India to South Korea Withholding Tax Rates Under DTAA

India to South Korea Withholding Tax Rates Under DTAA

The revised India-South Korea DTAA (signed 18 May 2015, in force from 12 September 2016 and effective in India from the financial year beginning 1 April 2017) provides significantly reduced withholding tax rates compared to India's domestic rates under the Income Tax Act. These reduced rates apply when the recipient is a tax resident of South Korea and is the beneficial owner of the income. Indian payers are required to deduct tax at source (TDS) under Section 195 of the Income Tax Act on payments to non-residents, and the DTAA rate can be applied instead of the domestic rate when proper documentation is provided.

The revised treaty represents a substantial improvement over the original 1985 DTAA, which had higher withholding rates of 15% on interest, royalties, and FTS. The current treaty brings these rates down to 10%, resulting in meaningful tax savings for South Korean investors and service providers receiving income from India. For a broader understanding of the treaty, see our complete India-South Korea DTAA guide.

Dividend Withholding Rates

Under Article 10(2) of the India-South Korea DTAA, dividends paid by an Indian company to a South Korean resident who is the beneficial owner are subject to a maximum withholding tax rate of 15% of the gross amount. This compares favourably to the domestic rate of 20% plus applicable surcharge and 4% health and education cess (effective rate approximately 21.84%).

The treaty applies a flat 15% cap regardless of the ownership percentage — there is no separate concessional rate for substantial corporate shareholdings. Note that under India's domestic law, dividend income is taxable in the hands of the recipient (post-Finance Act 2020 changes), and the DTAA rate provides relief from the higher domestic withholding obligation.

Interest Withholding Rates

Article 11(2) provides a maximum withholding tax rate of 10% on interest arising in India and paid to a beneficial owner resident of South Korea. This rate applies to commercial interest of all kinds, including bank loans, corporate bonds, and inter-company lending — a significant reduction from the original treaty's 15% rate. Under Article 11(3), interest is exempt from source-country tax when it is derived and beneficially owned by the government, a political sub-division or a local authority of the other country, or by specified institutions — in Korea's case the Bank of Korea, the Export-Import Bank of Korea, the Korea Development Bank, the Korea Trade Insurance Corporation and the Korea Finance Corporation (and on the Indian side the Reserve Bank of India, the Export-Import Bank of India and the National Housing Bank) — or by any other institution the two competent authorities agree upon.

Apart from the Article 11(3) exemption for government and specified-institution interest, the 10% cap applies uniformly across interest categories — the treaty has no separate rate tier for bank loans or financial institutions. The term "interest" is broadly defined to include income from debt-claims of every kind, whether or not secured by mortgage, and whether or not carrying a right to participate in the debtor's profits.

Royalty & FTS Withholding Rates

Article 12 of the India-South Korea DTAA combines royalties and fees for technical services in a single article, both subject to a maximum rate of 10%. This combined treatment is a distinctive feature of the India-Korea treaty.

The definition of royalties covers payments for the use of or right to use any copyright, patent, trademark, design, model, plan, secret formula, or process. FTS is defined as payments for services of a technical, managerial, or consultancy nature, including the provision of services by technical or other personnel. This broad FTS definition means that standalone technical or consultancy services are taxable in India at 10% regardless of whether the South Korean provider has a permanent establishment in India.

Capital Gains Treatment

The revised India-South Korea DTAA introduced source-based taxation for capital gains on shares, a significant departure from the original treaty:

• Shares (5%+ holding): Capital gains from alienation of shares where the transferor held at least 5% of the capital directly or indirectly during the 12 months before the transfer are taxable in the country where the company is resident (source-based taxation).
• Shares (less than 5% holding): Gains from shares where the transferor held less than 5% are taxable only in the country of residence of the transferor, unless the shares derive their value principally from immovable property (see below).
• Immovable property shares: Gains from shares deriving more than 50% of their value from immovable property are taxable in the country where the property is situated.
• Immovable property: Gains from alienation of immovable property are taxable where the property is located.
• Ships and aircraft: Gains from alienation of ships or aircraft operated in international traffic are taxable only in the country of residence.

These provisions are particularly relevant for South Korean companies with substantial shareholdings in Indian subsidiaries or joint ventures, as exit gains may now be subject to Indian capital gains tax under the treaty.

How to Apply Reduced Rates

To avail the DTAA rates on payments from India to South Korea, the following compliance steps must be followed:

1. Tax Residency Certificate (TRC): The South Korean recipient must obtain a TRC from the National Tax Service (NTS) of South Korea confirming Korean tax residence for the relevant financial year. The TRC should be obtained before the payment date.
2. Form 10F: File Form 10F electronically on the Indian income tax e-filing portal (incometax.gov.in). This self-declaration captures treaty details including tax identification number, residential status period, and address.
3. Beneficial ownership declaration: Provide a declaration confirming the South Korean recipient is the beneficial owner of the income.
4. Submit to Indian payer: All documentation must be provided to the Indian company making the payment before the TDS deduction date.
5. Form 15CA/15CB: The Indian payer files Form 15CA (information form) and Form 15CB (CA certificate, required for remittances exceeding INR 5 lakh) before processing the remittance through the authorised dealer bank.
6. Lower withholding certificate (Section 197): For recurring payments or large transactions, the South Korean recipient can apply to the Indian Assessing Officer for a lower or nil withholding certificate under Section 197 of the Income Tax Act.

