Repatriating Profits from India: Legal Routes Compared, Compliance

When an Indian subsidiary earns profits, moving them out of India is not simply a banking instruction. Every rupee crossing the border triggers obligations under the Foreign Exchange Management Act (FEMA) 1999, the Income Tax Act 1961, the Companies Act 2013, and in most cases a Double Taxation Avoidance Agreement (DTAA). The choice of method determines how much tax the group pays, how long the process takes, how much GST the Indian company owes under the reverse charge mechanism, and whether the documentation survives an audit three years later. Five regulatory changes between April 2023 and April 2026 have materially altered the economics of the comparison. This article maps all five primary repatriation routes as they actually stand in FY 2026-27.

What is the most tax-efficient way to repatriate profits from India?

There is no single answer that applies to all groups. Dividends are the most operationally straightforward route, with withholding tax of 20% under Section 115A reduced to 10-15% under most DTAAs. Royalties and fees for technical services carry the same 20% domestic rate post Finance Act 2023, making DTAA structuring critical. ECB interest carries a concessional 5% rate under Section 194LC for qualifying foreign currency borrowings, and is deductible in India, making it the lowest combined cost route where the structure supports it. Service fees are deductible in India but require transfer pricing documentation and carry GST at 18% under the reverse charge mechanism. Buybacks, under the Finance Act 2026 regime, are taxed as capital gains at 12.5% LTCG for unlisted shares held over 24 months.

How FEMA classifies each repatriation route

Under FEMA 1999, every outward remittance is classified as either a current account or a capital account transaction. Current account transactions do not alter India’s external assets or liabilities: dividends, royalties, fees for technical services, management fees, and ECB interest payments all fall here. They are freely repatriable without prior RBI approval, provided applicable taxes have been withheld and documentation is complete.

Capital account transactions alter India’s external balance sheet: share buybacks, capital reductions, and liquidation proceeds fall here. These involve FEMA (Non-Debt Instruments) Rules 2019 valuation requirements, Companies Act 2013 corporate procedures, and post-transaction Form FC-TRS filing on the RBI FIRMS portal within 60 days.

The AD bank (Authorised Dealer Category I bank) is the institutional gatekeeper for every remittance. For current account transactions, it requires Form A2 (purpose and amount declaration), Form 15CA (income tax declaration filed on the income tax portal), Form 15CB (CA certificate confirming TDS compliance), and the underlying contract or board resolution. For capital account transactions, it additionally requires the valuation certificate and FEMA reporting acknowledgement.

For a detailed treatment of the FEMA framework, reporting obligations, and the FDI filing calendar, see Treelife’s FEMA Compliance in India guide.

Dividends: the default route

Dividends remain the most commonly used repatriation mechanism for foreign-invested Indian subsidiaries. The legal authority to declare dividends derives from Section 123 of the Companies Act 2013, which requires distribution from current year profits or accumulated free reserves, after providing for depreciation. A subsidiary that has not provided adequately for depreciation in its accounts cannot validly declare dividends on accumulated profits from those years without a depreciation adjustment.

Withholding tax and DTAA mechanics

Dividend Distribution Tax (DDT) was abolished from FY 2020-21. Since then, dividends are taxable as “Income from Other Sources” in the shareholder’s hands under Section 56(2)(i). For a foreign shareholder, the Indian company withholds tax under Section 195 read with Section 115A at 20% plus applicable surcharge and 4% health and education cess. For a foreign company shareholder, the effective domestic rate is approximately 20.8%.

Where a DTAA applies and the foreign shareholder can produce a Tax Residency Certificate (TRC) and Form 10F, the lower of the domestic and treaty rate applies under Section 90(2). The table below reflects rates as amended under respective protocols and as modified by the Multilateral Instrument (MLI).

Dividend withholding rates under key India DTAAs (FY 2026-27)

Treaty partner	DTAA rate	Minimum holding for lower rate	MLI PPT activated
USA	15% (25% below 10% holding)	10% direct equity	Yes
UK	15%	No threshold	Yes
Singapore	10% (15% below 25% holding)	25% direct equity	Yes
Netherlands	10% (15% below 10% holding)	10% direct equity	Yes
Mauritius	5% (7.5% below 50% holding)	50% direct equity; amended 2016 Protocol	Yes (MLI coverage pending verification)
UAE	10%	No threshold	No
Japan	10% (15% below 25% holding)	25% direct equity	Yes
Germany	10% (15% below 10% holding)	10% direct equity	Yes

Two compliance conditions override the treaty rate if they are not met. First, Section 206AA: if the foreign shareholder does not hold a PAN or has not filed an income tax return in India, TDS applies at 20% regardless of the DTAA rate. Second, under Section 206AB (effective from 1 July 2021), if the foreign recipient has not filed income tax returns for the two preceding financial years and the aggregate TDS on their Indian income in each of those years exceeded Rs 50,000, the applicable rate is twice the normal rate or 5%, whichever is higher. For institutional foreign shareholders with a compliant India tax position, neither provision typically triggers. For individual NRI shareholders, both must be checked.

