How DTAAs Help Businesses Avoid Paying Tax Twice
| Authored by R & D Law Chambers LLP | Practice led by Ravish Bhatt, Dual-qualified lawyer (India and England & Wales) | Bar Council of Gujarat, Enrolment G/504/2008 | SRA (non-practising) Registration No. 492 477 | ADIT, Chartered Institute of Taxation, London
Published: 3 August 2026 | Last reviewed: 3 August 2026 | Estimated reading time: 16 minutes |
| This article states the position as at 3 August 2026 and reflects a change of statute. The Income-tax Act 1961 was repealed with effect from 1 April 2026 and replaced by the Income-tax Act 2025 (Act No. 30 of 2025), with the Income-tax Rules 2026 notified on 20 March 2026. India’s treaty framework, formerly sections 90 and 90A, now sits at section 159. Income earned up to 31 March 2026 continues to be governed by the 1961 Act, and proceedings already in motion continue under it, so both statutes remain in daily use. Provisions are cited under the new Act with the 1961 equivalent given where it aids recognition. |
The Short Answer
| A Double Taxation Avoidance Agreement is a tax treaty between two countries that prevents the same income being taxed twice. DTAAs allocate taxing rights and provide relief through exemption or credit. India has treaties with more than 90 countries. Under section 159 of the Income-tax Act 2025, a taxpayer may apply whichever of the treaty or domestic law is more beneficial, but relief is not automatic: it depends on a Tax Residency Certificate and prescribed documentation, and it can be displaced by anti-avoidance provisions. |
Executive Summary
Imagine your company is headquartered in London. You establish a subsidiary in India. The Indian business earns profits. Which country has the right to tax those profits? India? The United Kingdom? Both?
Without a treaty, there is a real possibility that the same income is taxed in two jurisdictions. That is the problem Double Taxation Avoidance Agreements exist to solve.
For multinational corporations, startups expanding globally, investment funds, family offices and international entrepreneurs, understanding DTAAs is no longer optional. Whether you are investing in India, establishing operations in GIFT City, licensing technology, receiving royalties or managing international subsidiaries, treaty analysis influences your tax position and your investment structure.
Two developments make 2026 a year to revisit any settled treaty position. India replaced its entire income tax statute with effect from 1 April 2026. And the documentation requirements for claiming treaty relief have been restated and tightened, with a new form replacing the one practitioners have used for years.
What Is a Double Taxation Avoidance Agreement?
A DTAA is a bilateral treaty between two countries determining how categories of income will be taxed. Its primary objective is to prevent the same income being taxed twice, and its secondary objectives are to promote trade and investment, reduce uncertainty, prevent tax discrimination and provide certainty to investors.
India has signed DTAAs with more than 90 countries across Asia, Europe, North America, Africa and the Middle East, including the United Kingdom, the United States, the UAE, Singapore, Canada, Australia, Germany and the Netherlands.
Section 159 of the Income-tax Act 2025 is the enabling provision. It empowers the Central Government to enter into agreements with foreign countries or specified territories for the granting of relief from double taxation, the avoidance of double taxation, the exchange of information and assistance in recovery. It carries forward the framework previously found in sections 90 and 90A of the 1961 Act.
How Does Double Taxation Actually Arise?
Double taxation arises because countries assert taxing rights on different bases. One country taxes on residence, meaning it taxes its residents on worldwide income. Another taxes on source, meaning it taxes income arising within its territory regardless of who earns it. When both apply to the same income, it is taxed twice.
The categories where this most commonly bites are business profits, dividends, interest, royalties, capital gains, professional fees and fees for technical services.
Consider a software company resident in the United Kingdom licensing technology to customers in India. The Indian customers pay royalties. India asserts a source-based right to tax the royalty. The United Kingdom asserts a residence-based right to tax the same income in the company’s hands. Without a treaty, the company pays twice on one receipt. The India-UK DTAA determines which country has the primary right, caps the rate India may impose, and requires the United Kingdom to give credit for what India has taken.
How DTAAs Eliminate Double Taxation
1. The exemption method
One country agrees not to tax certain income because it has been taxed in the other. The income is removed from the tax base entirely, though it may still be taken into account in setting the rate applied to other income.
2. The credit method
The country of residence taxes the income but allows a credit for tax already paid in the source country. If an Indian resident pays tax abroad on income also taxable in India, foreign tax credit reduces the Indian liability, subject to the treaty and to domestic rules on computation and evidence.
