1. Royalty withholding and the treaty rate
Under Section 115A, the domestic withholding rate on royalties and fees for technical services paid by an Indian entity to a non-resident was doubled to 20% (plus surcharge and cess) by the Finance Act 2023. A tax treaty typically caps it lower, often around 10–15%.
The treaty rate is not automatic. The recipient must hold a valid Tax Residency Certificate (TRC) from the home country and file Form 10F. Without those, 20% is withheld and you spend the next financial year chasing the difference through refund and treaty-credit mechanics.
2. The PE trap — where is the IP really developed?
If the people who actually create and run the IP sit in India, the department can argue that the foreign IP company has a permanent establishment or business connection in India — and tax much more than just the royalty stream.
An IP holdco with little real substance abroad and a full Bengaluru dev team is exactly the pattern they probe. The defence is substance: real people, real decisions, real infrastructure in the IP jurisdiction.
3. Transfer pricing — keep the royalty arm's-length
Inter-company royalties must be arm's-length and documented. Set the rate artificially high to strip profit out of India and it can be re-priced by the transfer-pricing officer, with interest and penalty on top. Get a benchmarking study before the first invoice, not in response to the first notice.
4. Don't forget GST on imported IP licences
The Indian entity importing the licence generally pays GST under the reverse-charge mechanism. The GST paid is usually creditable, but it still has to be discharged in cash first, so plan the cash flow.
Example — US IP company, 12% royalty. A US-incorporated IP company licenses its platform to its Bengaluru operating subsidiary at a 12% royalty. The Indian subsidiary withholds at the treaty rate (with TRC and Form 10F on file) rather than the 20% Section 115A rate, pays GST under reverse charge on the import of services, and keeps a contemporaneous benchmarking study to defend the 12% rate. The US-side dev team is genuine, with its own engineers and a real board — keeping PE risk under control.
5. IP & royalty checklist
- Is there a current TRC and Form 10F on file for every non-resident payee?
- Have you stress-tested PE/business-connection risk against where the IP is really developed?
- Is the royalty rate supported by a benchmarking study?
- Are reverse-charge GST entries booked and credit claimed on time?
- Do the inter-company agreements actually match what happens day-to-day?
Read alongside POEM & company residence, GIFT City for NRI founders, startup flips & share swaps and founder residency & exit timing.