Step-by-step process and timeline

A well-organised dividend remittance takes 7 to 15 working days from board resolution to funds credited abroad.

Step 1: Pass a board resolution for interim dividends (shareholder resolution at AGM required only for final dividends). Step 2: Obtain the TRC from the foreign parent’s home tax authority, covering the current financial year. Step 3: File Form 10F electronically on the income tax portal (PAN required to access the portal). Step 4: Withhold TDS at the applicable rate. Deposit TDS challan (ITNS 281) by the 7th of the following month. Step 5: File Form 27Q (quarterly TDS return for payments to non-residents) by the due date. Step 6: Issue Form 16A (TDS certificate) to the foreign shareholder within 15 days of filing Form 27Q. Step 7: Engage a CA to issue Form 15CB, certifying TDS rate correctness and DTAA applicability. Step 8: File Form 15CA (Parts A through D depending on amount) on the income tax portal. Part C applies for amounts exceeding Rs 5 lakh and requires Form 15CB to precede it. Step 9: Submit Form A2, Form 15CA acknowledgement, Form 15CB, TRC, Form 10F, board resolution, and TDS challan to the AD bank. Step 10: AD bank processes the SWIFT transfer.

For groups seeking regular quarterly cash flows, interim dividends declared by board resolution are far more flexible than waiting for the AGM calendar.

Buybacks: three tax regimes in 30 months

India has operated under three distinct buyback tax regimes since October 2024. The applicable regime is determined by the date the buyback payment is made to the shareholder, not the date the board resolution is passed.

Regime 1: before 1 October 2024

Under Section 115QA, the Indian company paid Buyback Distribution Tax (BDT) at 20% on “distributed income” (buyback price minus original issue price). With 12% surcharge and 4% cess, the effective company-level rate was approximately 23.296%. The shareholder received proceeds entirely tax-free under Section 10(34A). The company settled the tax within 14 days of the buyback payment.

Regime 2: 1 October 2024 to 31 March 2026

The Finance (No. 2) Act 2024 abolished Section 115QA. The entire buyback consideration was reclassified as a deemed dividend under Section 2(22)(f) in the shareholder’s hands. For a foreign shareholder, withholding at 20% under Section 115A (reducible under applicable DTAA) applied. The shareholder’s acquisition cost became a capital loss, which could not be offset against dividend income and effectively lapsed. This created the asymmetric outcome: dividend taxation on proceeds but a stranded capital loss with no offsetting mechanism.

Regime 3: from 1 April 2026 (Finance Act 2026)

The Finance Act 2026 reversed the October 2024 treatment. Capital gains taxation is restored. Section 115QA is not revived. No company-level buyback distribution tax applies. Tax falls on the shareholder, computed as: buyback price received minus cost of acquisition of shares tendered.

Applicable rates under the Finance Act 2026 regime:

• Unlisted shares held over 24 months: 12.5% LTCG (no indexation benefit) under Section 112
• Unlisted shares held 24 months or less: slab rates
• Listed shares held over 12 months: 12.5% LTCG under Section 112A (above the Rs 1.25 lakh annual exemption)
• Listed shares held 12 months or less: 20% STCG under Section 111A

For a foreign company shareholder receiving a buyback from an unlisted Indian subsidiary, the Indian company withholds TDS under Section 195 on the capital gains component at the applicable rate (approximately 13% inclusive of surcharge and cess for LTCG on unlisted shares). The DTAA capital gains article may apply if available and documentation is in order.

One addition in the Finance Act 2026 framework: a promoter-specific additional levy under Section 69 of the Income-tax Act 2025 applies to shareholders who meet the legal definition of “promoter” under Section 68 of the Companies Act 2013. For a foreign institutional investor or strategic parent company that is not classified as a promoter under Indian law, this additional levy does not apply. Verify shareholder classification before proceeding.

For a detailed treatment of all three regimes with worked examples, see Treelife’s buyback tax guide.

FEMA and corporate law compliance for buybacks

FEMA treatment: capital account transaction. No prior RBI approval, but Form FC-TRS must be filed on the RBI FIRMS portal within 60 days of the buyback payment. The buyback price must comply with NDI Rules Rule 21 valuation: for unlisted companies, an internationally accepted methodology (DCF or NAV-based) certified by a SEBI-registered Category I Merchant Banker or a CA holding a valid Certificate of Practice. Paying above the certified fair value to the foreign shareholder is a FEMA contravention. The valuation certificate must not be more than 90 days old on the date of payment.

Corporate law compliance under Companies Act 2013 Section 68 requires: board resolution (and special resolution if buyback exceeds 10% of paid-up capital and free reserves), declaration of solvency, extinguishment of shares within 7 days of completion, and a 6-month moratorium on fresh issuance of the same class. A company cannot buy back more than 25% of its total paid-up capital and free reserves in any financial year.

An important FEMA-to-IT Act pricing tension: the NDI Rules prescribe a valuation floor based on fair market value for the exit remittance. The Income Tax Act uses a separate computation (cost of acquisition vs. buyback price) to determine the capital gain. The two figures are not necessarily the same. The FEMA valuation provides the floor for the remittance; the income tax computation determines the taxable gain. A group structuring a buyback must satisfy both independently.

