The India-US Double Taxation Avoidance Agreement (DTAA), originally signed in 1989, is the bilateral framework that lets US-headquartered companies operate in India without being taxed twice on the same income. For a US parent with an Indian subsidiary (or vice versa), the DTAA caps the rate at which the source country can withhold tax on cross-border payments — and provides the mechanism for the residence country to credit the tax paid abroad.
Key DTAA rates that matter for tech operations
| Payment type | Domestic India rate (non-resident) | DTAA cap (treaty rate) | Effective rate to apply |
|---|---|---|---|
| Royalty (software licensing, IP) | 20% (plus surcharge) | 15% | 15% |
| Fees for Included Services (FIS) | 10% (under sec 9(1)(vii)) | 15% (with 'make available' test) | 10% (lower of the two) |
| Dividend | 20% (DDT abolished, withholding applies) | 15% (if 10%+ shareholding) / 25% (others) | 15% / 25% |
| Interest | 20% | 10% (banks / financial institutions) / 15% (others) | 10% / 15% |
| Business profits | 40% (if PE in India) | Only if PE exists (Article 7) | Depends on PE status |
| Capital gains on unlisted shares | 12.5% (LTCG) / 30% (STCG) | Generally India retains rights | 12.5% / 30% |
Fees for Included Services — the 'make available' test
The US-India DTAA's definition of Fees for Included Services (Article 12) is narrower than the Indian domestic Fees for Technical Services definition. FIS treaty rate applies only when the services 'make available' technical knowledge, experience, skill, know-how or processes that enable the recipient to apply the technology independently in the future.
Practical impact: routine services (HR support, finance support, customer support, sales operations) usually don't 'make available' technical knowledge. They fall outside FIS. If they also don't qualify as business profits (no PE), they may not be taxable in India at all. Get a tax opinion before assuming.
DTAA application reviewed per remittance
FastLegal's tax specialist categorises each cross-border payment from your Indian subsidiary, confirms FIS / royalty / business-profit classification, applies the lowest defensible rate, and files Form 15CA / 15CB. Your monthly compliance dashboard shows every treaty position applied.
How to actually claim treaty rates
- Recipient (US parent) obtains Tax Residency Certificate (TRC) from US Internal Revenue Service. IRS Form 6166. Annual.
- Recipient files Form 10F online on the Indian Income Tax portal — declaration of treaty benefit eligibility, requires Indian PAN.
- Recipient provides no-PE declaration where treaty article requires it (business profits, FIS in some cases).
- Indian payer (your subsidiary) holds documentation in file; applies treaty rate at withholding.
- Without TRC + Form 10F + (if applicable) no-PE declaration, payer must withhold at domestic rate. Refund possible later but cash-flow painful.
PE Article — when does the US parent become taxable in India
Under Article 5 of the India-US DTAA, a US enterprise has a Permanent Establishment in India if it has a fixed place of business through which its business is wholly or partly conducted, OR services rendered in India exceed 90 days in 12 months (Service PE), OR a person in India habitually exercises authority to conclude contracts on behalf of the US enterprise (Agency PE).
If PE is triggered, profits attributable to the PE are taxable in India at 40% plus surcharge + cess (~43.7%). Avoiding accidental PE is one of the most important operating guardrails for US companies with Indian operations.
FDI and treaty interplay
- US parent investing in Indian subsidiary — capital infusion is not income; not subject to DTAA withholding. FEMA FC-GPR reporting applies.
- Dividend from Indian subsidiary to US parent — taxable in India at 15% (treaty rate, if 10%+ shareholding) or 25% (others). US parent claims foreign tax credit.
- Sale of Indian subsidiary by US parent — capital gains taxable in India. DTAA Article 13 allocates taxing rights; India retains rights on share sales of Indian companies.
- Royalty from Indian subsidiary to US parent for IP — 15% withholding. Document the IP licensing structure carefully; transfer pricing applies.
Common mistakes US companies make
- Withholding at domestic 20% rate instead of 15% treaty rate because TRC wasn't obtained in time.
- Treating routine services as FIS — sometimes they're not, sometimes domestic rate (10%) is lower than treaty FIS (15%); pick the lower.
- Forgetting Form 10F for the US recipient — without it, treaty benefit is not available.
- Mis-categorising royalty as business profits — works only if no PE; needs robust no-PE declaration.
- Failing to file Form 15CA / 15CB — bank refuses the remittance; cash flow disrupted.
- Treating intercompany cost reimbursements as services — markup creates FIS exposure; pure reimbursement at cost may not.
Frequently asked questions
Can the US parent claim foreign tax credit for India TDS?+
Yes — under IRC §901 / §904. The India withholding tax is creditable against US federal tax on the same income. Limited to the US tax that would have applied; excess is carry-forward / carry-back.
Does the US-India treaty have a Most Favoured Nation clause?+
No — the treaty doesn't include an MFN clause. If India signs lower rates with another country later, US can't automatically claim the lower rate.
What about state taxes in the US — does the treaty cover them?+
DTAA covers federal income tax only. State and local taxes are not creditable under the treaty (though credit may be available under state law).
Should we route through Singapore or Mauritius for tax efficiency?+
Treaty shopping is scrutinised under India's GAAR and the Principal Purpose Test (PPT). Substance — real employees, decision-makers, business activity in the intermediate jurisdiction — is needed. Pure conduit structures are denied benefits.
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