Withholding Tax Rates: India to Finland Under DTAA

India to Finland Withholding Tax Rates Under DTAA

When an Indian entity makes payments to a Finnish resident -- whether dividends, interest, royalties, or fees for technical services -- withholding tax must be deducted at source under Section 195 of the Income Tax Act, 1961. The India-Finland DTAA, signed on 15 January 2010, provides a uniform reduced rate of 10% on most payment types compared to India's domestic rate of 20%. Under Section 90(2) of the Income Tax Act, taxpayers can apply whichever rate is more beneficial -- the treaty rate or the domestic rate -- meaning the effective rate is always the lower of the two.

The India-Finland treaty replaced the earlier convention signed on 10 June 1983 in Helsinki. Both India and Finland have signed and ratified the OECD Multilateral Instrument (MLI), which modifies the treaty with anti-abuse provisions including the Principal Purpose Test (PPT). The treaty entered into force on 19 April 2010, with provisions applying in India from 1 April 2011. A protocol to the treaty also contains a most-favoured-nation clause covering dividends, interest, royalties, and FTS: if India agrees lower rates or exemptions with another OECD member state, those better terms are to extend to Finland. Following the Supreme Court's Nestle ruling of October 2023, however, an MFN benefit operates only once the CBDT notifies it under Section 90 -- no such notification has been issued for Finland, so the treaty's 10% rates continue to apply. For the full treaty analysis, see our India-Finland DTAA complete guide.

Dividend Withholding Rates

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

Key points: The India-Finland DTAA applies a flat 10% rate on all dividend payments regardless of the shareholding percentage. This is a significant improvement over the earlier 1983 treaty which provided a 15% rate. The uniform 10% rate represents a 10-percentage-point saving compared to the domestic rate of 20% under Section 195.

Since India abolished the Dividend Distribution Tax (DDT) from 1 April 2020, dividends are now taxable in the hands of the recipient. Finnish shareholders benefit substantially from the reduced 10% treaty rate. The dividend withholding rate applies on the gross amount of dividends without deduction of expenses. Finnish companies with substantial investments in Indian subsidiaries should always ensure TRC documentation is in place to avail of this reduced rate.

Interest Withholding Rates

Article 11 of the treaty provides tiered interest rates depending on the nature of the recipient:

The interest provisions offer substantial savings for Finnish lenders. The treaty specifically exempts interest paid to the Government, local authorities or statutory bodies of either contracting state, and to specified state-owned institutions -- Finnvera, FINNFUND and Finnish Export Credit on the Finnish side, and the Reserve Bank of India, EXIM Bank and National Housing Bank on the Indian side -- as well as interest on loans guaranteed by these bodies. This exemption is valuable for government-backed lending programmes and development finance.

General interest payments to Finnish residents are taxed at 10%, providing a 10-percentage-point saving over the domestic 20% rate. This applies to interest on external commercial borrowings, bank loans, bonds, and other debt instruments. Finnish banks such as Nordea and OP Financial Group lending to Indian companies benefit significantly from this reduced rate.

Interest connected to a permanent establishment in India is treated as business profits rather than interest income and is taxed under Article 7 rather than Article 11.

Royalty and FTS Withholding Rates

Article 12 of the India-Finland DTAA covers both royalties and fees for technical services under a single article with a uniform rate:

The revised 2010 treaty standardized the royalty and FTS rates to a uniform 10%, reducing them from the 15% or 10% rates that applied under the earlier 1983 convention depending on the category. This simplification makes compliance more straightforward for both payers and recipients.

The definition of royalties under the treaty is broad, covering payments for copyrights of literary, artistic, or scientific works (including films and recordings), patents, trademarks, designs, models, plans, secret formulas or processes, and industrial, commercial, or scientific equipment. FTS encompasses payments for managerial, technical, or consultancy services.

Unlike the India-USA treaty which has a "make available" requirement for FTS taxation, the India-Finland DTAA taxes all managerial, technical, and consultancy services at 10% regardless of whether technical knowledge is transferred to the recipient. Finnish technology companies like Nokia providing technical services to Indian entities should note that most service payments will attract the 10% FTS withholding rate.

Beacon Filing's tax advisory services can help Finnish companies determine whether their payments constitute royalties, FTS, or business profits.

Capital Gains Treatment

Article 13 of the India-Finland DTAA addresses the taxation of capital gains from cross-border transactions:

Immovable property: Gains from the alienation of immovable property situated in India are taxable in India at domestic rates -- 12.5% for long-term capital gains (assets held over 24 months) and applicable rates for short-term gains.

Shares deriving value from immovable property: Gains from shares in companies whose assets consist principally of immovable property situated in India may be taxed in India.

Movable property of a PE: Gains from the alienation of movable property forming part of the business property of a permanent establishment are taxable in the state where the PE is situated.

Ships and aircraft: Gains derived by an enterprise of a contracting state from the alienation of ships or aircraft operated in international traffic are taxable only in that state.

Other shares: Under Article 13(5), gains from the alienation of shares of a company resident in a contracting state (other than those covered above) may also be taxed in that state -- so a Finnish resident selling shares of an Indian company can be taxed in India on the gain.

Other property: Gains from the alienation of any other property are taxable only in the state of residence of the alienator.

Finnish residents disposing of Indian assets should claim a foreign tax credit in Finland under the treaty's credit method to avoid double taxation on capital gains.