Royalties and fees for technical services: after the Finance Act 2023 rate change

Royalties allow the foreign parent to charge the Indian subsidiary for use of intellectual property: brand names, trademarks, patents, technology know-how, software licences, or any intangible the parent owns and the subsidiary uses. Fees for technical services (FTS) cover payments for services that make specialised knowledge available to the Indian entity.

FEMA classification: current account transaction, freely repatriable. Remittance via AD bank with Form A2, Form 15CA, and Form 15CB.

What the Finance Act 2023 changed and why it matters now

Prior to 1 April 2023, Section 115A taxed royalties and FTS paid to non-residents at 10% plus surcharge and cess, giving an effective rate of approximately 10.92% for a foreign company. Many foreign parents chose to absorb this domestic rate rather than go through the TRC/Form 10F/ITR filing exercise.

The Finance Act 2023, effective 1 April 2023, increased the Section 115A rate for royalties and FTS from 10% to 20%. The effective rate for a foreign company is now approximately 21.84%. Two consequences follow directly.

First, virtually every group that previously relied on the domestic Section 115A rate is now paying materially more than any applicable DTAA rate. Most of India’s major DTAAs set royalty and FTS rates at 10-15%, which is now well below the domestic 21.84%. Claiming domestic Section 115A treatment on royalties is no longer economically rational.

Second, claiming the lower DTAA rate now requires the foreign parent to file an income tax return in India. The Section 115A(5) exemption from return filing was available only where taxes were withheld at or above the Section 115A domestic rate. Since the foreign parent will now claim the DTAA rate (10-15%, below 20%), it does not satisfy the threshold for that exemption and must file an ITR. Filing requires obtaining a PAN and registering on the income tax portal.

Royalty withholding rates under key India DTAAs (FY 2026-27)

Treaty partner	DTAA royalty rate	FTS rate	“Make available” test for FTS
USA	15%	15%	Yes
UK	15%	15%	Yes
Singapore	10-15% (tiered by type)	10-17.5%	Yes
Netherlands	10%	10%	No
Germany	10%	10%	No
Japan	10%	10%	No
France	10%	10%	No
UAE	10%	12.5%	Yes
Mauritius	15%	Not covered under older treaty version	N/A

Under several DTAAs, FTS benefits apply only if the services “make available” technical knowledge in a way the Indian entity can independently use in future. Routine operational support, shared service charges, or help desk services typically do not satisfy this test. The income is then outside the FTS article and may fall outside the DTAA entirely if the foreign entity has no Permanent Establishment in India.

The Indian company’s obligation: correct withholding before remittance

The Indian company is the withholding agent under Section 195. If it withholds at 10% under a DTAA but cannot later produce a valid TRC and Form 10F, the shortfall is recovered from the Indian company with interest under Section 201(1A). The royalty deduction itself is disallowed under Section 40(a)(i) if TDS was not deducted or was at a shortfall rate.

Transfer pricing documentation (Form 3CEB and a benchmarking study) is mandatory under Section 92D for royalty or FTS payments to related parties exceeding Rs 1 crore in aggregate. Under the Finance Act 2026, failure to furnish Form 3CEB now attracts an automatic tiered penalty: Rs 5 lakh for delays up to one month, escalating thereafter.

GST on royalties: the RCM obligation

The Indian company pays GST at 18% on royalty payments to foreign parents under the Reverse Charge Mechanism (RCM), as these are classified as import of services under Section 2(11) of the IGST Act 2017, with the place of supply in India. The Indian company pays this IGST in cash (it cannot be set off from output GST credit without first paying in cash) and can subsequently claim the amount as Input Tax Credit (ITC) in GSTR-2B, subject to the payment being for a taxable business purpose and not falling under Section 17(5) blocked credits.

GST under RCM is a cash flow cost that arrives before the royalty income lands in the parent’s account. On a Rs 10 crore annual royalty, the Indian subsidiary pays Rs 1.8 crore in GST upfront, claims it as ITC, and the net cost is the timing difference. Groups with low output GST liability (export-heavy subsidiaries) may accumulate ITC refund positions; this adds administrative overhead on top of the royalty itself.

Management and intercompany service fees

Management fees and intercompany service fees cover a broad category: the Indian subsidiary pays the foreign parent (or a group entity) for finance, legal, HR, IT, marketing, compliance, or any other service the group provides centrally.

FEMA classification: current account transaction, freely repatriable.

Tax treatment: deductible as a business expense in the Indian company, reducing its corporate tax liability at 25.17% (Section 115BAA). No Indian income tax withholding applies if the foreign entity has no PE in India and the services do not qualify as FTS. Where FTS characterisation applies (because the services “make available” technical knowledge), Section 195 withholding triggers at the domestic or DTAA rate.

GST under reverse charge on management fees

The Finance Act 2026 amended the place of supply rules for intermediary services by omitting Section 13(8)(b) of the IGST Act, effective 30 March 2026. Before this change, a foreign entity providing intermediary or facilitation services to an Indian recipient had the place of supply treated as the supplier’s location, which meant the Indian recipient could face exposure without a clear RCM mechanism. Post the amendment, inward services from overseas suppliers to Indian recipients are now definitively treated as imports of services with place of supply in India, subjecting the Indian recipient to RCM.

