Withholding Tax Rates: India to Turkey Under DTAA

India to Turkey Withholding Tax Rates Under DTAA

When an Indian company makes payments to a Turkish 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-Turkey DTAA, signed on 31 January 1995 and effective from 1 February 1997, provides reduced withholding tax rates across all payment categories 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. In the case of the India-Turkey DTAA, all treaty rates are lower than domestic rates, making the treaty beneficial for every category of cross-border payment. For a comprehensive understanding of the full treaty provisions, refer to our India-Turkey DTAA complete guide.

Dividend Withholding Rates

Under Article 10 of the India-Turkey DTAA, dividends paid by an Indian company to a Turkish resident are subject to a maximum withholding rate of 15%:

Key points on dividends:

• The India-Turkey DTAA applies a uniform 15% rate for all dividends, without differentiation based on shareholding percentage.
• The 15% treaty rate provides a clear 5 percentage point saving over the domestic rate of 20%.
• The beneficial owner test requires the Turkish recipient to be the actual economic owner, not merely a conduit or nominee.
• Both countries have signed the MLI and listed this treaty as a Covered Tax Agreement, but Turkey has not yet ratified the MLI, so its Principal Purpose Test (PPT) does not yet modify this treaty. Once it takes effect, treaty benefits may be denied if obtaining the benefit was one of the principal purposes of an arrangement; India's domestic GAAR can apply in the meantime.
• Turkey itself recently increased its domestic dividend withholding rate from 10% to 15%, aligning with the DTAA rate for India-bound dividends.

Turkish companies with Indian subsidiaries should consider the interplay between Indian and Turkish dividend taxation. Our FDI advisory team helps optimise holding structures for maximum treaty benefit.

Interest Withholding Rates

Article 11 of the India-Turkey DTAA provides a tiered structure for interest withholding, distinguishing between bank loans, general interest, and government interest:

The treaty's tiered interest structure is particularly advantageous for Turkish bank lending to Indian borrowers. Key considerations include:

• Bank loans at 10%: Interest on loans from Turkish banks and financial institutions to Indian borrowers enjoys the most favourable rate at 10%, saving 10 percentage points over the domestic rate.
• General interest at 15%: Interest on bonds, debentures, supplier credit, and other non-bank debt instruments is capped at 15%.
• Government exemption: Interest paid to the Turkish Government, the Central Bank of the Republic of Turkey, or the Turkish Eximbank is fully exempt from Indian withholding tax.
• External commercial borrowings (ECBs) from Turkish banks qualify for the lower 10% rate, making Turkey an attractive source of cross-border financing.

Turkish financial institutions lending to Indian entities should ensure proper documentation is in place before disbursement. Our cross-border payments team assists with structuring compliant interest payment flows.

Royalty and FTS Withholding Rates

Article 12 of the India-Turkey DTAA covers both royalties and fees for technical services under a single article with a uniform maximum rate of 15%:

Critical observations:

• At 15%, the India-Turkey DTAA provides a clear 5 percentage point saving on royalties and FTS compared to the domestic rate of 20%.
• The definition of FTS includes managerial, technical, and consultancy services. Unlike certain DTAAs (such as India-USA), this treaty does not include a "make available" requirement, meaning all technical services are covered regardless of whether technical knowledge is transferred.
• Turkish construction and engineering companies providing technical services to Indian projects benefit significantly from this reduced rate.
• The royalty definition covers payments for patents, copyrights, trademarks, designs, models, plans, and secret formulae, as well as industrial, commercial, and scientific experience (know-how).

For businesses with significant royalty or FTS flows between India and Turkey, exploring optimal structuring through transfer pricing is essential to manage the effective tax burden while maintaining arm's length compliance.

Capital Gains Treatment

Under Article 13 of the India-Turkey 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 domestic rates.
• Shares in property-rich companies: If shares derive their value principally from immovable property in India, gains may be taxed in India.
• Short-term shares (less than 1 year): Gains from alienation of shares held for less than one year may be taxed in the source State.
• Long-term shares (1 year or more): Gains from shares held for one year or more are taxable only in the State of residence of the alienator (Turkey for Turkish residents).
• 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.
• Ships and aircraft: Gains from ships or aircraft in international traffic are taxable only in the State of the enterprise's effective management.

