 (independent personal services) and Article 15 (dependent personal services). There is no "make available" clause of the kind found in the India-USA or India-Singapore treaties, and managerial services are expressly within scope — broader than treaties that exclude pure management fees from FTS. Article 12(5) fixes where royalties/FTS are deemed to arise (state, subdivision, local authority or resident payer, or a PE/fixed base bearing the cost), with an additional fallback in 12(5)(b) for payments that the main rule does not place in either State.

Capital Gains Treatment

Article 13 allocates gains rather than setting a withholding rate:

Immovable property (13(1)): gains on Indian real estate are taxable in India regardless of the seller's residence.

PE and fixed-base movables (13(2)): gains on assets forming part of a PE's business property, including on alienation of the PE itself, are taxable where the PE is situated.

Ships and aircraft (13(3)): gains on ships/aircraft in international traffic and related movables are taxable only in the alienator's State of residence — not the place of effective management.

Land-rich company shares (13(4)): gains on shares of a company whose property consists "directly or indirectly principally of immovable property" in a Contracting State may be taxed there. The treaty sets no percentage threshold and no look-back period for "principally" — the MLI's Article 9 land-rich rule, which would have added a 365-day testing period, does not apply because Cyprus reserved against MLI Article 9.

All other share gains (13(5)): gains on any other shares of a company resident in a Contracting State "may be taxed in that State" — an unconditional source-taxation right, with no minimum shareholding and no land-rich test. This is the operative rule for an ordinary sale of Indian-company shares by a Cyprus resident.

Residual gains (13(6)): anything not covered above is taxable only in the alienator's State of residence.

Grandfathering. Protocol paragraph 2 overrides 13(4) and 13(5) for shares "acquired at any time prior to the first day of April, 2017," which remain taxable only in the alienator's residence State. Shares "acquired on or after the first day of April, 2017" get none of this protection. There is no transitional half-rate window of the kind found in some other Indian treaties, and no anti-abuse gate on the grandfathering itself — CBDT has clarified that the Principal Purpose Test applies prospectively and does not disturb existing treaty grandfathering. India's domestic capital gains rates then apply to non-grandfathered gains: long-term gains on listed equity under section 198 of the Income-tax Act, 2025 (section 112A of the Income-tax Act, 1961); short-term gains on listed equity under section 196 (section 111A of the 1961 Act); and other capital assets under section 197 (section 112 of the 1961 Act).

How to Apply Reduced Rates

Tax Residency Certificate (TRC)

The Cyprus resident obtains a Tax Residency Certificate from the Tax Department of the Cyprus Ministry of Finance, the competent authority named in Article 3(1)(i)(ii). Because Cyprus runs a calendar-year assessment year while India runs an April-March fiscal year (Article 3(1)(l)), a single Cyprus TRC will often straddle two Indian fiscal years — check the certificate's coverage dates against the payment date.

Form 41 (formerly Form 10F)

The non-resident electronically files Form 41 on the Indian income tax portal, providing status, tax identification number, and period of residential status, and confirming whether a PE exists in India.

Self-Declaration of Beneficial Ownership

Given the beneficial-ownership condition built into Articles 10(2), 11(2), and 12(2), the recipient should provide a declaration of beneficial ownership alongside the TRC and Form 41.

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

The Indian payer files Form 145 online before remitting. Form 146, a Chartered Accountant's certificate, is needed only where Part C of Form 145 applies — a taxable remittance above INR 5 lakh for which the payer has not obtained a section 395(1) certificate.

Lower Withholding Certificate

If there is uncertainty about the applicable rate, the Cyprus recipient can apply under section 395(1) of the Income-tax Act, 2025 (section 197 of the Income-tax Act, 1961) for a certificate specifying a lower or nil rate.

Domestic Rates vs Treaty Rates Comparison

Domestic rates under section 207(1) and 207(2) of the Income-tax Act, 2025 carry applicable surcharge and health-and-education cess (4%) on top; the treaty rate of 10% is final, with no surcharge or cess layered on. Worked example: on a royalty payment of INR 20,00,000, domestic withholding of 20% would be INR 4,00,000; the Article 12(2) treaty rate of 10% brings this down to INR 2,00,000 — a straight INR 2,00,000 saving once the TRC, Form 41, and beneficial-ownership declaration are in place.