The practical consequence for management fees: an Indian subsidiary receiving management services (finance support, group reporting coordination, HR policy, internal audit) from its foreign parent pays 18% GST under RCM. ITC is available if the subsidiary is GST-registered and uses the services for its taxable business activity. For subsidiaries in financial services or sectors with restricted ITC, this is a direct additional cost.

Royalties and management fees, while conceptually distinct, are both subject to RCM at 18%. The GST does not affect the income tax withholding calculation but is an independent cash flow obligation that management planning often overlooks.

Transfer pricing and the benefit test

The arm’s-length requirement under Sections 92 to 92F applies to every international transaction between associated enterprises. For management service fees, the Indian entity must demonstrate two things: that services were actually received (the benefit test) and that the fee corresponds to what an unrelated party would have paid (the arm’s-length price test).

The income tax department routinely challenges management fees on two grounds:

• The fee is a blanket headquarters cost allocation with no identifiable benefit to the Indian entity
• The rate is above the arm’s-length benchmark for comparable independent service arrangements

A disallowed management fee is added back to the Indian company’s taxable income. The TDS shortfall becomes payable with interest under Section 201(1A), and a penalty under Section 271C applies if the default was not voluntary.

Secondary adjustment under Section 92CE and Section 170 of the Income-tax Act 2025

Where a transfer pricing primary adjustment exceeds Rs 1 crore and the excess amount is not repatriated to India within the prescribed period (governed by Rule 83, typically 90 days from the assessment order becoming final), the excess is treated as an advance from the Indian entity to the foreign AE. Interest is imputed on this advance at the State Bank of India base lending rate plus 3.25% for INR transactions, or SOFR plus 3% for foreign currency transactions. The cash outflow continues until actual repatriation occurs. This mechanism can create a permanently recurring cost that outlives the original dispute.

Budget 2026 transfer pricing safe harbour

Budget 2026 restructured the safe harbour rules under Section 92CB, effective Tax Year 2026-27. For IT services, ITeS, knowledge process outsourcing, and contract R&D provided to overseas associated enterprises, the safe harbour margin is now a uniform 15.5% of operating expenses. The eligibility threshold was raised from Rs 300 crore to Rs 2,000 crore, automated approval replaces officer discretion, and validity is 5 consecutive years.

For the Indian subsidiary receiving management fees from a foreign parent rather than providing services to it, the safe harbour directly reduces scrutiny risk on the subsidiary’s overall margin position. A higher accepted margin on the India-side services leaves less room for the department to challenge the management fee deduction on benefit or pricing grounds.

For complex, high-value, or intangible-heavy arrangements, the Finance Act 2026 also targeted a 2-year resolution timeline for unilateral Advance Pricing Agreements (APAs) for IT services. An APA provides a binding agreement for up to 9 years (5 prospective plus 4 rollback years), eliminating litigation risk for the period.

For the full Form 3CEB process, benchmarking study requirements, and Master File/CbCR obligations, see Treelife’s transfer pricing documentation guide.

ECB interest: the fifth repatriation route and why it changed in February 2026

Intercompany loans from the foreign parent to the Indian subsidiary, structured as External Commercial Borrowings (ECBs) under FEMA, generate an interest payment that repatriates cash to the parent while being deductible in India. ECB interest is one of the most tax-efficient repatriation mechanisms available to foreign-invested subsidiaries when the structure is properly set up.

Tax treatment under Section 194LC

Interest paid on qualifying ECBs in foreign currency is subject to concessional 5% withholding tax under Section 194LC of the Income Tax Act 1961. The conditions for this concessional rate include: the borrowing must be in foreign currency from a recognised lender, and the interest must be paid under a borrowing arrangement entered into before the applicable cut-off date specified in RBI notifications. For ECBs that do not qualify under Section 194LC, the domestic rate under Section 115A applies: 20% plus surcharge and cess.

The combined tax efficiency of ECB interest: the interest is deductible at 25.17% corporate tax in India, and the foreign parent pays 5% withholding on the gross interest received. On a Rs 10 crore annual interest charge, the Indian company saves Rs 2.517 crore in corporate tax and the parent receives Rs 9.5 crore after TDS. The effective combined cost of the 5% withholding, against a 25.17% tax deduction, makes ECB interest the lowest all-in tax cost of any repatriation route where it is feasible.

DTAA interest articles may further reduce the 5% to 0-5% depending on the treaty (most India DTAAs set interest withholding at 10-15% for general interest, but Section 194LC provides a specific domestic concessional rate that most DTAAs do not undercut).

February 2026 ECB liberalisation

The RBI notified significant amendments to the Foreign Exchange Management (Borrowing and Lending) Regulations 2018 on 16 February 2026. The principal changes relevant to foreign parents lending to Indian subsidiaries:

The all-in-cost ceiling (previously benchmarked at SOFR plus 450-500 basis points) was removed. ECB pricing is now driven by prevailing market conditions rather than a regulatory cap. This is a material liberalisation: groups that previously had to price intercompany ECBs within a tight spread can now price them at a commercially justifiable rate without a FEMA violation risk.

