Withholding Tax Rates: India to Hong Kong Under DTAA

India to Hong Kong Withholding Tax Rates Under DTAA

When an Indian resident makes payments to a Hong Kong resident, the India-Hong Kong DTAA provides significantly reduced withholding tax rates compared to India's domestic rates under the Income Tax Act, 1961. These reduced rates are designed to promote cross-border trade and investment between the two jurisdictions.

India's domestic withholding rate for most payments to non-residents stands at 20% (plus applicable surcharge and health and education cess, bringing the effective rate to approximately 20.8%-21.84%). The DTAA reduces these rates substantially, with dividends benefiting the most at just 5%. Importantly, when treaty rates apply, no surcharge or cess is levied over and above the DTAA rate.

Hong Kong itself does not impose withholding tax on dividends or interest under its domestic tax law. However, the treaty sets maximum rates for the eventuality that Hong Kong introduces such taxes in the future. For Indian payers, understanding and correctly applying these rates is essential for compliance under Section 195 of the Income Tax Act. For a complete overview of the treaty, see our India-Hong Kong DTAA complete guide.

Dividend Withholding Rates

Dividends paid by an Indian company to a Hong Kong resident enjoy the most favourable rate under this treaty:

The 5% rate represents a 75% reduction from India's domestic rate of 20%. To qualify, the recipient must be the beneficial owner of the dividends, meaning they must have the right to use and enjoy the dividend income and not merely act as a conduit or nominee. The anti-avoidance provisions embedded in Article 10 prevent treaty shopping through Hong Kong entities that lack substance.

Since India abolished the Dividend Distribution Tax (DDT) from 1 April 2020, dividends are now taxable in the hands of shareholders. This makes the DTAA rate particularly valuable for Hong Kong investors receiving dividends from Indian companies.

Key Compliance Points for Dividends

• The Indian company must deduct TDS at 5% (not 20%) when paying dividends to a Hong Kong shareholder
• A valid Tax Residency Certificate from the Hong Kong Inland Revenue Department is mandatory
• Form 10F must be filed by the Hong Kong recipient on the Indian e-filing portal
• The Indian company must file Form 15CA/15CB when remitting dividends abroad

Interest Withholding Rates

Interest payments from India to Hong Kong residents are covered under Article 11 of the DTAA:

The treaty provides a 50% reduction on interest withholding, from 20% to 10%. Additionally, under Article 11(3), interest is completely exempt from withholding tax in the source country when it is derived and beneficially owned by the government of the other party, by the Hong Kong Monetary Authority or the Exchange Fund, by the Reserve Bank of India or the Export-Import Bank of India, or by institutions the two competent authorities agree upon.

An important limitation applies: if the interest amount exceeds what would have been agreed upon at arm's length between unrelated parties, the excess portion is not eligible for the reduced DTAA rate and is taxed according to domestic law. This prevents related parties from inflating interest payments to extract funds at the lower treaty rate.

Special Interest Categories

• Bank interest: The general 10% rate applies to interest on loans from Hong Kong banks
• Bond interest: Interest on corporate and government bonds follows the same 10% cap
• ECB interest: External Commercial Borrowings from Hong Kong lenders qualify for the 10% treaty rate
• Government and central institutions: Interest derived by the other party's government, the HKMA and Exchange Fund, or the RBI and Export-Import Bank of India is fully exempt under Article 11(3)

Royalty and FTS Withholding Rates

Unlike many of India's other DTAAs, the India-Hong Kong treaty does not combine royalties and fees for technical services (FTS) under a single article. Royalties are covered under Article 12, while FTS has its own separate Article 13:

Royalties under the DTAA include payments for the use of, or the right to use, any copyright, patent, trademark, design, model, plan, secret formula or process, or for the use of industrial, commercial, or scientific equipment. Transfer pricing rules apply to ensure that royalty payments between related parties are at arm's length.

Fees for technical services cover payments for managerial, technical, or consultancy services, including services provided by technical or other personnel. Note that unlike some of India's other treaties (such as those with Singapore, the UK, or the USA), the FTS definition in the India-Hong Kong DTAA does not contain a "make available" limitation — payments for managerial, technical, or consultancy services fall within Article 13 whether or not technical knowledge is transferred to the recipient.

Capital Gains Treatment

Capital gains under the India-Hong Kong DTAA are governed by Article 14, which provides a detailed framework:

A significant feature of this treaty is that India retains the right to tax capital gains arising from the sale of shares of Indian companies by Hong Kong residents. This is a departure from some older Indian treaties (such as the pre-2017 India-Mauritius DTAA) that gave exclusive taxing rights to the residence country.

The anti-avoidance clause in the capital gains article denies treaty benefits if the principal purpose of the arrangement is to exploit the capital gains provisions. This aligns with the Principal Purpose Test (PPT) under the MLI framework.

How to Apply Reduced Rates

To avail of the reduced withholding rates under the India-Hong Kong DTAA, the following compliance steps must be completed:

Tax Residency Certificate (TRC)

The Hong Kong resident must obtain a Certificate of Resident Status from the Hong Kong Inland Revenue Department. This is the foundational document for claiming any DTAA benefit and is mandatory under Section 90(4) of the Indian Income Tax Act.

