Summary: Dividend distributions by Indian companies to foreign shareholders involve income-tax withholding, treaty eligibility, foreign-exchange compliance and overseas tax-credit considerations. Following the abolition of Dividend Distribution Tax from 1 April 2020, dividends are generally taxable in the shareholder’s hands. The domestic rate for specified non-resident dividend income is ordinarily 20%, subject to applicable surcharge, cess and the relevant statutory provisions. However, an applicable Double Taxation Avoidance Agreement may provide a lower rate, depending on the shareholder’s tax residence, beneficial ownership, ownership percentage and satisfaction of treaty conditions. Documentation commonly includes a Tax Residency Certificate, Form 10F and supporting declarations. The article also examines the impact of the Multilateral Instrument, principal-purpose tests and the Supreme Court’s January 2026 Tiger Global decision on treaty eligibility and commercial substance. For remittance purposes, Indian companies must consider withholding certificates, Forms 145 and 146 under the Income-tax Act, 2025, authorised dealer banking procedures and corporate approvals under the Companies Act. Alternative methods of transferring funds to overseas shareholders or associated enterprises include royalties, technical service fees, interest, share buybacks and capital reduction, each having distinct income-tax, transfer-pricing and FEMA consequences. The article concludes by comparing dividends with remittances of post-tax branch profits, which are generally not treated as dividend distributions. Effective planning requires evaluating both the Indian tax cost and the foreign shareholder’s treatment of the income in its home jurisdiction.
1. Domestic rate
Dividend income of a non-resident is taxed at 20% under section 115A of the 1961 Act, plus surcharge and cess. Under the 2025 Act the payer withholds under section 393(2); published rate tables (July 2026) list dividends at 20% for the general category and 10% for a second category in the dividend row, so the applicable row should be confirmed for the payee. The payer must withhold at the higher of the applicable rates unless a lower rate is established. If the payee has not furnished a PAN, the withholding may go up to 20% in any case.
2. Treaty relief
Most treaties reduce the dividend rate, usually to between 5% and 15% depending on the shareholding percentage and the treaty. The conditions for the lower rate generally include:
- the recipient is the beneficial owner of the dividend;
- the recipient is a resident of the treaty state and holds a TRC;
- Form 10F is filed;
- the minimum shareholding for the lowest rate is satisfied (where the treaty prescribes one).
The multilateral instrument (MLI) added a principal purpose test to many treaties. In practice, a payer should ask whether the holding structure has commercial substance, because the Supreme Court’s January 2026 decision in Tiger Global International Holdings (Civil Appeal No. 262 of 2026, decided 15 January 2026) held that a TRC is a requirement for eligibility but is not conclusive, and that anti-avoidance rules can be applied to conduit structures. That case concerned capital gains on an indirect transfer, but the reasoning on TRCs and substance is relevant to any treaty claim.
3. Credit in the home country
The foreign shareholder will claim a credit in its country of residence for Indian tax withheld. The payer should issue the withholding certificate on time and the recipient should confirm that the treaty rate is the one it intends to claim, since the credit is limited to the treaty rate.
4. Repatriation mechanics
Dividends are a current account transaction under FEMA and can be remitted through an authorised dealer bank. The bank will normally ask for:
- the board and shareholder resolutions;
- a declaration that the dividend is paid out of profits and the company has complied with the Companies Act (no dividend from accumulated losses);
- evidence of tax withholding and the Form 145 and 146 filings under the 2025 Act (formerly 15CA and 15CB);
- compliance with the foreign investment reporting history (FC-GPR, FLA return).
Where the investment is in a sector with a dividend balancing condition, the position should be checked against the FDI policy conditions for the sector.
5. Comparing routes to extract cash
| Route | Indian tax outcome | Notes |
|---|---|---|
| Dividend | 20% domestic or treaty rate; no deduction for the company | Needs distributable profits |
| Royalty or FTS | Deductible if arm’s length; withholding at treaty rate | Subject to transfer pricing and GST |
| Interest on loan | Deductible; subject to section 94B limits and ECB rules | Withholding and FEMA conditions |
| Buyback or capital reduction | Different tax treatment | Needs separate analysis |
A mix is not a free choice, since each flow is tested for arm’s length price and character.
6. Branch profits
There is no separate dividend tax on a foreign company’s branch, because remittance of branch profits is not a dividend. Profits are taxed at the foreign company rate and then remitted through the authorised dealer.
Practical takeaway: the headline rate is rarely the issue. The cost of a dividend is determined by how early the TRC and Form 10F are collected, whether the holding structure has substance, and whether the home country credits the Indian tax.
Cases Discussed
- Authority for Advance Rulings (Income Tax) and Others v. Tiger Global International II Holdings, Civil Appeal No. 262 of 2026; decided on 15 January 2026 (Supreme Court of India). The Supreme Court examined the evidentiary significance of tax residency documentation, treaty eligibility, indirect transfers and prima facie tax-avoidance concerns in an investment structure involving Mauritius entities.
Sudheer Nagavarapu is a Partner at A2 Consultants, Hyderabad.