The eligible borrower universe was expanded. Financial sector entities, which previously faced restrictions, now have broader access.

The automatic route limit was raised from USD 750 million to the higher of USD 1 billion or 300% of net worth per financial year.

All previous ECB-related provisions from the former master directions were removed; the Amended Regulations themselves now constitute the complete governing framework for new ECBs. For ECBs with a Loan Registration Number (LRN) obtained before 16 February 2026, the prior norms continue to apply.

ECB compliance obligations

An ECB requires: a signed loan agreement with the foreign lender, obtaining a Loan Registration Number (LRN) from the RBI by filing Form ECB through the AD bank at drawdown, and monthly reporting in Form ECB-2 for all subsequent payments and balance changes. Missing the monthly Form ECB-2 filing is one of the most common FEMA contraventions for subsidiaries with outstanding intercompany debt and is compoundable under FEMA Section 15.

The end-use restrictions remain: ECB proceeds cannot be used for investment in real estate (outside permitted categories), investment in capital markets, or on-lending to other entities for non-permitted purposes.

ECBs as a repatriation vehicle have a structural constraint: the Indian subsidiary must have genuine cash flows to service the interest, the borrowing must serve a genuine business purpose, and the thin capitalisation provisions (Section 94B of the Income Tax Act, limiting interest deduction on borrowings from associated enterprises to 30% of EBITDA above Rs 1 crore) apply. A group using ECB interest purely as a cash extraction mechanism with no genuine capital use in the subsidiary will face both interest deductibility disallowance and transfer pricing scrutiny.

Capital reduction: the route most groups overlook

Capital reduction is distinct from both dividends and buybacks. It allows an Indian company to reduce its paid-up share capital and return the corresponding funds to shareholders, including foreign shareholders, without cancelling shares through a market buyback. Capital reduction requires NCLT (National Company Law Tribunal) approval under Section 66 of the Companies Act 2013, which makes it slower and more complex than dividends or buybacks, but it can achieve purposes that neither of those routes easily accommodates.

FEMA treatment: capital reduction involving foreign shareholders is treated as a transfer of shares under FEMA, as confirmed in an NCLT Kolkata ruling. This brings it under the NDI Rules valuation requirements (Rule 21: internationally accepted methodology certified by a CA or SEBI-registered Merchant Banker) and the Form FC-TRS filing obligation within 60 days.

Tax treatment: the amount received in a capital reduction is treated as deemed dividend to the extent it comes from accumulated profits (Section 2(22)(c) of the Income Tax Act). The balance is treated as capital gains on extinguishment of shares. The split between deemed dividend (taxable at 20% or applicable DTAA rate) and capital gains (taxable at 12.5% LTCG for unlisted shares held over 24 months under the Finance Act 2026 framework) requires a specific computation.

Capital reduction works best in two scenarios: where the Indian company has permanent capital surplus that cannot be distributed as dividends without triggering concerns about solvency (the NCLT review provides regulatory validation), and where the group is partially exiting without reducing to zero shareholding (which would be a full liquidation with different implications).

Numerical comparison: combined effective tax cost per Rs 100 of Indian pre-tax profits

The table below works through the actual take-home for the foreign parent per Rs 100 of pre-tax profit in the Indian subsidiary, using illustrative DTAA rates and the Section 115BAA corporate tax rate of 25.17%.

Combined effective tax cost comparison (illustrative, FY 2026-27)

Route	Indian corporate tax	Amount available after Indian tax	Withholding on repatriation	Amount arriving at foreign parent	Combined effective rate
Dividends (10% DTAA rate)	Rs 25.17	Rs 74.83	Rs 7.48 (10% of Rs 74.83)	Rs 67.35	32.65%
Dividends (15% DTAA rate)	Rs 25.17	Rs 74.83	Rs 11.22 (15% of Rs 74.83)	Rs 63.61	36.39%
Royalties (10% DTAA rate, deductible)	Reduced by royalty deduction; effective corporate tax on retained profits only	Royalty of Rs 100 deductible; parent receives Rs 100 less 10% WHT = Rs 90	Rs 10 (10% on Rs 100)	Rs 90	10% (on the royalty payment, ignoring the India deduction benefit)
Service fees (no PE, no FTS, deductible)	Reduced by fee deduction; parent receives gross fee	Rs 100 fee deductible, no WHT if not FTS	Nil	Rs 100 minus 18% GST RCM cash cost until ITC recovered	Nil WHT, timing cost of GST
ECB interest (Section 194LC qualifying)	Reduced by interest deduction at 25.17%	Parent receives interest less 5% TDS	Rs 5 (5% of Rs 100 interest)	Rs 95	5% (on the interest, with a 25.17% India tax deduction against it)
Buyback (LTCG 12.5%, unlisted, held 24+ months)	No deduction (capital transaction)	Post-corporate-tax surplus	Rs 12.5 (12.5% of capital gain, before surcharge/cess)	Rs 87.5 of capital gain net of TDS	12.5% + surcharge/cess on gain only

The royalty and service fee rows read differently from dividends because the payment is a deductible expense in India: the Indian company does not pay corporate tax on the amount paid as royalty or fees, so the comparison is not straightforward. The true efficiency gain from deductibility is approximately 25.17 paise saved in Indian corporate tax per rupee of deductible payment, partially offset by the withholding tax paid on the outward remittance.

