Withholding Tax Implications for Individuals and Corporate Shareholders – A Practical Compliance Guide
Why Understanding Article 10 Matters
Cross-border dividends between India and the United States have grown rapidly with expanding investments in listed shares, unlisted equity, and startup holdings. However, one of the most frequent compliance errors by both companies and advisors relates to applying the wrong withholding tax rate under the India–US Double Taxation Avoidance Agreement (DTAA).
Article 10 of this treaty governs how dividends are taxed when paid from one country to a resident of the other. Many investors assume that holding more than 10% shares automatically qualifies for a 15% concessional rate, even for individuals.
In reality, this is not correct — and applying the wrong rate can lead to TDS defaults, penalties under Section 271C, and loss of foreign tax credit (FTC) benefits.
This guide explains how Article 10 works, the logic behind it, and how to apply the correct rate with complete documentation — helping professionals and businesses avoid costly errors.
Legal Framework: What Article 10(2) of the Treaty Says
Under Article 10(2) of the India–US DTAA, the tax on dividends is capped as follows:
(a) 15% — if the beneficial owner is a company which owns at least 10% of the voting stock of the company paying the dividends.
(b) 25% — in all other cases.
In essence:
| Beneficial Owner Type | Voting Stock Held | Applicable WHT Rate |
|---|---|---|
| Company | ≥10% | 15% |
| Company | <10% | 25% |
| Individual (any %) | Any | 25% |
Key takeaway:
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The 15% concessional rate applies only when the shareholder is a company (not an individual) and owns 10% or more voting stock.
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All individual shareholders, regardless of their shareholding, fall under the 25% category.
Compliance Steps to Determine and Apply the Correct Rate
For every dividend paid between India and the US, follow this six-step compliance flow to ensure proper withholding and documentation:
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Identify the shareholder type
→ Is it a company or an individual?
Only companies are eligible for the 15% rate. -
Verify beneficial ownership
→ Confirm that the shareholder is the true beneficial owner of the dividend (not a nominee or conduit). -
Check shareholding percentage
→ The 15% rate applies only if the company holds ≥10% voting stock.
→ Otherwise, default to 25%. -
Collect documentation
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Tax Residency Certificate (TRC)
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Form 10F
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Beneficial ownership declaration
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Corporate proof of shareholding
-
-
Apply the rate and deduct TDS
→ Use Form 15CA/15CB to remit dividend under correct treaty clause. -
Maintain documentation trail
→ For defense during tax audit or scrutiny. Non-compliance may lead to interest under Section 201(1A) and penalty under Section 271C.
Illustrative Examples
| Scenario | Shareholder Type | Voting Power | Applicable Rate | Remarks |
|---|---|---|---|---|
| U.S. company holds 12% in Indian company | Company | ≥10% | 15% | Eligible for lower rate |
| U.S. company holds 5% | Company | <10% | 25% | Below threshold |
| U.S. individual holds 15% | Individual | ≥10% | 25% | Individual – not eligible |
| Indian company pays dividend to U.S. individual | Individual | Any % | 25% | Covered under “all other cases” |
Treaty Logic and Policy Rationale
The differential treatment between companies and individuals reflects deliberate treaty design. The underlying policy reasoning includes:
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Promoting genuine FDI: Encourages long-term corporate investments rather than short-term individual holdings.
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Simplified administration: Easier verification of company ownership versus individual tracing.
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Anti-abuse protection: Prevents individuals from misusing high shareholdings to claim lower rates.
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OECD model alignment: Global standard — reduced dividend rates reserved for corporate investors with substantial ownership.
Thus, the treaty benefits are intentionally entity-specific, not shareholding-size-specific.
Domestic Law vs. Treaty Rate – Which One Applies?
Under Indian domestic tax law, dividends to non-residents are taxed at 20% (plus surcharge and cess) under Section 115A, read with Section 195.
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If the treaty rate (25%) is higher, apply the lower domestic rate (20%).
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If claiming treaty benefit, ensure complete TRC, Form 10F, and beneficial ownership documentation.
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Missing documentation leads to automatic application of domestic rate and potential denial of treaty relief.
Note: Choosing between the domestic rate and treaty rate should always be based on whichever is more beneficial to the taxpayer but backed by full compliance.
Avoiding Defaults: Key Risks and Practical Safeguards
| Common Mistake | Risk / Penalty Exposure | Prevention Tip |
|---|---|---|
| Applying 15% rate to individuals | Short deduction → penalty u/s 271C + interest u/s 201(1A) | Verify shareholder type before applying rate |
| Missing TRC/Form 10F | Disallowance of treaty benefit | Obtain both before remittance |
| Incorrect entry in Form 15CB | Professional liability and audit objection | Quote correct treaty clause and reasoning |
| Ignoring beneficial ownership test | Treaty denial | Maintain ownership and control proofs |
Professional Tip: Document your rate analysis in the Form 15CB working paper to demonstrate due diligence during scrutiny.
Decision Matrix: Determine the Correct Withholding Rate
Below is a visual decision matrix for quick reference during compliance or tax audit review:
Recommendations
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Individuals are not eligible for the 15% rate under the India–US DTAA, regardless of shareholding size.
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The 15% concessional rate applies only to corporate shareholders holding 10% or more voting stock.
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Ensure complete documentation — TRC, Form 10F, and beneficial ownership proof — before applying the treaty rate.
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In all other cases, apply 25% (or lower domestic rate of 20%) as applicable.
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Maintain internal audit notes or Form 15CB justification to avoid penalties and ensure defendable compliance.
Accurate interpretation of Article 10 of the India–US DTAA is not just a technical issue — it’s a matter of regulatory compliance and risk control.
Whether you’re a CFO, tax consultant, or NRI investor, applying the correct withholding rate and maintaining proper documentation ensures peace of mind, avoids TDS defaults, and enables smooth foreign tax credit claims abroad.
In cross-border taxation, precision is protection — get the structure, paperwork, and rate right before you remit.
