DTAA (Double Taxation Avoidance Agreement)

DTAA (Double Taxation Avoidance Agreement) is a bilateral tax treaty between India and a foreign country that determines how income with a cross-border element is taxed — and prevents the same income from being taxed twice: once in the source country (where the income arises) and once in the residence country (where the recipient is based). India has DTAAs with over 90 countries, including the US, UK, Singapore, UAE, Netherlands, Germany, and Japan.

For startups, the most practical DTAA applications are: reducing the TDS rate on payments to foreign vendors, and understanding whether income received from foreign clients creates a tax liability in India.

Who it applies to

• Startups making payments to foreign vendors, contractors, or SaaS platforms — where TDS under Section 195 would otherwise apply
• Companies receiving investment from foreign investors, where future dividend or interest flows back to those investors
• Founders and employees who are non-resident Indians receiving salary or director fees from an Indian company
• Startups with foreign subsidiaries or cross-border intercompany transactions

How DTAA reduces TDS on cross-border payments

Without a DTAA, payments to non-residents under Section 195 attract high default TDS rates. DTAAs cap withholding at lower rates for specific income categories:

To apply the DTAA rate, the foreign vendor must provide:

1. Tax Residency Certificate (TRC) — issued by the vendor's home country tax authority confirming residency in that country
2. Form 10F — a self-declaration filed on the Indian income tax portal by the vendor

The Indian company's CA then issues Form 15CB (certifying the nature of payment and applicable rate) before the company files Form 15CA on the income tax portal and instructs the bank to process the remittance.

What most founders miss

The Mauritius and Singapore capital gains routes are largely closed for new investments. Historically, VC investments were structured through Mauritius or Singapore holding companies to benefit from DTAA-based capital gains exemptions on sale of Indian company shares. Post-2016 amendments phased this out for investments made after April 2017. New VC structures do not benefit from these routes — the holding company location matters far less than it did a decade ago.

SaaS payments may not require TDS at all — but take a documented position. Payments for cloud software access are commonly treated as business profits under Indian courts' interpretation — taxable only in the vendor's country, with no Indian withholding. However, tax authorities sometimes argue that software access payments are royalties, which attract withholding even under DTAAs. A startup that applies a nil-TDS position without documentation of the reasoning is exposed if the position is later challenged. Obtain a CA opinion for any material recurring payment.

Foreign vendors must file Form 10F on the Indian portal. Before April 2023, Form 10F was filed physically. It is now filed online on the Indian income tax portal by the foreign vendor — who must obtain a PAN (or use the non-PAN Form 10F option). Some foreign vendors are unfamiliar with this requirement. Startups should brief vendors early when the DTAA benefit is material; delays in Form 10F filing can hold up remittances.

Royalties paid to founders are a DTAA-adjacent issue. When a founder who has relocated abroad licenses IP to the Indian company, the royalty payments may be subject to TDS under Section 195 at rates modified by the applicable DTAA. The interaction between the founder's residency, the applicable DTAA, and the nature of the IP must be analysed — this is a common issue as Indian startup founders move to Singapore, UAE, or the US.

See also

• TDS (Tax Deducted at Source) — Section 195 TDS on payments to non-residents is the operative provision DTAA modifies
• FEMA (Foreign Exchange Management Act) — cross-border payments require both FEMA compliance and TDS/DTAA analysis; both obligations apply to the same transaction
• AIF (Alternative Investment Fund) — historical investment routing through Mauritius/Singapore AIFs was DTAA-driven; the capital gains benefit is now largely closed for new investments