For a foreign parent that controls both the IP and the Indian subsidiary, the optimum structure is often: a royalty arrangement for IP monetisation at the DTAA rate (10%), plus service fees for genuine services with no PE at nil withholding, plus dividends for any residual profit repatriation. ECB interest applies where the subsidiary was partially funded by intercompany debt. Buybacks serve capital repatriation, not routine profit extraction.

GAAR, the MLI Principal Purpose Test, and the Tiger Global ruling

Any structure designed to access a DTAA rate must now be tested against two anti-avoidance frameworks operating simultaneously.

General Anti-Avoidance Rules (GAAR)

GAAR under Chapter X-A of the Income Tax Act 1961 (effective 1 April 2017) applies to “impermissible avoidance arrangements”: those where the main purpose is to obtain a tax benefit and one or more of four tainted elements are present (artificial or fictitious steps, no business purpose, misuse of treaty provisions, or non-arm’s-length transactions). The GAAR threshold is high: it requires the main purpose to be tax avoidance and a specific tainted element. A high-powered approving panel reviews GAAR applications before they are invoked, providing a degree of procedural protection for genuine commercial structures.

GAAR does not apply to investments made before 1 April 2017, which are grandfathered under the Income Tax Act.

The Multilateral Instrument Principal Purpose Test (PPT)

India activated the PPT under Article 7 of the OECD Multilateral Instrument (MLI) for most of its covered tax treaties. The PPT denies treaty benefits where “one of the principal purposes” of an arrangement was to obtain those benefits. The PPT has a lower threshold than GAAR: it requires only that tax benefit was “a” principal purpose, not the main purpose, and there is no approving panel process or grandfathering for post-2017 investments. This makes it broader in scope than GAAR for covered treaty transactions.

Tiger Global Supreme Court ruling (15 January 2026)

The Supreme Court of India, in Tiger Global International III Holdings and Others, set aside the Delhi High Court decision and upheld the Authority for Advance Rulings’ finding that the arrangement was prima facie for tax avoidance. The ruling makes three material observations: GAAR can override DTAA benefits; a Tax Residency Certificate is not conclusive proof of genuine treaty entitlement (it is a necessary but not sufficient condition); and the substance and commercial purpose of the intermediate holding structure must be independently demonstrable.

The practical implication for repatriation structures: a Singapore or Mauritius holding company through which dividends or capital gains are routed must have genuine economic substance in that jurisdiction: real employees, actual decision-making, and a commercial purpose beyond accessing the DTAA rate. A pass-through holding company with no substance, formed after 1 April 2017, faces a material risk of having treaty benefits denied under both GAAR and the PPT. This applies with equal force to royalty arrangements where the IP holding entity is in a treaty jurisdiction but lacks operational presence.

Groups that structured holdcos before 2017 should confirm whether their arrangements survive the Tiger Global reasoning for post-2017 transactions, even if the holdco itself predates the grandfathering cut-off.

Common mistakes that cost groups years of exposure

Paying dividends while FDI filings are outstanding. AD banks with automated FIRMS portal checks will flag a dividend remittance where the company’s FDI filings (FC-GPR, FLA return) are not current. Resolving an outstanding filing under time pressure during a dividend cycle is expensive. Run an FDI compliance health check 60 days before each planned dividend.

Claiming a DTAA rate without a current TRC. A TRC issued in the previous financial year and covering only that year is invalid for withholding in the current year. The CA issuing Form 15CB will not certify a DTAA rate without a valid TRC. The sequence is: obtain TRC, file Form 10F, then issue Form 15CB. Post-remittance documentation reconstruction is not a recognised compliance approach.

Missing the royalty rate change from 10% to 20% (Finance Act 2023). Groups that set up royalty arrangements before April 2023 and have not reviewed their withholding position since then may be withholding at 10% without a valid TRC. Each payment creates a TDS default: interest under Section 201(1A) accruing from the date of each remittance, plus a potential Section 271C penalty equal to the TDS not deducted. A royalty arrangement at 10% withholding with no current TRC on file is a compounding exposure that grows with every quarterly payment.

Applying the wrong buyback tax regime. The applicable regime is determined by the payment date. A company that made a board resolution under Section 115QA assumptions (pre-October 2024) but paid after 1 October 2024 was in the Regime 2 (deemed dividend) framework. A company paying after 1 April 2026 is in the Regime 3 (capital gains) framework regardless of when the resolution was passed. The resolution date does not determine the tax treatment; the payment date does.

