Expert opinion · Cross-border tax

Paying a foreign vendor at the treaty rate: the papers that matter

The treaty rate is often a fraction of the rate under the Act, and sometimes nil. Whether you can apply it depends less on the treaty than on what the payee has given you.

FxLayer compliance deskFEMA, RBI reporting and cross-border tax 6 min read Updated
  1. InvoiceService identifiedNature of the payment
  2. TreatyArticle locatedRoyalty, technical fees or business profits
  3. PapersTRC and declarationsResidency and no-PE
  4. RateLower of Act and treatyWith the papers on file
  5. Form 145Part chosenAnd Form 146 where Part C
From invoice to the right rate

Key points

  • A treaty rate can only be applied if the payee is resident in the treaty country.
  • The payee's tax residency certificate is the core evidence, supported by the prescribed declaration.
  • A no-permanent-establishment declaration supports treating business income as not taxable in India.
  • Without the papers, tax is withheld at the rate under the Act.

Why the treaty matters

Payments to non-residents for services, royalties or interest may be taxable in India. India's double taxation avoidance agreements often reduce the rate, or allocate the right to tax solely to the payee's country, for example where business profits are earned without a permanent establishment in India. The lower of the Act rate and the treaty rate can be applied.

The papers

  • Tax residency certificate (TRC) from the payee's tax authority, covering the period of the payment.
  • The prescribed declaration with the details the TRC does not show, such as the payee's tax identification number and address.
  • No-PE declaration confirming that the payee has no permanent establishment in India.
  • Where the treaty has a limitation of benefits or beneficial-ownership condition, evidence that it is met.

How it flows into Form 145

With the papers in hand, a payment that would be taxable under the Act may be not chargeable under the treaty, moving it to Part D of Form 145, or taxable at a lower rate, which the Form 146 certificate records. Without them, the full rate applies and the payment is grossed up if you have agreed to bear the tax.

FxLayer keeps the TRC, declaration and no-PE status on the party master with their validity dates, warns when they are missing or expired and shows the treaty article and rate with its source.

Questions

Yes. It usually covers one tax year. Ask the payee for a fresh certificate each year.
Where the payee has no PAN, the rules ask for specified details and documents, including the TRC, to avoid the higher rate. Follow the current requirements.

This article is general information on Indian foreign exchange and tax rules as they stood on the date shown. It is not legal or tax advice. Rules and limits change; confirm the current position with your AD bank, the relevant RBI Master Direction or your adviser before acting.

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