Withholding Tax Rates: India to Italy Under DTAA

India to Italy Withholding Tax Rates Under DTAA

When an Indian company makes payments to an Italian resident — whether dividends, interest, royalties, or fees for technical services (FTS) — the Indian payer must deduct tax at source under Section 195 of the Income Tax Act. The India-Italy DTAA, signed on 19 February 1993 and in force since 23 November 1995, provides reduced withholding tax rates on certain payment types compared to India's domestic rates.

The taxpayer is entitled to apply the lower of the treaty rate or the domestic rate under Section 90(2) of the Income Tax Act. This is particularly relevant for this treaty because the general dividend rate under the DTAA (25%) is actually higher than the domestic rate (20%). For a comprehensive understanding of the full treaty provisions, refer to our India-Italy DTAA complete guide.

Dividend Withholding Rates

Under Article 11 of the India-Italy DTAA, dividends paid by an Indian company to an Italian resident may be taxed in India, subject to the following maximum rates:

Key points on dividends:

• The 15% rate for substantial holdings provides a clear 5 percentage point saving over the 20% domestic rate.
• For portfolio dividends (less than 10% holding), the DTAA rate of 25% is not beneficial — the Indian payer should apply the domestic rate of 20% under Section 90(2).
• The beneficial owner test requires the Italian recipient to be the actual economic owner, not merely a conduit.

Italian companies with substantial Indian subsidiaries benefit from structuring equity at the 10% threshold. Our FDI advisory team helps optimize holding structures.

Interest Withholding Rates

Article 12 of the India-Italy DTAA governs the taxation of interest income. Interest arising in India paid to an Italian resident is subject to a maximum withholding rate of 15%, with two categories exempted outright:

The 15% ceiling in Article 12(2) applies to interest paid in respect of loans or debts, and clause (b) of the Protocol narrows that expression: in the case of India it means loans or debts approved in this behalf by the Government of India. Where a borrowing does not carry that approval, the Article 12(2) cap is not available and the interest falls to be taxed under Indian domestic law. Subject to that condition, the 15% rate covers:

• Interest on approved loans from Italian banks and financial institutions to Indian borrowers
• Interest on bonds and debentures issued by Indian corporate borrowers and held by Italian investors
• Interest on trade credit and supplier financing arrangements
• Interest on external commercial borrowings (ECBs) from Italian lenders, which carry RBI/Government approval under the ECB framework

Two exemptions sit outside the 15% cap altogether. Under Article 12(3)(a), interest arising in India is exempt from Indian tax where the payer is the Government of India or a local authority thereof — which is what takes interest on Government of India securities out of charge, rather than the 15% rate. Under Article 12(3)(b), interest is exempt where it is paid to an agency or instrumentality (including a financial institution) that the two Contracting States have specifically agreed upon for this purpose; a body does not qualify merely because it is government-owned, so the agreed status must be confirmed before nil withholding is applied.

Italian banks lending to Indian entities should ensure proper documentation is in place before disbursement to secure the reduced rate from the first payment. Our cross-border payments team assists with structuring compliant interest payment flows.

Royalty and FTS Withholding Rates

Article 13 of the India-Italy DTAA covers both royalties and fees for technical services under a single article with a uniform rate:

Critical observations:

• At 20%, the India-Italy DTAA offers no tax saving on royalties and FTS compared to domestic rates — both are identical at 20%.
• This is one of the highest royalty/FTS rates among India's DTAAs. For comparison, India's DTAAs with the France and Netherlands provide lower rates.
• The definition of FTS under this DTAA includes managerial, technical, and consultancy services, which is broader than some other Indian treaties that require a "make available" clause.
• Italian technology companies licensing software or providing consulting services to Indian entities face the full 20% withholding.

For businesses with significant royalty or FTS flows, exploring alternative structuring through transfer pricing optimization is essential to manage the effective tax burden.

Capital Gains Treatment

Under Article 14 of the India-Italy DTAA, capital gains are treated as follows:

• Immovable property: Gains from sale of immovable property situated in India are taxable in India at applicable Indian rates.
• Shares in property-rich companies: If shares derive their value principally from immovable property in India, the gains may be taxed in India.
• PE-related movable property: Gains from alienation of movable property forming part of the business property of a PE are taxable in the PE State.
• Shares in Indian companies generally: Under Article 14(5), gains from the alienation of shares other than those covered by paragraph 4, in a company resident in a Contracting State, may be taxed in that State. India therefore retains the right to tax an Italian resident's gains on shares of an Indian company, and the treaty sets no minimum-shareholding threshold.
• Other property: Under Article 14(6), gains from the alienation of any property other than that covered by the paragraphs above are taxable only in the State of residence of the alienator (i.e., Italy for Italian residents).

Italian investors selling shares in Indian companies should not assume treaty exemption. Article 14(5) preserves India's taxing right over share gains whether or not the company is property-rich; the property-rich rule in Article 14(4) is an additional source-taxing right, not the only one.