Missing Form ECB-2 monthly filings. ECBs require monthly Form ECB-2 reporting of utilisation and repayment. This is one of the most commonly missed FEMA obligations for subsidiaries with outstanding intercompany loans. Each missed filing is a separate compoundable FEMA contravention. The compounding application process takes months and requires RBI processing. Automate the calendar immediately after each ECB drawdown.

Not accounting for GST RCM on royalties and management fees. GST under RCM on import of services (royalties, management fees) at 18% is an independent obligation entirely separate from income tax withholding. It is payable in cash each month in which services are received or invoiced. Groups that do not build this into their cash flow model discover the obligation only when a GST audit raises it, at which point interest and penalty apply retroactively.

Overlooking the secondary TP adjustment. A transfer pricing assessment that results in a primary adjustment above Rs 1 crore triggers a secondary adjustment under Section 92CE unless the excess is repatriated within 90 days. Missing that window converts the excess into an advance on which imputed interest accrues annually. This can run on for years after the primary dispute is settled.

Using a holdco without substance to access DTAA rates after the Tiger Global ruling. Post the Supreme Court’s 15 January 2026 ruling, a TRC alone does not guarantee treaty benefits. The beneficial owner of the income and the economic substance of the holding structure are independently examined. Restructuring a holding structure after a notice has been issued is significantly harder than building substance into it before the assessment cycle begins.

Treelife practitioner note

In the repatriation mandates we run at Treelife, the single most expensive mistake we encounter is not a wrong filing. It is a structure that was set up correctly in 2019 or 2020 and has never been reviewed since, while three or four regulatory parameters around it changed.

The Finance Act 2023 royalty rate change from 10% to 20% is the clearest example. We have seen groups paying royalties under arrangements documented in 2018 or 2019, withholding at 10%, with a TRC that expired in 2022. Every payment since then has been at the wrong rate, creating a TDS default with interest from the date of each remittance. The aggregate exposure on a Rs 5 crore annual royalty over three years of non-compliance is not trivial: approximately Rs 1.5 crore in TDS shortfall plus interest running at 1.5% per month under Section 201(1A).

The February 2026 ECB liberalisation is an opportunity that several of our clients have not yet acted on. Removing the all-in-cost ceiling means groups that historically avoided ECBs because they could not price the intercompany loan within the SOFR-plus-500-bps band now have the flexibility to use intercompany debt at a commercially justified rate. For a subsidiary that is profitable and has genuine capital needs, adding an ECB component reduces the Indian corporate tax base at 25.17% and repatriates cash at 5% withholding under Section 194LC. That is a combination most dividends-only structures cannot match.

The Tiger Global ruling is the one we watch most carefully for structures that were set up as routing arrangements rather than genuine holding structures. The TRC-is-not-conclusive observation changes the documentation standard: beneficial ownership analysis, board meeting records, employee presence, and decision-making trails in the treaty jurisdiction are now minimum requirements for any holding company that plans to claim a reduced DTAA rate on dividends or capital gains from India.

FAQs on Repatriation of Profits from India

Q: Does an Indian company need RBI approval before paying dividends to a foreign shareholder?
A: No. Dividends are a current account transaction under FEMA and are freely repatriable without prior RBI approval, provided applicable taxes have been withheld and the company’s FDI filings (Form FC-GPR, FLA return) are current. The remittance goes through an AD bank with Form A2, Form 15CA, and Form 15CB.

Q: What documentation is needed to claim a DTAA withholding rate lower than 20% on royalties?
A: The foreign parent must produce a Tax Residency Certificate from its home jurisdiction’s tax authority, covering the financial year of payment. It must file Form 10F electronically on the Indian income tax portal (PAN required). It must file an Indian income tax return for the year (since the Section 115A(5) ITR exemption is no longer available at DTAA rates below 20%). The Indian company must hold all three documents before issuing Form 15CB. Post-remittance documentation is not accepted.

Q: Which buyback tax regime applies to a payment made on 15 May 2026?
A: The Finance Act 2026 regime (capital gains in the shareholder’s hands), effective from 1 April 2026. The company pays no buyback distribution tax. The foreign shareholder pays capital gains tax: 12.5% LTCG for unlisted shares held over 24 months, or slab rates for shorter holding. TDS is withheld by the Indian company under Section 195 on the capital gains component.

Q: Is GST payable on management fees received from a foreign parent company?
A: Yes. The Indian subsidiary must pay IGST at 18% under the Reverse Charge Mechanism on management fees received from the foreign parent, as this is an import of services with place of supply in India. The amount is payable in cash (not setoff from output credit) but is eligible for Input Tax Credit if used for taxable business activities and the conditions of Section 16 and Section 17(5) of the CGST Act are met.

Q: Can an ECB from the foreign parent qualify for the 5% Section 194LC withholding rate?
A: Yes, subject to conditions. The ECB must be denominated in foreign currency, from a recognised lender, and the interest must be paid under a borrowing arrangement that meets the conditions in Section 194LC. Following the February 2026 liberalisation, the all-in-cost ceiling has been removed, so the interest rate itself no longer creates a FEMA compliance constraint. The RBI Loan Registration Number must be obtained before drawdown.

