U.S.-India tax treaty: withholding rates on interest, dividends, royalties and services

What sets the U.S.-India treaty apart

The U.S.-India treaty, in force since 1990 with no later protocol, keeps rates well above the other major treaties: 15% and 25% on dividends, 10% and 15% on interest, and 15% on royalties. Its distinctive feature is "fees for included services": technical and consulting fees are taxed like royalties at 15% only when they are ancillary to a royalty or "make available" technical knowledge to the payer. Every other service fee is business profits, and a services permanent establishment arises after just 90 days.

Common payments at a glance

Assumes the payee is the beneficial owner, is resident under the treaty, meets its limitation-on-benefits article and gives a valid W-8BEN, W-8BEN-E or Form 8233. Article references are to the treaty as amended.

Rates on investment and other income

Treaty in effect generally from Jan. 1, 1991. Protocols in effect from: none listed. IRS country code IN.

"n/a" means the payment type is not covered by the royalty article: equipment leasing is business profits (no withholding without a permanent establishment) or other income. Superscript letters are the IRS's own conditions, listed at the end of this page.

Pay for personal services performed in the United States

Each row is an exemption the treaty gives, with the limits the IRS lists. All conditions in a row must be met; if any is not, the pay is withheld on at 30% (contractors) or under the wage rules (employees). Services performed entirely outside the United States are foreign-source and need no treaty claim.

Reading the U.S.-India treaty as a payer

Documents and dates

The convention and its protocol were signed in New Delhi on September 12, 1989, together with notes on tax sparing and a memorandum of understanding on fees for included services. It entered into force on December 18, 1990, and its U.S. withholding provisions apply to amounts paid or credited from January 1, 1991. No later protocol has amended it.

Fees for included services

Article 12 taxes royalties and "fees for included services" at the same 15% rate. Fees for included services are payments for technical or consultancy services, including through providing personnel, that either:

• are ancillary and subsidiary to the use of something for which a royalty is paid (a consultant who helps install a licensed process), or
• make available technical knowledge, experience, skill, know-how or processes, or consist of developing and transferring a technical plan or design (Art. 12(4)).

The memorandum of understanding says technology is made available when the recipient is enabled to apply it. Using a service that relies on technology, or receiving a product that embodies it, is not enough, and non-technical consulting (management, marketing, commercial advice) is never covered by the second limb. Its examples: custom software development and engineering design are fees for included services; contract manufacturing, a market simulation for a marketing plan, and a cleaning service using leased monitoring equipment are not. Installation and initial training sold with equipment are excluded, but a ten-year support and update contract is not linked to the sale and can qualify.

Article 12(5) excludes services that are inextricably linked to a sale of property, services ancillary to ship or aircraft rental, teaching in or by educational institutions, services for the personal use of the individual paying, and payments to an employee or to an individual or non-corporate firm for professional services (which go to Article 15 instead).

For a U.S. payer the starting point is still the Code: the treaty never increases U.S. tax (Art. 1(2)), so fees for work performed in India are foreign-source and not withheld on, whatever Article 12 says about them. The 15% rate matters for services performed in the United States.

Permanent establishment and business profits

Indian enterprises reach a U.S. permanent establishment sooner than under most treaties. A construction, installation or assembly project, or a natural-resource installation, counts after 120 days in any 12-month period (Art. 5(2)(j), (k)). Services other than fees for included services, provided through employees or other personnel, create a permanent establishment if they last more than 90 days in any 12-month period, or for any period if the services are for a related enterprise (Art. 5(2)(l)). A protocol rule disregards a taxable year with fewer than 30 days of activity.

Article 7 also has a limited force of attraction: once there is a permanent establishment, the U.S. may tax profits from sales of the same or similar goods, and from other business activities of the same or similar kind, carried on directly in the U.S. Business profits include rent for tangible property other than the equipment covered by Article 12(3)(b) (Art. 7(7)). The U.S. branch profits tax on an Indian company is capped at 15% (Art. 14).