Common Mistakes and Compliance Tips

Mistake 1: Applying Protocol paragraph 1 as if it still exempts dividends

The "no withholding on dividends" clarification in the Protocol was tied to the pre-2020 section 10(34) exemption regime. That regime ended on 1 April 2020. The Article 10(2) 10% cap is the current rule, and under-withholding on the old assumption exposes the payer to interest and penalties.

Mistake 2: Assuming Cyprus has a named-institution interest exemption mirroring India's

Article 11(3)(b) names the Reserve Bank of India, the Export-Import Bank of India, and the National Housing Bank "in the case of India" only. There is no equivalent Cyprus institution in the treaty text, and copying an interest-exemption structure from another India treaty onto Cyprus will misstate the law.

Mistake 3: Applying a "make available" test to FTS payments

Article 12(3)(b) has no make-available limb. Pure managerial fees and seconded-personnel arrangements are taxable as FTS at 10%, not excluded for lack of knowledge transfer.

Mistake 4: Missing the services-PE exposure alongside the FTS rate

Article 5(3)(b)'s 90-day services PE test has no carve-out for income already taxed as FTS. A Cyprus consultancy engagement can trigger both a 10% FTS withholding and, once personnel are present for more than 90 days on the same or a connected project, a full services PE taxed on a net basis.

Mistake 5: Assuming a transitional rate applies to post-2017 share sales

Protocol paragraph 2's grandfathering is a binary cut-off keyed to the acquisition date of the shares, not a phased-in rate. Shares acquired on or after 1 April 2017 are fully taxable in India under Article 13(5) from day one, with no half-rate bridge period.

For the complete treaty analysis, see our India-Cyprus DTAA complete guide, or our DTAA master guide for India's wider treaty network.

Frequently Asked Questions

What withholding tax rates apply on payments from India to Cyprus?

The treaty caps dividends at 10% under Article 10(2), interest at 10% under Article 11(2), and royalties and fees for technical services at 10% under Article 12(2). Every head is flat: there is no shareholding tier on dividends, no bank tier on interest, and no make-available test on technical fees. India's domestic rate for each is 20%, so the treaty saves 10 percentage points across the board.

Can interest paid from India to Cyprus ever be exempt under Article 11(3)?

Only where the Government of Cyprus, a political subdivision, or a local authority derives and beneficially owns it. The Reserve Bank of India, Export-Import Bank of India and National Housing Bank limb opens "in the case of India" and names no Cyprus counterpart, so it can only reach interest arising in Cyprus. There is no payer-side leg — interest is not exempt merely because an Indian government body pays it.

Is there a make-available test on royalties and technical fees paid to Cyprus?

No. Article 12 combines both heads in a single article and caps them at the same 10% in the same paragraph, Article 12(2). The definition in Article 12(3)(b) has no make-available limitation, so managerial and consultancy fees and seconded personnel are withheld on at 10%. Aircraft and ship rentals are carved out of the royalty definition and fall under Article 8 instead.

What documents does an Indian payer need before remitting to Cyprus at 10%?

The Cyprus recipient obtains a Tax Residency Certificate from the Tax Department of the Cyprus Ministry of Finance, files Form 41 (formerly Form 10F) electronically on the Indian portal, and declares beneficial ownership and PE status. The Indian payer files Form 145 online before remitting. Form 146, a Chartered Accountant's certificate, is needed only where Part C of Form 145 applies — a taxable remittance above INR 5 lakh for which no section 395(1) certificate has been obtained.

Who applies for a lower withholding certificate, the Cyprus payee or the Indian payer?

Each side has its own route. The Cyprus recipient applies under section 395(1) of the Income-tax Act, 2025 (section 197 of the Income-tax Act, 1961) for a certificate specifying a lower or nil rate. The Indian payer cannot use that route; the payer applies separately under section 395(2) of the Income-tax Act, 2025 (section 195(2) of the Income-tax Act, 1961) for a determination of the proportion of the remittance chargeable to tax.

How is withholding affected if the Cyprus recipient has a PE in India?

The 10% caps stop applying. Articles 10(4), 11(5) and 12(4) route dividends, interest, royalties and technical fees that are effectively connected with an Indian permanent establishment or fixed base into Article 7 business-profits treatment. That income is then taxed on a net, arm's-length basis at the 35% foreign-company rate plus applicable surcharge and cess, rather than withheld at the treaty rate.