Where no treaty exists, India provides unilateral relief for its own residents, allowing a deduction computed by reference to the lower of the Indian and foreign rates on the doubly taxed income. This is less generous than treaty relief and is available only to Indian residents earning in non-treaty countries; it does not assist a non-resident earning income in India.
Which Income Types Do DTAAs Cover?
| Income type | What the treaty typically determines |
|---|---|
| Business profits | Whether a permanent establishment exists in the source country, and how much profit is attributable to it. Without a PE, business profits are generally taxable only in the residence country. |
| Dividends | A capped withholding rate in the source country, often lower than the domestic rate, sometimes with a reduced rate for substantial shareholdings. |
| Interest | A capped withholding rate, with exemptions in some treaties for interest paid to governments, central banks or approved financial institutions. |
| Royalties | A capped rate for intellectual property licensing, software, patents, trade marks and copyrights. Whether a payment is a royalty at all is among the most litigated questions in Indian tax. |
| Fees for technical services | Treated separately in most Indian treaties, with a capped rate. Some treaties apply a make-available test, so a payment is taxable only if the service transfers technical knowledge enabling the recipient to apply it independently. |
| Capital gains | Which country may tax gains on shares, securities and other assets. Provisions vary sharply between treaties and have been the subject of significant amendment. |
| Employment income | Where cross-border employees are taxable, commonly turning on days present, who bears the remuneration cost and whether a PE bears it. |
Each treaty is negotiated separately. Rates, definitions and tests differ, and a provision in the India-Singapore treaty tells you nothing reliable about the India-Germany treaty. Treaty analysis is always specific to the two countries and the income type in question.
Claiming Treaty Relief Is a Documentation Exercise
This is where more treaty positions fail than on substantive interpretation, and where the law changed in 2026.
Under section 159(8) of the Income-tax Act 2025, a non-resident cannot claim treaty relief without obtaining a Tax Residency Certificate from the government of the country of residence, together with such other information and documents as are prescribed. Rule 75 of the Income-tax Rules 2026 supplies the operational detail. The effect is that treaty relief is a documentation-driven entitlement, not an automatic one.
The form has changed
Form 41 replaces Form 10F with effect from 1 April 2026. It is a self-declaration filed electronically by the non-resident, supplying the particulars that a foreign-issued TRC frequently omits: status, nationality, tax identification number, period of residency and address in the country of residence. Forms 42 and 43 correspond to the former Forms 10FA and 10FB, used by Indian residents applying for and receiving an India-issued TRC for use abroad.
A non-resident claiming treaty relief on Indian-source income should therefore expect to provide the TRC from its home revenue authority, Form 41 filed electronically, and a PAN where available. Without them, the Indian payer is obliged to withhold at the full domestic rate, and the treaty rate never applies at source. Recovering the difference afterwards through a refund claim is possible but slow, and it converts a rate question into a cash-flow problem.
| A recurring practical trap. Most countries issue Tax Residency Certificates for the calendar year, while India’s tax year runs from 1 April to 31 March. A TRC covering January to December 2026 does not cover payments made in January to March 2027, and a fresh certificate is needed for the following period. A second trap: where the entity receiving Indian income is a subsidiary, the TRC must be in that subsidiary’s own name, not the parent’s. Each legal entity needs its own. |
Treaty Benefits Are Not Unconditional
The most important shift in international tax over the last decade is that treaty entitlement is now tested rather than assumed. Three mechanisms do that work in India.
The Principal Purpose Test and the Multilateral Instrument
India is a party to the Multilateral Instrument, which modifies many of its bilateral treaties without renegotiating them individually. Its most consequential provision is the Principal Purpose Test: a treaty benefit is denied where it is reasonable to conclude, having regard to all relevant facts and circumstances, that obtaining that benefit was one of the principal purposes of the arrangement, unless granting it would accord with the object and purpose of the relevant provisions.
Limitation of Benefits clauses
Several Indian treaties contain express limitation of benefits provisions, imposing objective tests such as expenditure thresholds or listing requirements before a resident of the other state may claim benefits. These operate independently of the Principal Purpose Test and must be checked treaty by treaty.
The General Anti-Avoidance Rule
India’s domestic GAAR can override otherwise available treaty benefits where an arrangement is an impermissible avoidance arrangement. This is significant because it means a structure can satisfy the treaty on its face and still be denied benefits under domestic law.