How to Apply Reduced Rates

To apply the DTAA rates instead of domestic rates, follow these steps:

Documentation Requirements

• Tax Residency Certificate (TRC): The Italian recipient must obtain a TRC from the Agenzia delle Entrate (Italian Revenue Agency) for the relevant financial year.
• Form 10F: Must be filed electronically on the Indian income tax e-filing portal. Contains details including name, status, nationality, tax identification number, period of residential status, and address.
• Self-declaration: Confirming beneficial ownership of the income and no PE in India (where applicable).
• No PE declaration: The Italian entity must confirm it does not have a PE in India to which the payment is attributable.

Payer Compliance Steps

• Verify the TRC and Form 10F before the first payment.
• Deduct TDS at the applicable treaty rate under Section 195.
• File Form 15CA electronically before remittance.
• Obtain Form 15CB from a Chartered Accountant for remittances exceeding INR 5 lakh.
• Deposit TDS with the government within the prescribed timeline (7th of the following month).

For Italian companies setting up in India, establishing proper withholding compliance from day one avoids penalties and interest under Section 201.

Domestic Rates vs Treaty Rates Comparison

The following comprehensive comparison helps determine when to apply treaty rates versus domestic rates:

Important: When applying the domestic rate, surcharge and health & education cess (currently 4%) are added, making the effective domestic rate approximately 20.8%-21.84% depending on income. When applying the treaty rate, no surcharge or cess applies. Therefore, even for royalties and FTS where both rates are nominally 20%, applying the treaty rate is beneficial because it avoids the surcharge and cess overlay.

Our tax advisory team provides detailed withholding rate analyses specific to your transaction structure.

Common Mistakes and Compliance Tips

Based on our experience advising Italian businesses with India operations, here are the most common withholding tax errors and how to avoid them:

Mistake 1: Applying Treaty Rate Without Valid TRC

Indian tax authorities frequently disallow treaty benefits when the TRC is expired, does not cover the relevant period, or is not obtained from the correct Italian authority. Always ensure the TRC from the Agenzia delle Entrate covers the specific financial year of the payment.

Mistake 2: Not Filing Form 10F Electronically

Since the introduction of electronic filing requirements, paper-based Form 10F submissions are not accepted. Form 10F must be filed through the income tax e-filing portal; non-residents without an Indian PAN can register on the portal under the dedicated non-resident category to file it.

Mistake 3: Applying 15% Rate on Portfolio Dividends

The 15% rate under Article 11(2)(a) applies only when the beneficial owner owns at least 10% of the shares. Applying this rate to portfolio investors with less than 10% holding leads to short deduction and penalty exposure.

Mistake 4: Ignoring Surcharge and Cess Benefit

Even when the treaty rate equals the domestic rate (as with royalties/FTS at 20%), applying the treaty rate avoids the additional surcharge and health & education cess, saving approximately 0.8%-1.84%. This saving is often overlooked.

Mistake 5: Missing Form 15CA/15CB Filing

Failure to file Form 15CA before remittance or obtain Form 15CB from a CA is a compliance violation under Section 195 read with Rule 37BB, regardless of whether the correct TDS rate was applied. Banks may hold remittances without proper Form 15CA submission.

For end-to-end compliance support, our compliance outsourcing service handles all withholding tax documentation and filings for Italian-Indian cross-border payments.

Italian companies entering the Indian market should also evaluate whether the foreign subsidiary route or a branch office structure optimizes their overall withholding tax position across dividends, interest, and management fees.

Frequently Asked Questions

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

For substantial holdings (10% or more of capital), the treaty rate is 15%, offering a 5% saving over the 20% domestic rate. For portfolio dividends (less than 10% holding), the domestic rate of 20% applies as the treaty rate of 25% is higher and not beneficial.

Is there any tax saving on royalties paid from India to Italy?

The nominal treaty rate and domestic rate are both 20%, so there is no headline rate saving. However, applying the treaty rate avoids surcharge and health & education cess that apply on top of the domestic rate, resulting in an effective saving of approximately 0.8%-1.84%.

What documents must an Italian company provide to claim reduced withholding?

An Italian company must provide a Tax Residency Certificate from the Agenzia delle Entrate, electronically filed Form 10F on the Indian income tax portal, a self-declaration of beneficial ownership, and a no-PE declaration if applicable.

Can an Italian resident apply for a lower withholding certificate?

Yes, under Section 197 of the Income Tax Act, a non-resident can apply to the Assessing Officer for a certificate authorizing the payer to deduct TDS at a lower rate or nil rate if the actual tax liability is lower than the withholding amount.

Are there special rates for interest paid to Italian banks?

No, unlike some of India's other DTAAs, the India-Italy treaty sets no separate rate for interest paid to banks or financial institutions. Article 12(2) caps the tax at 15% of the gross interest, and clause (b) of the Protocol confines that cap, in India's case, to loans or debts approved in this behalf by the Government of India. Two exemptions sit outside the cap: Article 12(3)(a) exempts interest where the payer is the Government of the source State or a local authority thereof, and Article 12(3)(b) exempts interest paid to an agency or instrumentality (including a financial institution) which the two Contracting States have agreed upon in this behalf. An Italian bank therefore qualifies for the exemption only if it is an agreed-upon institution, not merely because it is government-owned.

What happens if the Indian payer deducts TDS at the wrong rate?

If TDS is short-deducted, the payer faces penalty under Section 201(1) plus interest at 1% per month under Section 201(1A). The Italian recipient can claim a refund of excess TDS through Indian income tax return filing or through the MAP process.