Withholding Tax Rates: India to Spain Under DTAA

India to Spain Withholding Tax Rates Under DTAA

When an Indian entity makes payments to a Spanish resident — whether dividends, interest, royalties, or fees for technical services (FTS) — tax must be deducted at source under Section 195 of the Income Tax Act. The India-Spain DTAA, signed on 8 February 1993 and significantly updated by the March 2024 MFN notification, provides some of the most competitive withholding tax rates among India's European treaty partners.

The treaty rates are particularly attractive for royalties and FTS — now at just 10% following the MFN clause invocation — making Spain an efficient jurisdiction for technology licensing and consulting arrangements with Indian operations. The taxpayer can apply the lower of the treaty rate or domestic rate under Section 90(2). For the full treaty analysis, see our India-Spain DTAA complete guide.

Dividend Withholding Rates

Under Article 11 of the India-Spain DTAA, dividends paid by an Indian company to a Spanish resident are subject to a maximum withholding rate of 15%:

Key points on dividends:

• Unlike some DTAAs that differentiate by shareholding percentage (e.g., India-Italy at 15%/25%), the India-Spain treaty applies a flat 15% rate regardless of the ownership stake.
• This flat rate simplifies compliance — there is no need to verify the beneficial owner's shareholding percentage for rate determination.
• The 5 percentage point saving applies consistently whether the Spanish shareholder holds 1% or 100% of the Indian company.
• Dividends are taxable in the hands of the shareholder in India at 20% under domestic law (post-Finance Act 2020 abolition of dividend distribution tax), making the treaty rate clearly beneficial.

Spanish companies with Indian subsidiaries benefit from this uniform rate. Our dividend repatriation service ensures compliant and tax-efficient profit distribution.

Interest Withholding Rates

Article 12 of the India-Spain DTAA governs interest taxation. Interest arising in India paid to a Spanish resident is subject to a maximum rate of 15%:

The treaty applies a 15% ceiling across these interest categories, with one notable exemption: under Article 12(3), interest is exempt from Indian tax where the recipient and beneficial owner is the Spanish Government, a political subdivision or local authority, or Spain's central bank. The 15% rate covers:

• Loans from Spanish banks (such as Santander, BBVA, CaixaBank) to Indian borrowers
• Inter-company loans from Spanish parent companies to Indian subsidiaries
• Interest on bonds and debentures held by Spanish institutional investors
• External commercial borrowing (ECB) interest from Spanish lenders
• Trade credit and supplier financing interest

For inter-company loans, the interest rate must comply with transfer pricing arm's length requirements under Section 92 of the Income Tax Act. Our transfer pricing team helps determine compliant interest rates for related-party lending.

Royalty and FTS Withholding Rates

Following the landmark MFN notification in March 2024, Article 13 rates have been significantly reduced:

Note: royalties for the use of industrial, commercial, or scientific equipment were already capped at 10% under Article 13(2)(i) of the original treaty; the MFN notification brought FTS and all other royalties down to the same 10% level.

MFN Clause Background

The Protocol to the India-Spain DTAA contains a Most Favoured Nation (MFN) clause: if, under any convention between India and a third State that is an OECD member and that enters into force after 1 January 1990, India limits its source taxation of royalties or FTS to a lower rate or a more restricted scope than under the India-Spain DTAA, that lower rate or restricted scope also applies to Spain. Following the Supreme Court's October 2023 ruling in the Nestle MFN case, such benefits operate only once notified under Section 90 — which the CBDT did for Spain through Notification No. 33/2024.

The India-Germany DTAA (effective 26 October 1996) provides a 10% rate on royalties and FTS. The Indian government's Notification No. 33/2024 dated 19 March 2024 formally activated this benefit for Spain, effective from financial year 2023-24 (assessment year 2024-25).

Key implications:

• The 10% rate represents a 50% reduction from the original treaty rate and domestic rate.
• Only the rate has changed — the definition of "royalties" and "FTS" under the India-Spain DTAA remains unchanged.
• Spanish technology companies providing software, engineering designs, or consulting services to India benefit substantially.
• For a 1 crore INR royalty payment, the tax saving is INR 10 lakh (20% minus 10%).

This makes the India-Spain corridor one of the most tax-efficient for technology and knowledge transfer. Our tax advisory team helps structure royalty and FTS arrangements to maximize treaty benefits.

Capital Gains Treatment

Under Article 14 of the India-Spain DTAA, capital gains are treated according to the type of asset:

• Immovable property (Article 14(1)): Gains taxable where the property is situated — Indian real estate gains are taxable in India.
• PE movable property (Article 14(2)): Gains from movable property of a PE taxable in the PE State.
• Shares in property-rich companies (Article 14(4)): Gains from shares deriving value principally from immovable property taxable where the property is located.
• 10%+ shareholding (Article 14(5)): Gains from transfer of shares representing 10% or more participation in an Indian company may be taxed in India.
• Other gains (Article 14(6)): Gains from any other asset taxable only in the State of residence (Spain for Spanish residents).

The 10% shareholding threshold is particularly important for Spanish PE/VC investors in Indian startups — exits involving 10%+ stakes may trigger Indian capital gains tax. Our FDI advisory service helps structure investments with exit taxation in mind.

How to Apply Reduced Rates

Follow these steps to claim the treaty-reduced withholding rates:

Documentation Checklist

• Tax Residency Certificate (TRC): Obtained from the Agencia Estatal de Administracion Tributaria (AEAT) — the Spanish Tax Agency. Must cover the Indian financial year (April to March).
• Form 10F: Filed electronically on the Indian income tax portal. The Spanish entity needs an Indian PAN.
• Beneficial ownership declaration: Self-declaration confirming the Spanish recipient is the beneficial owner of the income.
• No PE declaration: Confirmation that the Spanish entity does not have a permanent establishment in India to which the payment is attributable.
• MFN rate claim: For royalties/FTS at 10%, include reference to Notification No. 33/2024 in the documentation.