The practical consequence is that treaty planning cannot rest on the treaty text alone. A structure must be able to explain its commercial purpose, demonstrate substance in the jurisdiction whose treaty it relies on, and produce contemporaneous evidence of both. Structures assembled purely for rate arbitrage, with a holding entity that has no employees, no decision-making and no function beyond holding, are precisely what these provisions were designed to catch.
The Beneficial Provision Rule, and Why It Sometimes Points Away From the Treaty
Indian law permits a taxpayer to apply whichever of the treaty or the domestic statute is more beneficial. That rule, carried into section 159 of the 2025 Act from section 90(2) of the 1961 Act, is usually described as a way of accessing treaty rates. It also works in the opposite direction, and that is under-appreciated.
Where domestic law offers a better outcome than the treaty, the taxpayer may simply rely on domestic law. This matters particularly for GIFT City. Funds and units established in the International Financial Services Centre remain Indian tax residents governed by India’s treaties, but the IFSC regime provides domestic-law incentives that can exceed treaty benefits. Relying on a domestic exemption rather than invoking a treaty removes the treaty-benefit question altogether, and with it the exposure to the Principal Purpose Test and to limitation of benefits arguments.
That is a risk-management point rather than merely a rate comparison, and it is one of the more compelling structural arguments for the IFSC where the transaction otherwise has an India nexus.
DTAAs and GIFT City
For businesses considering GIFT City, treaty analysis forms part of a broader structuring exercise alongside the IFSCA regulatory framework, FEMA and the domestic incentive regime.
The headline domestic incentive is the IFSC tax holiday, a 100% deduction on eligible business income for any 20 consecutive years out of 25, extended from the earlier 10-out-of-15 window and now taxed at a concessional flat 15% once the holiday ends. Practitioners will recognise this as section 80LA of the 1961 Act; under the Income-tax Act 2025 it is section 147, and the change of numbering is worth noting in documentation prepared after 1 April 2026.
Where treaty analysis matters in an IFSC context is in cross-border investment structures, international fund management, treasury operations, financing arrangements, licensing models and international service delivery. Entitlement to the domestic deduction depends on the unit actually carrying on the eligible business from the IFSC and satisfying the statutory substance and commencement conditions, so the treaty and the domestic incentive both ultimately test the same thing: whether there is real activity where the structure says there is.
Our GIFT City practice covers this in detail at giftcitylawyers.com, including a legal checklist for businesses entering the IFSC.
Common Misconceptions
A DTAA means you will never pay tax
It does not. A DTAA allocates taxing rights and provides relief from double taxation. It does not eliminate taxation. In most cases tax is paid somewhere, and often in both countries with credit given in one.
Every treaty contains the same provisions
Each is negotiated separately with its own rules, definitions, rates and eligibility conditions, and many have since been modified by the Multilateral Instrument. Two treaties can produce opposite outcomes on identical facts.
You automatically receive treaty benefits
You do not. Benefits require a Tax Residency Certificate, Form 41 and the prescribed documentation, and remain subject to the Principal Purpose Test, any limitation of benefits clause and GAAR.
A treaty position, once taken, is settled
Treaty positions are among the most actively litigated areas of Indian tax, and the evidentiary standard applied to them has been tightening. A position formed several years ago on the basis of the law and practice then current should be revisited, particularly given the change of statute in April 2026.
Who Benefits Most From DTAAs?
Multinational corporations; foreign investors; technology and SaaS companies; investment funds; family offices; banks and financial institutions; aircraft and ship leasing companies; professional service firms; exporters and importers; and companies operating in GIFT City.
Why Legal Advice Matters
Although DTAAs are designed to simplify international taxation, applying them correctly requires careful analysis. Questions commonly arise on treaty interpretation, whether a permanent establishment exists and how much profit is attributable to it, beneficial ownership, the characterisation of a payment as royalty or fees for technical services or business profits, withholding obligations, documentation, and the interaction between domestic law and treaty provisions.
The change of statute adds a further layer for the next few years. Income up to 31 March 2026 remains governed by the 1961 Act and proceedings already in motion continue under it, so advisers must work across two statutes and map provisions between them. Documentation prepared now should cite the correct Act for the period it concerns.
How R & D Law Chambers Assists Global Businesses
International expansion involves more than incorporating an entity or signing a contract. Businesses must consider how legal, regulatory and tax frameworks interact across jurisdictions, and whether the resulting structure will hold up under examination.
