Withholding Tax Rates: India to Israel Under DTAA

India to Israel Withholding Tax Rates Under DTAA

The India-Israel DTAA, signed in 1996 and amended by the 2015 Protocol, provides reduced withholding tax rates for Israeli residents receiving income from India. The treaty applies a uniform 10% rate across all major income categories, compared to India's domestic rate of 20% for non-residents under the Income Tax Act.

These reduced rates apply only when the recipient is the beneficial owner of the income and holds a valid Tax Residency Certificate from the Israel Tax Authority. Without proper documentation, the Indian payer must withhold at the higher domestic rate.

Under the treaty, no surcharge or health and education cess is added to the treaty rates. At domestic rates, the effective rate for non-residents can exceed 20% once surcharge is factored in, making the treaty benefit even more significant in practice.

For the complete treaty overview, see our India-Israel DTAA Complete Guide.

Dividend Withholding Rates

Dividends paid by an Indian company to an Israeli beneficial owner are subject to a maximum withholding rate of 10% under Article 10 of the DTAA.

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

• No tiered structure: Unlike many Indian DTAAs (such as with the US, which has different rates for 10%+ and sub-10% shareholdings), the India-Israel treaty applies a flat 10% regardless of the shareholding percentage.
• Dividend Distribution Tax abolished: Since April 2020, India no longer levies DDT. Dividends are taxed in the hands of the recipient, and the 10% withholding under the treaty applies directly.
• No surcharge or cess: The 10% rate is the maximum effective rate. At domestic rates without treaty, effective rates can be higher once surcharge and cess are included.
• Beneficial ownership required: The recipient must be the actual beneficial owner, not a conduit entity. The 2015 Protocol's Limitation of Benefits article and India's GAAR reinforce this requirement.

The original 1996 treaty included a deemed tax credit of 15% on dividend income, meaning Israel would credit Indian tax at 15% even though the actual Indian withholding was 10%. The 2015 Protocol removed this deemed credit provision.

Interest Withholding Rates

Interest arising in India and paid to an Israeli resident is subject to a maximum withholding rate of 10% under Article 11.

The term "interest" covers income from debt-claims of every kind, including government securities, bonds, debentures, and income assimilated to income from money lent under the tax law of the source country.

Key considerations for interest withholding:

• Bank loans: Interest paid by Indian borrowers to Israeli banks is subject to the 10% treaty rate. This applies to both term loans and working capital facilities.
• External Commercial Borrowings: Israeli lenders providing ECBs to Indian entities benefit from the reduced 10% rate, subject to RBI's ECB guidelines and end-use restrictions.
• Bond interest: Indian corporate bonds and government securities held by Israeli investors attract 10% withholding under the treaty.
• Connected person exception: If the interest paid exceeds the arm's length amount due to a special relationship between the payer and recipient, the excess portion is taxed under domestic law provisions.

The original treaty provided a deemed tax credit of 10% on interest income, which was removed by the 2015 Protocol.

Royalty and FTS Withholding Rates

Royalties and fees for technical services are each subject to 10% withholding under Articles 12 and 13 respectively.

Royalties (Article 12)

Royalties mean payments for the use of, or the right to use, any copyright of literary, artistic, or scientific work (including films), any patent, trademark, design or model, plan, secret formula, or process, or for information concerning industrial, commercial, or scientific experience.

Israeli technology companies licensing software, patents, or other IP to Indian entities benefit from the 10% rate. This is significant given the growing India-Israel technology corridor, particularly in cybersecurity, agritech, and defence technology.

Fees for Technical Services (Article 13)

FTS covers payments for managerial, technical, or consultancy services. The India-Israel DTAA is notable for not including a make available clause. Under treaties with countries like the US and UK, FTS is only taxable in India if the service "makes available" technical knowledge to the recipient. No such restriction exists in the India-Israel treaty.

This means:

• All consulting fees paid to Israeli consultants are subject to Indian withholding at 10%
• Technical support services, even if delivered remotely from Israel, trigger 10% withholding
• Management fees paid by an Indian subsidiary to its Israeli parent are subject to 10% withholding
• The absence of the make available clause increases the Indian tax base but also means the rate is predictable and straightforward

Israeli companies providing transfer pricing-sensitive services to Indian affiliates should ensure that the service fees are at arm's length to avoid challenges from both Indian and Israeli tax authorities.

Capital Gains Treatment

Capital gains under the India-Israel DTAA follow a source-based taxation model for certain categories, as amended by the 2015 Protocol:

• Immovable property: Gains from alienation of immovable property situated in India are taxable in India.
• Shares deriving value from immovable property: Gains from shares deriving more than 50% of their value (directly or indirectly) from immovable property in India are taxable in India. This applies at the time of alienation or at any time during the preceding 12 months.
• PE-related movable property: Gains from alienation of movable property forming part of the business property of a PE in India are taxable in India.
• Other shares: Gains from alienation of shares in an Indian company (not falling under the immovable property rule) may be taxed in India.
• Other property: Gains from alienation of any other property are taxable only in the country of residence of the alienator.

Israeli investors holding shares in Indian companies should be aware that capital gains on share sales may be taxable in India under the treaty. The tax rate depends on the holding period and the type of shares under Indian domestic law (short-term vs. long-term capital gains).

How to Apply Reduced Rates

Claiming the reduced 10% withholding rate requires proper documentation before the first payment. Here is the step-by-step process:

Step 1: Obtain Tax Residency Certificate

Israeli residents apply to the Israel Tax Authority for a TRC confirming Israeli tax residency. The certificate must cover the Indian financial year (April to March) in which income is received.