Form 10F

Form 10F is a self-declaration by the non-resident that must be filed electronically on the Indian Income Tax e-filing portal. It captures essential details including the taxpayer's status, nationality, tax identification number, period of residential status, and address in Hong Kong.

Lower Withholding Certificate (Section 197)

If the Indian payer is unable or unwilling to apply the lower DTAA rate directly, the Hong Kong resident can apply for a Lower Withholding Certificate under Section 197 of the Income Tax Act. The Assessing Officer, upon verification, issues a certificate specifying the rate at which TDS should be deducted.

Form 15CA/15CB

For every remittance to Hong Kong, the Indian payer must:

• Obtain a Form 15CB certificate from a Chartered Accountant, certifying the nature of remittance, applicable DTAA provisions, and the rate of TDS
• File Form 15CA electronically as a declaration to the Income Tax Department, prior to making the remittance

For companies structuring their India operations from Hong Kong, our tax advisory services and FEMA compliance support can help ensure full regulatory adherence.

Domestic Rates vs Treaty Rates Comparison

Understanding the full picture of tax savings requires comparing the effective domestic rates (including surcharge and cess) with the clean DTAA rates:

A critical advantage of DTAA rates is that surcharge and health and education cess are not applicable when the treaty rate is applied. This means the 5% dividend rate under the DTAA is a flat 5%, whereas the domestic 20% rate effectively becomes 20.8% to 21.84% after adding the 2%-5% surcharge applicable to foreign companies and the 4% cess.

For companies with significant cross-border payment flows, this can result in substantial annual tax savings. Indian companies should factor these savings into their financial models when structuring FEMA-compliant transactions with Hong Kong counterparts.

Common Mistakes and Compliance Tips

Based on our experience advising clients on India-Hong Kong tax matters, here are the most common errors and best practices:

Mistakes to Avoid

• Missing or expired TRC: The most common reason for DTAA benefit denial. Ensure the TRC covers the exact period of income accrual
• Failing to file Form 10F: Since the electronic filing mandate, many non-residents overlook this requirement. Without Form 10F, DTAA benefits cannot be claimed
• Ignoring beneficial ownership requirements: Merely routing payments through a Hong Kong entity does not automatically qualify for treaty benefits. The Hong Kong entity must be the true beneficial owner
• Applying treaty rates without documentation: Indian payers who deduct TDS at DTAA rates without obtaining proper documentation risk being treated as assessees in default under Section 201
• Overlooking GAAR provisions: Arrangements lacking commercial substance or designed primarily for tax avoidance can be challenged under both the treaty's anti-avoidance clauses and India's domestic GAAR

Compliance Tips

• Maintain a complete documentation trail: TRC, Form 10F, self-declaration, and beneficial ownership evidence
• Renew the TRC annually before it expires
• File Form 15CA/15CB for every remittance, even small amounts
• Verify that the Hong Kong entity has sufficient substance (office, employees, decision-making) to support beneficial ownership claims
• Keep records of the business rationale for using the Hong Kong route to counter any GAAR challenge

If you need assistance with DTAA compliance for India-Hong Kong transactions, our tax advisory team can guide you through the documentation and filing requirements.

Frequently Asked Questions

What is the withholding tax rate on dividends from India to Hong Kong?

The DTAA rate for dividends from India to Hong Kong is 5%, compared to the domestic rate of 20%. This applies when the Hong Kong recipient is the beneficial owner and holds a valid Tax Residency Certificate. No surcharge or cess is added to the 5% treaty rate.

Is there a separate withholding rate for bank interest payments?

Bank interest payments from India to Hong Kong are subject to the general treaty rate of 10%. There is no special reduced rate for banks under this treaty. However, interest earned by the Hong Kong Monetary Authority is exempt from withholding tax under Article 11(3).

What happens if TDS is deducted at the domestic rate instead of the DTAA rate?

If TDS is deducted at 20% instead of the applicable DTAA rate, the Hong Kong resident can claim a refund of the excess TDS by filing an income tax return in India. The resident can claim the benefit under Section 90 of the Income Tax Act by providing the required documentation.

Do I need a PAN number in India to claim DTAA benefits?

While having a PAN is not strictly required for claiming DTAA benefits, without a PAN, TDS may be deducted at a higher rate under Section 206AA. Filing Form 10F and obtaining a lower withholding certificate can help mitigate this issue.

How does the Principal Purpose Test affect DTAA benefits?

The India-Hong Kong DTAA builds its own main-purpose anti-abuse tests into the dividends, interest, royalties, FTS, and capital gains articles, mirroring the MLI's Principal Purpose Test: benefits under an article are denied if obtaining them was a main purpose of the arrangement. Genuine commercial substance in Hong Kong is therefore essential.

Can a Hong Kong branch of a foreign company claim DTAA benefits?

Only tax residents of Hong Kong can claim DTAA benefits. A Hong Kong branch of a foreign company may not qualify unless it meets the residency criteria under Hong Kong tax law. The branch must be managed and controlled in Hong Kong, and the parent company's residence is not sufficient.

Are capital gains on Indian shares taxable when sold by a Hong Kong resident?

Yes. Under Article 14 of the DTAA, India retains the right to tax capital gains arising from the sale of shares of Indian companies by Hong Kong residents. This differs from some older Indian treaties that gave exclusive taxing rights to the residence country.