Domestic Rates vs Treaty Rates Comparison

The effective saving is particularly significant for interest, royalties, and FTS, where the DTAA rate is nearly half the domestic effective rate. Note that domestic rates assume the highest surcharge rate of 5% (for foreign companies with income above INR 10 crore). For smaller remittances, the surcharge may be lower (2%) or nil.

Common Mistakes & Compliance Tips

Based on practical experience with India-South Korea cross-border payments, the following compliance tips can help avoid common pitfalls:

• Obtain TRC before payment: A TRC obtained after the payment date may not be accepted for applying the reduced DTAA rate at the time of TDS deduction. Plan ahead and apply for the TRC well in advance.
• File Form 10F electronically: Since CBDT Notification No. 03/2022 (July 2022), Form 10F must be filed electronically on the Indian income tax portal. The South Korean recipient files it using their PAN, or — if not required to hold a PAN — through the e-filing portal's registration route for non-residents without PAN, available since October 2023.
• Distinguish between royalties and business profits: If a South Korean company provides services that do not fall within the FTS definition (e.g., purely commercial services without a technical element), the payment may be classified as business profits under Article 7 and exempt from Indian tax if there is no PE. Proper characterisation of the payment is critical.
• Track PE exposure: South Korean companies providing services in India must carefully track the number of days their employees are present in India to avoid inadvertently triggering a services PE (183 days in any 12-month period).
• Limitation of Benefits: Article 28 of the revised treaty denies treaty benefits where a person's affairs were arranged so that the main purpose, or one of the main purposes, was to avoid taxes covered by the treaty, and it preserves each country's domestic anti-avoidance rules. Ensure arrangements have genuine commercial substance before claiming treaty benefits.
• MLI Principal Purpose Test: Following ratification by both countries, the PPT applies. Arrangements structured primarily to obtain treaty benefits may be challenged by tax authorities. Maintain robust documentation of commercial substance.
• Apply beneficial rate under Section 90: Under Section 90 of the Income Tax Act, a non-resident can apply whichever rate is lower — the domestic rate or the DTAA rate. The Indian payer should compare both rates and apply the more favourable one.
• Ensure arm's length pricing for inter-company transactions: If interest is paid on inter-company loans between Indian and South Korean group entities, the interest rate must comply with transfer pricing regulations under Sections 92 to 92F of the Income Tax Act. An interest rate above the arm's length benchmark may be disallowed or the excess may not qualify for the reduced DTAA rate.
• Retain documentation long-term: As a matter of prudence, records supporting DTAA claims should be retained for at least eight years from the end of the relevant assessment year, since Indian tax proceedings — including reassessment in cases of substantial escaped income — can arise years after filing.

Frequently Asked Questions

What is the withholding tax rate on interest payments from India to South Korea?

The withholding tax rate on interest is 10% under Article 11(2) of the revised India-South Korea DTAA. This applies to commercial interest including bank loans, corporate bonds, and inter-company lending; interest derived and beneficially owned by the government, a political sub-division, a local authority, or specified institutions of either country — for Korea, including the Bank of Korea, the Export-Import Bank of Korea, the Korea Development Bank, the Korea Trade Insurance Corporation, and the Korea Finance Corporation — is exempt under Article 11(3). The domestic rate without treaty benefit is approximately 21.84% (20% + surcharge + cess).

Are fees for technical services (FTS) taxable under the India-South Korea DTAA?

Yes. Unlike some Indian treaties that contain no FTS provision at all (leaving such services to be tested under the business profits article), the India-South Korea DTAA includes FTS in Article 12 alongside royalties. The maximum withholding rate is 10% of the gross amount of fees for technical, managerial, or consultancy services.

Do I need a PAN to file Form 10F for claiming DTAA benefits?

Not necessarily. Form 10F must be filed electronically, which is simplest with a PAN — but since October 2023 the Indian e-filing portal allows non-residents who are not required to hold a PAN to register without one and file Form 10F.

Can a South Korean company avoid PE creation by providing services remotely from Korea?

Generally, yes. If the South Korean company has no fixed place of business in India and its employees are not physically present in India for more than 183 days in any 12-month period, no PE is typically created. However, the MLI's expanded PE provisions and anti-fragmentation rules should be considered.

Is there a reduced dividend rate for substantial shareholdings?

No. The revised India-South Korea DTAA applies a flat 15% rate on all dividends regardless of the ownership percentage. A single 15% cap applies to all dividends, with no lower rate for substantial shareholdings.

What happens if the Indian payer deducts TDS at the domestic rate instead of the DTAA rate?

If excess TDS is deducted, the South Korean recipient can file an Indian income tax return and claim a refund for the excess tax withheld. Alternatively, the Indian payer can rectify the TDS by filing a correction statement. To avoid this situation, ensure all treaty documentation (TRC, Form 10F, beneficial ownership declaration) is provided to the Indian payer before the payment date.