Withholding Tax Rates: India to Vietnam Under DTAA

India to Vietnam Withholding Tax Rates Under DTAA

When an Indian entity makes payments to a Vietnamese resident — whether dividends, interest, royalties, or fees for technical services — withholding tax must be deducted at source under Section 195 of the Income Tax Act, 1961. The India-Vietnam DTAA, signed on 7 September 1994 and in force from 2 February 1995, provides a uniform reduced rate of 10% on most payment types compared to India's domestic rate of 20%. Under Section 90(2), taxpayers can apply whichever rate is more beneficial — the treaty rate or the domestic rate — meaning the effective rate is always the lower of the two.

The India-Vietnam DTAA is based on the UN Model Tax Convention. Both countries have signed and ratified the OECD Multilateral Instrument (MLI), which introduces anti-abuse provisions such as the Principal Purpose Test (PPT). An amending protocol signed at Hanoi on 3 September 2016 (in force from 21 February 2017, notified in India on 30 August 2017) replaced the exchange of information article and added a new article on assistance in the collection of taxes. For the full treaty analysis, see our India-Vietnam DTAA complete guide.

Dividend Withholding Rates

Under Article 10 of the India-Vietnam DTAA, dividends paid by an Indian company to a Vietnamese resident are subject to the following withholding rates:

Key points: The India-Vietnam DTAA provides a single flat 10% rate on dividends regardless of the shareholding percentage. This is simpler than many Indian DTAAs (such as the India-USA DTAA) that use tiered rates. Since India abolished the Dividend Distribution Tax (DDT) from 1 April 2020, dividends are now taxable in the hands of the recipient, making the treaty rate directly relevant to Vietnamese investors in Indian companies.

The dividend provisions do not apply if the beneficial owner carries on business in India through a permanent establishment to which the shareholding generating the dividends is effectively connected. In such cases, the dividends are taxed as business profits under Article 7.

Interest Withholding Rates

Article 11 of the treaty provides tiered interest rates depending on the nature of the recipient:

The interest provisions offer substantial savings for Vietnamese lenders. The general rate of 10% represents a 50% reduction compared to India's domestic withholding rate of 20%. Interest paid to the Government of Vietnam, its political subdivisions, local authorities, or the State Bank of Vietnam is fully exempt from withholding tax under Article 11(3). Similarly, interest paid to the Government of India, the Reserve Bank of India, and other specified Indian institutions is exempt in Vietnam.

This exemption is particularly valuable for government-backed lending arrangements and sovereign debt instruments. The interest must arise in India and be paid to a beneficial owner who is a resident of Vietnam. Interest connected with a PE in India is taxed under the business profits provisions of Article 7.

Royalty and FTS Withholding Rates

Unlike most Indian treaties, the India-Vietnam DTAA deals with royalties and fees for technical services in two separate articles: Article 12 covers royalties, while a distinct Article 13 (titled "Technical fees") covers payments for services of a technical, managerial, or consultancy nature. Both are capped at the same 10% rate:

Unlike the India-USA DTAA which has a "make available" clause, the India-Vietnam DTAA does not include such a clause. Under Article 13, all payments for services of a technical, managerial, or consultancy nature (other than payments to an employee) are taxable at the flat 10% rate, regardless of whether the services transfer technical knowledge to the recipient. This broader definition means that most cross-border service payments from India to a Vietnamese recipient trigger the 10% withholding requirement.

The definition of royalties under Article 12(3) includes payments for the use of or right to use any copyright of literary, artistic, or scientific work (including cinematograph films and recordings for radio or television broadcasting), any patent, trade mark, design, model, plan, secret formula or process, or for information concerning industrial, commercial, or scientific experience. Payments for the use of, or the right to use, industrial, commercial, or scientific equipment are also expressly included in the royalty definition.

Capital Gains Treatment

Article 14 of the India-Vietnam DTAA addresses capital gains with the following provisions:

Immovable property: Gains from the alienation of immovable property situated in India are taxable in India under domestic rates — 12.5% for long-term capital gains (held over 24 months) and applicable slab rates for short-term gains.

Shares of property-rich companies: Gains from alienation of shares in a company whose property consists directly or indirectly principally of immovable property situated in a contracting state may be taxed in that state (Article 14(4)).

Other shares: Gains from alienation of any other shares in a company resident in a contracting state may also be taxed in that state (Article 14(5)). This means a Vietnamese resident selling shares in an Indian company is taxable in India on the gains even where the company holds no significant immovable property.

Business assets: Gains from alienation of movable property forming part of the business property of a permanent establishment are taxable in the state where the PE is situated, including gains from alienation of the PE itself.

Ships and aircraft: Gains from alienation of ships or aircraft operated in international traffic are taxable only in the state of which the alienator is a resident.

Vietnamese residents disposing of Indian assets should claim a foreign tax credit in Vietnam to avoid double taxation on capital gains.