R & D Law Chambers LLP advises on cross-border transactions, international business structuring, corporate and commercial law, GIFT City legal advisory, regulatory compliance, commercial contract drafting, international arbitration, cross-border dispute resolution, investment documentation and legal due diligence. The practice is led by a dual-qualified lawyer holding the Advanced Diploma in International Taxation from the Chartered Institute of Taxation, London, which is directly relevant where treaty interpretation, permanent establishment analysis and anti-avoidance exposure are in issue.
Related services
- International Taxation & Cross-Border Tax Planning, treaty analysis, structuring and litigation.
- Withholding Tax on Non-Resident Payments, section 195 obligations and treaty rates at source.
- Mutual Agreement Procedure in India, treaty-based resolution of cross-border disputes.
- Advance Pricing Agreements, certainty on transfer pricing outcomes.
- International Acquisitions & FDI Advisory, inbound investment structuring.
- GIFT City IFSC Legal Advisory, where the IFSC regime and treaty analysis intersect.
Frequently Asked Questions
What is a Double Taxation Avoidance Agreement (DTAA)?
A DTAA is a bilateral treaty between two countries that prevents the same income being taxed twice, by allocating taxing rights between them and providing relief through exemption or credit. In India the enabling provision is section 159 of the Income-tax Act 2025, which replaced sections 90 and 90A of the Income-tax Act 1961 with effect from 1 April 2026.
Does India have DTAAs with the UK and the US?
Yes. India has tax treaties with both, among more than 90 countries. Each treaty contains its own provisions, definitions, rates and eligibility requirements, and many have been modified by the Multilateral Instrument, so the applicable text is the treaty as modified rather than as originally signed.
What documents do I need to claim DTAA benefits in India?
A Tax Residency Certificate issued by the tax authority of your country of residence, and Form 41 filed electronically, which replaced Form 10F with effect from 1 April 2026 under section 159(8) of the Income-tax Act 2025 and Rule 75 of the Income-tax Rules 2026. A PAN should be provided where available. Without these, the Indian payer must withhold at the full domestic rate rather than the treaty rate.
Has Form 10F been replaced?
Yes. Form 41 replaced Form 10F with effect from 1 April 2026, following the repeal of the Income-tax Act 1961 and its replacement by the Income-tax Act 2025. Forms 42 and 43 correspond to the former Forms 10FA and 10FB, used by Indian residents applying for and receiving an India-issued Tax Residency Certificate.
Do DTAAs eliminate all taxes?
No. They prevent double taxation, not taxation. Relief depends on the applicable treaty and on domestic law, and in most cases tax is paid in at least one country, frequently in both with credit given in the residence country.
Can treaty benefits be denied even if the treaty applies?
Yes. Benefits may be denied under the Principal Purpose Test introduced through the Multilateral Instrument, under a limitation of benefits clause where the treaty contains one, or under India’s domestic General Anti-Avoidance Rule. A structure can satisfy the treaty on its face and still be denied benefits, which is why commercial purpose and demonstrable substance matter as much as the treaty text.
Why should businesses review treaty positions before investing in India?
Reviewing treaty provisions early establishes the likely tax cost, the documentation required, withholding obligations and available relief before the structure is fixed. It is far cheaper to design a defensible structure than to defend an indefensible one, and the change of statute in April 2026 means positions formed under the 1961 Act should be re-examined.
Final Thoughts
Cross-border business is no longer the preserve of large multinationals. Technology companies, startups, investment funds, family offices, manufacturers and professional service firms all operate across jurisdictions, and all of them encounter treaty questions.
Two things have changed the character of treaty planning. Anti-avoidance provisions mean entitlement is tested rather than assumed, so substance and commercial purpose now carry as much weight as the treaty text. And India’s replacement of its income tax statute in April 2026 means the provisions, forms and section numbers practitioners have used for decades have moved.
The most durable international structures are those built to be explained: with a commercial rationale that stands on its own, substance that matches the paperwork, and documentation assembled at the time rather than reconstructed under examination.
| This article is for informational purposes only and does not constitute legal advice. The views expressed are those of the author. Specific legal or tax matters should be referred to qualified advisers. Practice led by Ravish Bhatt, dual-qualified lawyer (India and England & Wales), Bar Council of Gujarat (Enrolment G/504/2008), SRA (non-practising) Registration No. 492 477, ADIT (CIOT, London). |