Q: What does the Tiger Global Supreme Court ruling mean for a Singapore holdco claiming dividend treaty benefits?
A: The January 2026 ruling held that GAAR can override DTAA benefits and that a TRC is not conclusive proof of treaty entitlement. A Singapore holdco must demonstrate genuine economic substance: actual employees or personnel in Singapore, real decision-making activity, and a commercial purpose beyond accessing the India-Singapore DTAA rate. A holding company with no substantive presence that was formed or restructured after 1 April 2017 is at material risk of having DTAA benefits denied on GAAR or PPT grounds.

Q: Can a branch office repatriate its profits freely?
A: Yes, but the process differs from a subsidiary. A branch office (taxed at 40% corporate rate for FY 2026-27) remits its after-tax profits to the foreign head office without declaring dividends. The AD bank requires an auditor’s certificate confirming the remittable amount, the income tax position on the profits being repatriated, and the applicable Form 15CA/15CB. There is no Form FC-TRS obligation. The higher corporate tax rate on branch offices (40% versus 25.17% for a subsidiary under Section 115BAA) means that for most operating businesses, the subsidiary structure remains more tax-efficient despite the additional withholding layer on dividends.

Q: What is a secondary transfer pricing adjustment and how does it affect repatriation?
A: Where a TP primary adjustment exceeds Rs 1 crore, Section 92CE requires the excess to be repatriated to India within 90 days of the assessment order becoming final. If it is not, the excess is treated as an advance from the Indian entity to its foreign AE, on which arm’s-length interest is imputed annually under Section 170 of the Income-tax Act 2025. This is an open-ended cash flow drain that runs until the amount is actually returned. Groups with pending TP assessments should calculate this exposure before it crystallises.

Q: What happens if the AD bank blocks a remittance?
A: The bank will issue a query letter requiring additional documentation. Common triggers: expired TRC, incomplete Form 10F, beneficial ownership declarations missing or outdated, a jurisdictional FATF grey list concern, or a mismatch between the stated purpose and the counterparty profile. The remittance is held until all documentation is satisfactory. Funds can be returned to the Indian company if the issue is not resolved within the bank’s internal timeline. Prepare documentation before the transaction is initiated, not after.

Q: Can capital reduction be used to return original share capital to a foreign parent?
A: Yes, subject to NCLT approval under Section 66 of the Companies Act 2013. Capital reduction involving a foreign shareholder is treated as a transfer of shares under FEMA, as established in NCLT jurisprudence. Valuation under NDI Rules Rule 21 and Form FC-TRS filing within 60 days are required. The tax treatment splits the payment between deemed dividend (to the extent of accumulated profits under Section 2(22)(c)) and capital gains on the extinguishment of shares.

Q: Does the Indian company need to disclose all intercompany transactions in any filing beyond Form 3CEB?
A: Yes. For Indian entities that are part of a multinational group with consolidated global revenue exceeding Rs 5,500 crore (approximately EUR 600 million), Country-by-Country Reporting (CbCR) and Master File obligations apply under Sections 92D and 286 of the Income Tax Act 1961. These require the group’s ultimate parent to file the CbCR in its home jurisdiction, and the Indian entity to file a CbCR notification, Master File (Form 3CEAA/3CEAB), and Local File.

Q: What is the thin capitalisation rule and how does it limit ECB interest deduction?
A: Section 94B of the Income Tax Act limits the deduction for interest paid to non-resident associated enterprises to 30% of EBITDA (earnings before interest, tax, depreciation, and amortisation), to the extent the net interest expense exceeds Rs 1 crore. Interest disallowed under Section 94B can be carried forward for 8 assessment years and set off against future eligible interest income. For groups using high intercompany debt as a repatriation vehicle, modelling the EBITDA-to-interest ratio across future years is a necessary planning step before structuring the ECB.

Q: Are there any restrictions on which foreign companies can receive ECB interest from India?
A: Post the February 2026 liberalisation, the eligible lender universe now includes any person resident outside India. Previously, lenders were required to be from FATF or IOSCO-compliant countries. The expanded borrower and lender base removes a structural constraint that previously excluded certain foreign parent entities or group treasury companies from acting as ECB lenders to their Indian subsidiaries.

Regulatory references:

• Foreign Exchange Management Act, 1999 (FEMA)
• FEMA (Non-Debt Instruments) Rules 2019, Rule 21 (pricing guidelines for share transactions)
• FEMA (Borrowing and Lending) Regulations 2018, as amended 16 February 2026
• FEMA 20(R): Transfer or Issue of Security by a Person Resident Outside India
• Income Tax Act 1961, Section 2(22)(c) and (f) (deemed dividend: capital reduction and buyback)
• Income Tax Act 1961, Section 56(2)(i) (dividends as income from other sources)
• Income Tax Act 1961, Section 90 (DTAA benefit), Section 90(2) (more-beneficial rule)
• Income Tax Act 1961, Section 90(4) and Rule 21AB (TRC and Form 10F)
• Income Tax Act 1961, Section 92 to 92F (transfer pricing framework)
• Income Tax Act 1961, Section 92B (safe harbour), Section 92CE (secondary adjustment)