How to Apply Reduced Rates

To apply the reduced DTAA rates instead of domestic rates, both the Vietnamese recipient and the Indian payer must follow specific procedures:

For the Vietnamese Recipient

1. Obtain a Tax Residency Certificate (TRC) — The Vietnamese resident must obtain a TRC from the General Department of Taxation of Vietnam certifying tax residency for the relevant fiscal year
2. Complete Form 10F — Furnish Form 10F to the Indian payer with prescribed details including name, status, nationality, tax identification number, and period of residential status
3. Self-declaration — Provide a declaration confirming beneficial ownership of the income and absence of a PE in India (if applicable)

For the Indian Payer

1. Verify documentation — Ensure TRC, Form 10F, and self-declaration are on file before applying reduced rates
2. File Form 15CA online — Submit Form 15CA on the Income Tax portal before making the remittance
3. Obtain Form 15CB — For payments exceeding INR 5 lakh, obtain a Chartered Accountant's certificate in Form 15CB
4. Work with a lower-withholding certificate where one applies — A Section 197 certificate authorising lower or nil withholding is applied for by the payee, i.e. the Vietnamese recipient. The Indian payer's own route is an application to the Assessing Officer under Section 195(2) to determine the proportion of the remittance chargeable to tax

Beacon Filing's tax advisory team handles the complete documentation process for claiming DTAA benefits on cross-border payments to Vietnam.

Domestic Rates vs Treaty Rates Comparison

India's domestic withholding tax rates for non-residents (without surcharge and cess) compared against the India-Vietnam DTAA rates:

Important note on surcharge and cess: Under domestic law, the withholding rate is further increased by applicable surcharge (rates vary by income level) and health and education cess of 4%, leading to effective rates of approximately 20.8% to 21.84%. When treaty rates are applied, surcharge and cess are not levied on top of the treaty rate, making the effective savings even greater than the headline comparison suggests.

The India-Vietnam DTAA offers one of the most consistent and straightforward rate structures among India's DTAAs, with a uniform 10% cap across all passive income categories. For businesses considering market entry, see our guide on registering a company in India from Vietnam.

Common Mistakes and Compliance Tips

Mistake 1: Not Obtaining TRC Before Remittance

Many payers apply treaty rates without collecting the Tax Residency Certificate first. The Income Tax Department can disallow the treaty benefit and demand tax at domestic rates plus interest under Section 201(1A) if the TRC is not on record at the time of payment.

Mistake 2: Assuming a 'Make Available' Clause Exists

Some tax practitioners accustomed to the India-USA DTAA mistakenly apply the "make available" test to the India-Vietnam treaty. The India-Vietnam DTAA has no such clause — all fees for managerial, technical, or consultancy services are taxable at 10% regardless of whether the services transfer technical knowledge.

Mistake 3: Ignoring MLI Impact on Treaty Benefits

Since both India and Vietnam have ratified the MLI, the Principal Purpose Test (PPT) now applies. Treaty benefits may be denied if the principal purpose of an arrangement is to obtain treaty benefits. Ensure that cross-border structures have genuine commercial substance beyond tax optimization.

Mistake 4: Forgetting Form 15CA/15CB Requirements

Failing to file Form 15CA/15CB before remittance can result in penalties under Section 271-I (up to INR 1 lakh). The form must be filed electronically before the bank processes the outward remittance.

Mistake 5: Misapplying Capital Gains Provisions

Some investors assume the treaty shields share sale gains from Indian tax. It does not: under Article 14(5), gains from the alienation of shares in a company resident in India may be taxed in India even where the company is not property-rich, in addition to the specific rule in Article 14(4) for shares of companies whose property consists principally of immovable property. Plan for Indian capital gains tax and claim the corresponding foreign tax credit in Vietnam.

For end-to-end compliance support on cross-border payments between India and Vietnam, contact Beacon Filing's FEMA and RBI compliance team.

Frequently Asked Questions

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

The DTAA rate on dividends paid from India to a Vietnamese resident is 10% of the gross amount, regardless of the shareholding percentage. This is significantly lower than the domestic withholding rate of 20%, providing a uniform 10 percentage point saving.

Are interest payments to the State Bank of Vietnam exempt from withholding tax?

Yes. Interest paid to the Government of Vietnam, its political subdivisions, local authorities, or the State Bank of Vietnam is fully exempt from withholding tax under Article 11(3) of the India-Vietnam DTAA.

Does the India-Vietnam DTAA have a 'make available' clause?

No. Unlike the India-USA DTAA, the India-Vietnam treaty does not include a 'make available' clause. All fees for managerial, technical, or consultancy services are taxable at the flat 10% rate regardless of whether the services transfer technical knowledge to the recipient.

How has the MLI modified the India-Vietnam DTAA?

Both India and Vietnam have ratified the MLI. Key modifications include the Principal Purpose Test (PPT) which can deny treaty benefits for arrangements whose principal purpose is obtaining treaty benefits, and potential changes to permanent establishment definitions. Vietnam's MLI became effective on 1 September 2023.

What is the effective withholding rate after surcharge and cess?

When treaty rates apply, surcharge and cess are not levied on top. The effective rate remains 10% flat. Under domestic rates, the effective rate would be approximately 20.8% to 21.84% (20% plus surcharge and 4% health and education cess), making the treaty savings even more significant.

What documentation is required to claim the 10% DTAA rate?

The Vietnamese resident must provide a Tax Residency Certificate from the General Department of Taxation of Vietnam, Form 10F, and a self-declaration of beneficial ownership. The Indian payer must file Form 15CA electronically and obtain Form 15CB for payments exceeding INR 5 lakh.