Withholding Tax Rates: India to Denmark Under DTAA

India to Denmark Withholding Tax Rates Under DTAA

When an Indian company makes cross-border payments to a Danish resident — whether dividends, interest, royalties, or fees for technical services — it must deduct withholding tax at source under Section 195 of the Income Tax Act. The India-Denmark DTAA, signed on 8 March 1989, provides a tiered rate structure that differs significantly from India's more modern treaties. While interest on bank loans benefits from a reduced 10% rate, royalties and FTS remain at 20% — equal to the domestic rate.

An important provision to note is Section 90(2) of the Income Tax Act, which allows the taxpayer to apply whichever rate is lower — the treaty rate or the domestic rate. This is particularly relevant for the 25% treaty rate on general dividends, where the domestic 20% rate would apply instead. The treaty rates apply only when the Danish recipient is the beneficial owner of the income and holds a valid Tax Residency Certificate (TRC) from Skattestyrelsen (Danish Tax Agency). For a comprehensive overview, see our India-Denmark DTAA complete guide.

Dividend Withholding Rates

Under Article 11 of the India-Denmark DTAA, dividends paid by an Indian company to a Danish resident follow a two-tier structure based on the percentage of shareholding. This is notably different from India's newer DTAAs which typically offer a flat 10% rate.

For Danish companies holding 25% or more shares in an Indian company, the treaty provides a meaningful benefit — a 5 percentage point reduction from 20% to 15%. For portfolio investors and companies with smaller holdings, the treaty rate of 25% exceeds the domestic rate, so the domestic 20% rate applies under Section 90(2). Danish investors should always compare both rates before determining the applicable withholding rate.

Interest Withholding Rates

Article 12 of the India-Denmark DTAA governs interest payments. The treaty provides a differentiated rate structure based on whether the lender is a bank or a non-bank entity.

The distinction between bank and non-bank interest is significant for Indian companies borrowing from Danish financial institutions. Danish banks lending to Indian companies can benefit from the reduced 10% rate, while interest on bonds, debentures, or loans from non-bank entities attracts a 15% rate. Note that if the interest payment is connected with a permanent establishment that the Danish recipient has in India, the interest is taxed as business profits under Article 7 rather than under Article 12.

Royalty & FTS Withholding Rates

The India-Denmark DTAA provides a 20% withholding rate for both royalties and fees for technical services under Article 13. This rate is identical to the domestic rate, meaning the treaty provides no tax reduction for these payment categories. This is one of the key differences between the 1989-era India-Denmark treaty and India's more modern DTAAs, which typically offer 10% rates.

Despite the 20% rate offering no immediate tax benefit, the treaty still serves an important function: it caps the withholding rate at 20%, protecting Danish taxpayers against any future increase in India's domestic withholding rates. Additionally, the treaty's definition of royalties and FTS may differ from India's domestic definition, which can affect the taxability of certain payments. Danish companies paying for software licenses, IT services, or technology consulting should carefully evaluate whether the payment constitutes a "royalty" or "FTS" under the treaty definition.

Capital Gains Treatment

Capital gains are governed by Article 14 of the India-Denmark DTAA (note the non-standard article numbering). The treaty provides the following treatment:

• Immovable property: Gains from sale of immovable property (real estate) in India are taxable in India at domestic rates.
• Movable property of PE: Gains from sale of movable property forming part of a Danish enterprise's PE in India are taxable in India.
• Ships/aircraft: Gains from sale of ships or aircraft operated in international traffic are taxable only in the country of which the seller is a resident — for a Danish seller, only in Denmark (Article 14(3)).
• Shares: Gains on shares of a company whose property consists principally of immovable property may be taxed in the country where the property is situated (Article 14(4)); gains on other shares representing at least 10% of a company's share capital may be taxed in the company's country of residence — so India can tax a Danish investor's gains on a 10%+ stake in an Indian company (Article 14(5)).
• Other property: Gains from any other property, including shareholdings below 10%, are taxable only in the seller's country of residence (Article 14(6)).

Note: India's domestic law includes indirect transfer provisions (Section 9(1)(i)) and GAAR, which may override treaty provisions for transactions involving substantial value derived from Indian assets. Danish investors should seek professional tax advice before structuring share transactions.

