Definition
What is DTAA (Double Taxation Avoidance Agreement)?
A DTAA (Double Taxation Avoidance Agreement) is a bilateral tax treaty between two countries that prevents the same income from being taxed twice and sets lower withholding rates on cross-border payments. India has DTAAs with 90+ countries.
How it works
How DTAA works.
- Two countries agree on which has primary taxing right on each income type
- Resident-state typically taxes worldwide income; source-state taxes its source
- DTAA provides Foreign Tax Credit (FTC) — credit for tax paid abroad
- Lower withholding rates on cross-border payments (royalty, FTS, interest, dividends)
- Tie-breaker rules if both countries claim residency
Common India DTAAs
Common Indian DTAAs.
Important ones:
- US: Withholding on royalty/FTS reduced to 15% (down from 20%+); business profits taxed where PE exists
- UK: Similar 15% withholding; tighter PE definition
- Singapore: 10-15% withholding; widely used for fund vehicles
- Mauritius: Used to be very advantageous for capital gains; reformed in 2017
- UAE: 10-12% withholding; ground for Dubai-based businesses
- Netherlands: 10% withholding; old favorite for IP holding companies
DTAA misuse risks
DTAA misuse.
- GAAR can disregard structures with no commercial substance
- MFN (Most Favoured Nation) clauses sometimes inapplicable
- Treaty shopping increasingly contested by tax departments
- Need to maintain substance — real offices, employees, decision-making in treaty country
- Beneficial Ownership rules increasingly enforced