How to Apply Reduced Rates

To apply the reduced DTAA rates instead of domestic rates, both the Finnish recipient and the Indian payer must follow specific procedures:

For the Finnish Recipient

1. Obtain a Tax Residency Certificate (TRC) -- The Finnish resident must obtain a Tax Residency Certificate from the Finnish Tax Administration (Verohallinto) certifying Finnish tax residency for the relevant year
2. Complete Form 10F -- Furnish Form 10F to the Indian payer with prescribed details including name, status, nationality, tax identification number, and period of residential status
3. Self-declaration -- Provide a declaration confirming beneficial ownership of the income and absence of a PE in India (if applicable)

For the Indian Payer

1. Verify documentation -- Ensure TRC, Form 10F, and self-declaration are on file before applying the reduced 10% rate
2. File Form 15CA online -- Submit Form 15CA on the Income Tax portal before making the remittance
3. Obtain Form 15CB -- For payments exceeding INR 5 lakh, obtain a Chartered Accountant's certificate in Form 15CB
4. Lower withholding certificate -- Under Section 197 it is the Finnish payee that applies to the Assessing Officer for a certificate authorizing lower or nil withholding; the Indian payer's own route is an application under Section 195(2)

Beacon Filing's FEMA and RBI compliance services handle the complete documentation process for claiming DTAA benefits on cross-border payments to Finland.

Domestic Rates vs Treaty Rates Comparison

India's domestic withholding tax rates for non-residents (without surcharge and cess) compared against the India-Finland DTAA rates:

Important note on surcharge and cess: Under domestic law, the withholding rate is further increased by applicable surcharge (rates vary by income level) and health and education cess of 4%, leading to effective rates of approximately 20.8% to 21.84%. When treaty rates are applied, surcharge and cess are not levied on top of the treaty rate, making the effective savings even greater than the headline comparison suggests. The uniform 10% DTAA rate across all income categories simplifies compliance considerably.

Common Mistakes and Compliance Tips

Mistake 1: Not Obtaining TRC Before Remittance

Many payers apply the 10% treaty rate without collecting the Tax Residency Certificate from the Finnish Tax Administration (Verohallinto) first. The Income Tax Department can disallow the treaty benefit and demand tax at the domestic 20% rate plus interest under Section 201(1A) if the TRC is not on record at the time of payment.

Mistake 2: Ignoring the Limitation of Benefits Clause

Article 27 of the India-Finland DTAA is a Limitation of Benefits provision framed as a main purpose test: treaty relief is denied if the main purpose, or one of the main purposes, of any person concerned with the creation or assignment of the income was to take advantage of the treaty. In making that determination the competent authorities may examine the nature of the income and who in law or in fact controls or beneficially owns it. The MLI's Principal Purpose Test reinforces this. Conduit arrangements routed through Finland without commercial rationale can therefore be denied the 10% rate.

Mistake 3: Mischaracterizing Income Types

The distinction between royalties, FTS, and business profits affects documentation requirements and PE analysis. Payments for software licenses, consulting services, and technical support can fall into different categories depending on their specific nature. Incorrect characterization can lead to short-deduction notices or over-withholding.

Mistake 4: Forgetting Form 15CA/15CB Requirements

Failing to file Form 15CA/15CB before remittance can result in penalties under Section 271-I (up to INR 1 lakh). The form must be filed electronically before the bank processes the outward remittance to Finland.

Mistake 5: Not Claiming Foreign Tax Credit in Finland

Finnish residents who have had Indian tax withheld must claim the foreign tax credit on their Finnish tax return. Finland follows the credit method under the treaty, allowing Finnish taxpayers to offset Indian taxes paid against their Finnish tax liability on the same income. The credit is limited to the amount of Finnish tax attributable to the Indian-source income. Note that under Article 22, dividends paid by an Indian company to a Finnish company that directly controls at least 10% of the voting power in the Indian company are exempt from Finnish tax altogether rather than credited.

For end-to-end compliance support on cross-border payments between India and Finland, contact Beacon Filing's team of chartered accountants and transfer pricing advisors.

Frequently Asked Questions

What is the withholding tax rate on dividends paid from India to Finland?

The India-Finland DTAA provides a uniform withholding rate of 10% on all dividends paid to Finnish residents, regardless of the shareholding percentage. This compares favorably to the domestic rate of 20% under Section 195, offering a straight 10-percentage-point saving on every dividend payment.

How does the revised 2010 treaty differ from the earlier 1983 convention?

The 2010 treaty reduced dividend withholding from 15% to 10%, standardized royalty and FTS rates to a uniform 10% (from 15%/10%), expanded exchange of information provisions to meet current international standards, and added a Limitation of Benefits article to prevent treaty shopping.

Are interest payments to Finnish banks taxed under the DTAA?

Yes. Interest paid to Finnish banks is taxed at 10% under Article 11(2) -- a significant saving compared to the 20% domestic rate. Only interest paid to the Finnish Government, local authorities or statutory bodies, or to specified state-owned institutions such as Finnvera, FINNFUND and Finnish Export Credit, qualifies for the 0% exemption under Article 11(3).

Is there a "make available" clause for FTS in the India-Finland DTAA?

No. Unlike the India-USA DTAA, the India-Finland treaty does not include a "make available" requirement for fees for technical services. All managerial, technical, and consultancy services are taxable at 10%, regardless of whether technical knowledge is transferred to the recipient.

What documentation is required to claim the reduced 10% rate?

The Finnish resident must provide a Tax Residency Certificate from the Finnish Tax Administration (Verohallinto), Form 10F, and a self-declaration of beneficial ownership and non-PE status. The Indian payer must file Form 15CA (and Form 15CB for payments exceeding INR 5 lakh) before making the remittance.

Can a Finnish company apply for nil withholding on interest payments?

Government entities, statutory bodies and specified state-owned institutions qualify for 0% withholding under Article 11(3). For other entities, the Finnish payee can apply under Section 197 to the Assessing Officer for a certificate authorizing lower or nil withholding if the actual tax liability is expected to be nil or lower than the standard 10% treaty rate.