The one-year holding period distinction is an important feature of this DTAA. Turkish investors selling Indian shares should carefully track holding periods to optimise capital gains taxation.

How to Apply Reduced Rates

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

Documentation Requirements

• Tax Residency Certificate (TRC): The Turkish recipient must obtain a TRC from the Turkish Revenue Administration (Gelir Idaresi Baskanligi) 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, Turkish 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 Turkish 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 Turkish 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 level. When applying the treaty rate, no surcharge or cess applies. Therefore, the actual savings are greater than the headline rate differences shown above.

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

Common Mistakes and Compliance Tips

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

Mistake 1: Applying General Interest Rate to Bank Loans

The treaty distinguishes between bank/financial institution loans (10%) and general interest (15%). Ensure that interest on loans from Turkish banks and regulated financial institutions is correctly classified at the lower 10% rate under Article 11(2)(a). This requires the lending entity to qualify as a "bank or financial institution" under Turkish law.

Mistake 2: 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 Turkish authority. The TRC must be issued by the Gelir Idaresi Baskanligi and cover the specific financial year of the payment.

Mistake 3: Not Filing Form 10F Electronically

Since the introduction of electronic filing requirements, paper-based Form 10F submissions are not accepted. The Turkish recipient must have a valid Indian PAN and file Form 10F through the income tax e-filing portal before claiming treaty benefits.

Mistake 4: Ignoring Short-Term Capital Gains Provision

Turkish residents selling Indian shares within one year of acquisition face Indian capital gains tax under Article 13. The one-year holding period is a critical threshold — disposing of shares even one day before completing one year triggers Indian tax liability that would otherwise not apply.

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 Turkish-Indian cross-border payments.

Additional Compliance Considerations

Indian companies making regular payments to Turkish entities should establish a compliance calendar tracking TRC validity dates, Form 10F renewal requirements, and Form 15CA/15CB filing deadlines. Since Turkey recently increased its own domestic dividend withholding rate from 10% to 15%, aligning with the DTAA rate, the overall tax burden on cross-border dividends requires careful analysis of both Indian withholding and Turkish credit mechanisms. The interaction between the treaty's tiered interest structure and India's ECB regulations under FEMA also warrants specialist advice for Turkish lenders structuring cross-border financing facilities.

Frequently Asked Questions

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

Dividends paid from India to Turkish residents are subject to a maximum withholding rate of 15% under Article 10(2) of the India-Turkey DTAA. This is a uniform rate regardless of the shareholding percentage, providing a 5 percentage point saving over the 20% domestic rate.

Why is the interest rate lower for Turkish bank loans?

The treaty provides a tiered interest structure: 10% for bank/financial institution loans versus 15% for general interest. This incentivises institutional lending by offering a 10 percentage point saving to Turkish banks lending to Indian borrowers, making Turkey a competitive source of cross-border financing.

What documents must a Turkish company provide to claim reduced withholding?

A Turkish company must provide a Tax Residency Certificate from the Gelir Idaresi Baskanligi (Turkish Revenue Administration), electronically filed Form 10F on the Indian income tax portal, a self-declaration of beneficial ownership, and a no-PE declaration if applicable.

Is there a make available clause for FTS in the India-Turkey DTAA?

No, unlike some DTAAs such as India-USA, the India-Turkey treaty does not include a "make available" requirement for fees for technical services. All managerial, technical, and consultancy services qualify for the 15% treaty rate under Article 12(2) regardless of whether technical knowledge is transferred to the Indian payer.

How does the MLI Principal Purpose Test affect treaty benefits?

Not yet. Although both India and Turkey have signed the MLI and designated this DTAA as a Covered Tax Agreement, Turkey has not yet deposited its instrument of ratification, so the PPT does not currently modify the India-Turkey treaty. Once the MLI takes effect for Turkey, benefits may be denied if one of the principal purposes of an arrangement was to obtain the treaty benefit, so ensure cross-border structures have genuine business substance beyond tax advantages.

Can a Turkish 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 authorising the payer to deduct TDS at a lower rate or nil rate if the actual tax liability is lower than the withholding amount calculated at the treaty rate.

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 Turkish recipient can claim a refund of excess TDS through Indian income tax return filing or through the treaty's Mutual Agreement Procedure (MAP).