Individuals: contractors, employees, directors and performers

Article 15 covers professional services of an individual or a firm of individuals other than a company. The U.S. may tax the income only if the person has a fixed base regularly available in the U.S. (income attributable to it), or stays in the U.S. for 90 days or more in the aggregate during the tax year. The IRS table states the presence limit as 89 days. There is no dollar limit.

Employees are exempt only if present no more than 183 days in the tax year, paid by or for a non-U.S. employer, and the pay is not borne by a U.S. permanent establishment, fixed base or trade or business (Art. 16). The technical explanation says a reimbursement by a U.S. entity defeats the last two conditions. Directors' fees may be taxed where the company is resident (Art. 17).

The performer threshold is very low: a performer or athlete is exempt only if net income for the year, after expenses of the visit and performance, is $1,500 or less (Art. 18). Above that, all of it is taxable. Recording royalties and endorsements fall under Articles 12 or 15, not Article 18.

Pensions and Social Security

Private pensions and annuities are taxable only in the country of residence, but the treaty requires a pension to be periodic: a lump sum is other income under Article 23, which the U.S. may tax. Social Security and other public pensions are taxable only in the paying country (Art. 20(2)), so U.S. Social Security paid to an Indian resident is withheld on.

Students and teachers

Article 21 exempts Indian students and business apprentices on payments from outside the U.S. for maintenance, education or training. A payment by a U.S. person, or borne by a U.S. permanent establishment, is not from outside the U.S. Article 21(2) also gives them, on grants, scholarships and employment income, the same exemptions, reliefs and reductions as U.S. residents, which is why Publication 519 lets Indian students and business apprentices claim the standard deduction. Teachers and researchers at a recognized educational institution are exempt for up to two years, but the technical explanation warns that a stay longer than two years may make the whole period taxable (Art. 22).

Residence and limitation on benefits

A dual-resident company is outside the treaty almost entirely (Art. 4(3)). Under Article 24, a non-individual qualifies if more than 50% of each class of its shares is owned by residents of either country or U.S. citizens and its income is not used in substantial part to pay non-qualifying persons (the technical explanation treats less than 50% of gross income as generally not substantial), if its income is connected with an active business in India, or if its principal class of shares trades on a recognized exchange. There is no derivative benefits test.

Other income and gains

Article 23 follows the U.N. model: income not dealt with elsewhere and arising in the U.S. may be taxed by the U.S. as well as India, so prizes, lottery winnings and lump-sum pension payments are withheld on. The treaty gives no relief on capital gains other than on ships, aircraft and containers (Art. 13).

Where payers get it wrong

• Treating every technical or consulting fee as a 15% royalty. Only fees that are ancillary to a royalty or make technology available are fees for included services. Management, marketing and routine support are business profits, exempt without a permanent establishment.
• Withholding on fees for work done in India. Services performed outside the U.S. are foreign-source under the Code, and the treaty cannot create U.S. tax.
• Applying Article 12 to an individual consultant. Professional fees paid to an individual or a non-corporate firm are excluded from fees for included services and fall under Article 15, with its 90-day and fixed-base tests.
• Using 15% for equipment rent. Rent for industrial, commercial or scientific equipment is a 10% royalty.
• Missing the 90-day services PE. An Indian company's staff providing services in the U.S. for more than 90 days in 12 months, or for any time for a related company, creates a permanent establishment, and the force-of-attraction rule can then pull in related sales and activities.

Read from the treaty documents: Convention and Protocol of Sept. 12, 1989; exchanges of notes and Memorandum of Understanding on fees for included services; Treasury Technical Explanation. Texts and technical explanations: United States income tax treaties, A to Z.