Step 2: File Form 10F

Submit Form 10F electronically on the Indian Income Tax e-filing portal. This self-declaration requires your name, status (individual, company, etc.), nationality, Tax Identification Number, period of residency, and the address in Israel.

Step 3: Submit to Indian Payer

Provide the TRC, Form 10F, and a self-declaration of beneficial ownership to the Indian entity making the payment. The payer then applies 10% withholding under Section 195 instead of the 20% domestic rate.

Step 4: Lower Withholding Certificate (Optional)

If circumstances warrant, the Israeli recipient can apply to the Indian Assessing Officer for a certificate under Section 197 authorizing lower or nil withholding. This is useful when the actual tax liability is expected to be lower than the treaty rate (for example, due to treaty-exempt income categories).

Step 5: Form 15CA/15CB Compliance

The Indian payer must file Form 15CA online before making the remittance and obtain a CA certificate in Form 15CB. This is an information reporting requirement under Section 195(6) and is essential for the Authorized Dealer bank to process the outward remittance.

Domestic Rates vs Treaty Rates Comparison

The effective savings are even larger when surcharge and cess are included. Under domestic law, non-residents face surcharge rates that vary based on income levels (for foreign companies, 2% for income between Rs 1 crore and Rs 10 crore and 5% for income above Rs 10 crore; non-resident individuals face higher surcharge rates), plus a 4% health and education cess on the tax plus surcharge. Treaty rates are not subject to surcharge or cess.

For Indian entities making payments to Israeli recipients, the treaty rate reduces the cost of cross-border transactions and makes Israeli technology, consulting, and IP licensing more commercially viable.

Common Mistakes and Compliance Tips

Based on our experience handling India-Israel cross-border transactions, here are the most common mistakes and how to avoid them:

• Late TRC submission: Many Israeli recipients provide TRC documentation after the first payment has already been made. The Indian payer then withholds at 20%, and the recipient must file a refund claim. Submit documentation before the first payment.
• Annual TRC renewal: TRCs are valid for one financial year. Israeli entities receiving ongoing income from India must renew their TRC annually. Missing the renewal means withholding reverts to domestic rates.
• Ignoring Form 10F: Even with a valid TRC, Form 10F must be filed separately on the Indian income tax portal. This step is frequently overlooked, creating compliance issues.
• Misclassifying FTS as business profits: Some Israeli service providers assume their fees qualify as business profits (taxable only with a PE) rather than FTS (taxable at 10% without a PE). Under the India-Israel DTAA, managerial, technical, and consultancy fees are explicitly covered by Article 13 as FTS.
• Ignoring PE risk: The India-Israel DTAA has no service PE clause, but Israeli companies sending employees to India for extended engagements can still create a permanent establishment through a fixed place of business or a dependent agent concluding contracts, and construction, assembly, or supervisory activities lasting more than six months constitute a PE under Article 5. Track presence and activities carefully.
• Transfer pricing documentation: Cross-border payments between related Israeli and Indian entities require transfer pricing documentation under Section 92D of the Indian Income Tax Act. Undocumented or above-arm's-length payments face adjustment and penalties.
• Not using Form 15CA/15CB: Banks may refuse to process outward remittances without Form 15CA/15CB. This is a regulatory requirement, not optional.

For end-to-end compliance support, including TRC coordination, withholding calculations, and Form 15CA/15CB filing, contact our FEMA and cross-border compliance team.

Frequently Asked Questions

Is the 10% rate automatic, or do I need to apply for it?

The 10% rate is not automatic. You must obtain a Tax Residency Certificate from the Israel Tax Authority, file Form 10F on the Indian Income Tax portal, and provide both documents to the Indian payer before the payment is made. Without these documents, the payer must withhold at the domestic rate of 20%.

What if the Indian payer withholds at 20% instead of 10%?

If the payer withholds at the domestic rate despite your eligibility for treaty benefits, you can claim a refund by filing an Indian income tax return. You will need to file under Section 139(1), declare the Indian income, claim treaty benefits, and request a refund of the excess tax withheld. The refund process typically takes 6-12 months.

Do surcharge and cess apply on top of the 10% treaty rate?

No. When income is taxed at a rate prescribed under a DTAA, surcharge and health and education cess are not applicable. The 10% treaty rate is the maximum effective rate. This is a significant benefit because at domestic rates, the effective rate exceeds 20% once surcharge and cess are added.

Can I get a nil withholding certificate for treaty-exempt income?

Yes. If your income falls under a category that is exempt from Indian tax under the treaty (for example, business profits without a PE), you can apply to the Assessing Officer under Section 197 for a certificate authorizing nil or lower withholding. This avoids the need to file a refund claim later.

Does the India-Israel DTAA apply to capital gains on mutual fund investments?

Capital gains on shares and similar investments are covered under the capital gains article of the treaty. However, mutual fund redemptions are treated differently under Indian domestic law. The applicable rate depends on the type of fund, the holding period, and whether the treaty or domestic law provides a more favorable rate. Professional advice is recommended for this specific situation.

How does the Limitation of Benefits clause affect Israeli entities?

The LOB clause added by the 2015 Protocol restricts treaty benefits to entities with genuine economic substance in Israel. Shell companies or conduit entities set up in Israel solely to access the 10% treaty rate may be denied benefits. The entity must demonstrate that its establishment in Israel has a bona fide business purpose beyond obtaining treaty benefits.

What is the withholding rate for software payments to Israeli companies?

Software licensing fees paid to Israeli companies are generally classified as royalties under Article 12, subject to 10% withholding. Whether a payment qualifies as a royalty depends on whether it involves the use of, or the right to use, copyright in the software. Payments for copyrighted software (as opposed to mere purchase of a copyrighted article) attract royalty withholding.