How to Apply Reduced Rates

To apply the reduced DTAA rates instead of domestic rates, the following steps are mandatory:

1. Tax Residency Certificate (TRC): The Danish recipient must obtain a TRC from Skattestyrelsen (Danish Tax Agency) confirming tax residency in Denmark for the relevant period.
2. Form 10F: The Danish recipient must file Form 10F electronically on the Indian income tax portal with details including name, status, nationality, TIN, period of residency, and address.
3. Self-Declaration: A declaration confirming beneficial ownership, absence of PE in India (if applicable), and that the income is not connected with any PE.
4. Form 15CB: The Indian payer must obtain a certificate from a Chartered Accountant in Form 15CB, certifying the applicable DTAA rate and nature of remittance.
5. Form 15CA: The Indian payer must file Form 15CA electronically before making the remittance, providing details of the payment, recipient, and tax deducted.
6. Lower Withholding Certificate: If the Danish recipient expects income below the threshold or has carry-forward losses, they can apply for a lower/nil withholding certificate under Section 197 from the Indian tax authorities.

For step-by-step instructions, read our guide on claiming DTAA lower withholding tax.

Domestic Rates vs Treaty Rates Comparison

The India-Denmark DTAA provides more limited tax savings compared to India's modern treaties. The following comparison shows the effective rates after applying Section 90(2):

The main tax savings under this treaty come from interest on bank loans (10% vs 20%) and dividends where the Danish company holds 25%+ shares (15% vs 20%). For royalties and FTS, the treaty offers no reduction.

Common Mistakes & Compliance Tips

Indian companies making payments to Danish residents should be aware of these common issues:

1. Applying Treaty Rate Instead of Domestic Rate on Dividends

The most common error is applying the 25% treaty rate on general dividends instead of the lower 20% domestic rate. Under Section 90(2), the lower rate always prevails. Indian payers should always compare both rates before deducting withholding tax.

2. Missing or Invalid TRC

Applying treaty rates without obtaining a valid TRC from Skattestyrelsen is a frequent mistake. The TRC must cover the specific financial year in which the payment is made.

3. Not Differentiating Bank vs Non-Bank Interest

The 10% rate on interest applies only to bank loans. Interest on bonds, debentures, or loans from non-bank Danish entities attracts the 15% rate. Misclassification leads to under-deduction and potential tax demands.

4. Ignoring PE Implications

If the Danish recipient has a permanent establishment in India and the payment is connected to that PE, the reduced withholding rates under Articles 11, 12, and 13 do not apply. The income is taxed as business profits under Article 7.

5. Incorrect Article References in Form 15CB

The India-Denmark DTAA uses non-standard article numbering (dividends under Article 11, not Article 10). Using incorrect article references in Form 15CA/15CB can trigger queries from tax officers.

6. Not Claiming Section 90(2) Relief

Danish companies sometimes accept the treaty rate without checking if the domestic rate is lower. Always compute the effective rate under both the treaty and domestic law to determine the applicable rate.

For assistance with FEMA compliance and cross-border payment structuring, consult our tax advisory team.

Frequently Asked Questions

What is the withholding tax rate on interest from India to Denmark?

Interest on bank loans from India to Denmark is taxed at 10% under Article 12(2)(a). Interest in all other cases is taxed at 15% under Article 12(2)(b). Interest paid to the Government or Central Bank of Denmark is fully exempt. The domestic rate without DTAA would be 20%.

Why does the India-Denmark DTAA have higher rates than other Nordic treaties?

The India-Denmark DTAA was signed in 1989, when India's treaty negotiation position included higher rates for dividends (15%/25%) and royalties/FTS (20%). India's more recent DTAAs, such as those with Norway and Sweden (both providing 10% across the board), reflect a modernised approach. Denmark's treaty has not been renegotiated to lower these rates.

Can a Danish company get a nil withholding certificate from India?

Yes. A Danish company can apply under Section 197 of the Income Tax Act for a lower or nil withholding certificate if the expected income is below the taxable threshold or if the company has carry-forward losses. The application must be supported by TRC and Form 10F.

Does surcharge apply on DTAA rates?

It depends on which rate is applied. Where tax is withheld at a domestic-law rate — for example the 20% rate on general dividends — surcharge and Health & Education Cess are added on top. Where a DTAA rate is applied, Indian tribunals have consistently held that the treaty cap is inclusive: no surcharge or cess is added on top of the treaty rate.

Is the 25% dividend rate ever applied in practice?

No. Since the domestic rate of 20% is lower than the 25% treaty rate, Section 90(2) of the Income Tax Act ensures that the lower domestic rate of 20% applies. The 25% treaty rate effectively has no practical application for general dividend payments.

How are technology consulting fees taxed under this treaty?

Technology consulting fees are typically classified as "fees for technical services" under Article 13(2) and taxed at 20%. Since this equals the domestic rate, there is no tax saving. However, the classification may be disputed — if the service does not involve making available technical knowledge, it may not qualify as FTS under the treaty definition, potentially resulting in non-taxation in India.