How the payee claims these rates

• Individuals claim a reduced rate on interest, dividends, royalties or pensions in Part II of Form W-8BEN: treaty country, article, rate and any conditions. Most claims need a U.S. TIN or a foreign TIN on the form.
• Entities claim in Part III of Form W-8BEN-E, which also asks which limitation-on-benefits test the entity meets (the India treaty's LOB provision is Article 24).
• Pay for services performed in the United States by an individual is exempted on Form 8233, not the W-8BEN, one form per tax year and per payer.
• The payer reports the payment on Form 1042-S with the income code shown above and chapter 3 exemption code 04 (exempt or reduced withholding under a tax treaty). From 2026 an exemption code is required whenever less than 30% is withheld.

Questions payers ask

The IRS notes behind the figures

Notes to the rates (IRS Table 1)

• f Includes alimony.
• w The rate in column 6 applies to dividends paid by a regulated investment company (RIC) or a real estate investment trust (REIT). However, that rate applies to dividends paid by a REIT only if the beneficial owner of the dividends is an individual holding less than a 10% interest (25% in the case of Portugal, Thailand, and Tunisia) in the REIT.
• x In India, the rate also applies to fees for included services. See Article 12(4) of the U.S.-India treaty and the May 15, 1989, Memorandum of Understanding Concerning Fees for Included Services in Article 12.
• z An exemption from tax or a reduced rate of tax may apply to interest that is paid to the government of a Contracting State or a political subdivision or local authority thereof. An exemption or reduced rate may also apply to certain other types of interest, including interest paid to certain banks or other financial institutions, interest derived on loans guaranteed or insured by the government of a Contracting State, and interest arising in connection with commercial credit for goods or services. Please refer to the interest article of the relevant treaty for specific information. Income Tax Treaties
• ii In Canada, the 15% rate does not apply to a lump-sum payment. In Italy, the exemption does not apply to lump-sum or severance payments received if the applicable past employment was performed in the United States while such person was a resident of the United States. In the Netherlands, the exemption does not apply if (1) the recipient was a U.S. resident during the 5-year period before the date of payment, (2) the amount was paid for employment performed in the United States, and (3) the amount is not a periodic payment, or is a lump-sum payment in lieu of a right to receive an annuity. In the United Kingdom, the exemption does not apply to a lump-sum distribution derived from a U.S. pension plan. In India, the exemption does not apply to a lump-sum payment.

Notes to the services table (IRS Table 2)

• 4 Does not apply to compensation for research work primarily for private benefit.
• 7 Exemption does not apply to the extent income is attributable to the recipient's fixed U.S. base. For residents of Korea and Norway, the fixed base must be maintained for more than 182 days (for Norway, 30 days in the case of the exploration or exploitation of the seabed and sub-soil and their natural resources); for residents of Morocco, the fixed base must be maintained for more than 89 days.
• 8 Does not apply to fees paid to a director of a U.S. corporation.
• 17 The exemption does not apply if the employee's compensation is borne by a permanent establishment (or in some cases a fixed base) that the employer has in the United States.
• 26 Exemption does not apply if net income exceeds this amount.
• 27 Exemption does not apply to payments borne by a permanent establishment in the United States or paid by a U.S. citizen or resident or the federal, state, or local government.
• 50 This provision does not apply if these activities are substantially supported by a nonprofit organization or by public funds of the treaty country or its political subdivisions or local authorities. For Indonesia and the Philippines, the competent authority of the sending state must certify that the visit qualifies.
• 57 Remuneration for employment exercised aboard a ship or aircraft operated in international traffic by a resident of a contracting State may be taxed in that State. Canada may tax the income from employment if the income is derived by a resident of Canada and the ship or aircraft is operated by a resident of Canada. If operated by a Luxembourg resident and Luxembourg fails to tax the income, such income shall be taxed in the State of which the employee is a resident. The income may be taxed in Tunisia only if the ship or aircraft is operated by an enterprise that is managed and controlled in Tunisia.

Transcribed from the IRS Tax Treaty Tables. Treaty texts and technical explanations: United States income tax treaties, A to Z.

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