Lower Withholding Certificate (Section 197)

If the Spanish recipient's actual tax liability on the income is lower than the withholding amount (e.g., due to expenses, losses, or other deductions), they can apply under Section 197 of the Income Tax Act for a lower or nil withholding certificate from the Assessing Officer. This is particularly useful for:

• Spanish companies with significant India-sourced losses to offset
• Royalty income with substantial associated expenses
• Cases where the effective tax rate is lower than the withholding rate

Indian Payer's Compliance

• Verify TRC and Form 10F validity before first remittance.
• Withhold TDS at the applicable treaty rate under Section 195.
• File Form 15CA electronically before each remittance.
• Obtain Form 15CB from a Chartered Accountant for remittances exceeding INR 5 lakh.
• Deposit TDS by the 7th of the following month.
• File quarterly TDS return (Form 27Q) for non-resident payments.

Domestic Rates vs Treaty Rates Comparison

The comprehensive comparison below shows the benefit of applying treaty rates for each payment type:

Critical note: When applying the treaty rate, no surcharge or health & education cess is added on top. The effective domestic rate includes surcharge (2%-5% depending on income) and cess (4%), making the actual saving even larger than the headline rate difference. For royalties and FTS, the effective saving is approximately 11-12 percentage points — making the India-Spain treaty one of the most beneficial in India's network for these payment types.

Common Mistakes and Compliance Tips

Mistake 1: Applying Old 20% Rate on Royalties/FTS

Since the MFN notification was issued on 19 March 2024, many Indian payers are still unaware of the reduced 10% rate for royalties and FTS. Ensure your tax team has updated withholding schedules to reflect the MFN rate from FY 2023-24 (AY 2024-25) onwards.

Mistake 2: Not Referencing Notification 33/2024

When claiming the 10% MFN rate, documentation should explicitly reference Notification No. 33/2024. Tax authorities may question the reduced rate if the MFN basis is not documented in the Form 15CB and withholding workpapers.

Mistake 3: Ignoring MLI Principal Purpose Test

With the MLI in force for both India and Spain, treaty benefits may be denied if the principal purpose of an arrangement is to obtain the treaty benefit. Ensure transactions have genuine commercial substance beyond tax savings. GAAR and PPT challenges are increasing.

Mistake 4: Expired or Incorrect TRC Period

The TRC from AEAT must cover the Indian financial year (1 April to 31 March), not the calendar year. A TRC for calendar year 2025 does not fully cover Indian FY 2025-26 (April 2025 to March 2026).

Mistake 5: Not Filing Form 10F Electronically

Since the mandate for electronic filing, paper-based Form 10F submissions are not accepted. The Spanish entity must have an Indian PAN to access the e-filing portal. Apply for PAN well in advance of the first payment.

Mistake 6: Missing Capital Gains Withholding on Share Transfers

When a Spanish shareholder sells 10%+ shares in an Indian company, the buyer must withhold tax under Section 195. This obligation is often overlooked in private equity exits and M&A transactions. Our cross-border payments service covers withholding on capital transactions.

For comprehensive support on India-Spain withholding compliance, our compliance outsourcing team handles end-to-end TDS management for Spanish-Indian cross-border payments.

Frequently Asked Questions

What are the current withholding tax rates from India to Spain?

Dividends: 15%, Interest: 15%, Royalties: 10% (post-MFN notification), FTS: 10% (post-MFN notification). These are all lower than the domestic rate of 20%, and the effective saving is even greater when accounting for surcharge and cess that apply only on domestic rates.

When did the royalty and FTS rates change to 10%?

The Indian government issued Notification No. 33/2024 on 19 March 2024 invoking the MFN clause in the India-Spain DTAA Protocol. The reduced 10% rate applies from financial year 2023-24 (assessment year 2024-25), importing the lower rate from the India-Germany DTAA (effective since 26 October 1996).

What is the effective saving on royalties paid to Spanish companies?

The effective saving is approximately 10.8%-11.84%. The treaty rate of 10% is applied without surcharge or cess, while the domestic rate of 20% plus surcharge (2-5%) and cess (4%) results in an effective rate of 20.8%-21.84%.

Does the India-Spain DTAA have different rates for substantial shareholders?

No, unlike the India-Italy DTAA which has different rates for 10%+ holdings and general dividends, the India-Spain treaty applies a flat 15% rate on all dividends regardless of the ownership percentage, simplifying compliance.

Is a Spanish NIF acceptable as identification for Form 10F?

Form 10F requires an Indian PAN, not a Spanish NIF. The Spanish entity must first obtain an Indian PAN by applying through the Indian income tax department before it can file Form 10F electronically on the e-filing portal.

Can the MFN benefit be claimed retroactively?

The notification states the reduced rates apply from FY 2023-24 (AY 2024-25). For payments made in prior years at the higher 20% rate, the Spanish taxpayer may need to file an Indian tax return or pursue a MAP claim to obtain a refund of the excess tax withheld.

How does the MLI affect withholding tax claims?

The MLI introduces the Principal Purpose Test, which allows Indian tax authorities to deny treaty benefits if obtaining the benefit was one of the principal purposes of an arrangement. Spanish entities must ensure genuine commercial substance and maintain documentation of business purposes beyond tax savings.