# India Canada DTAA for Companies in 2026 with Rates, FIS and PE Rules

> Source: https://krystal7.com/insights/india-canada-dtaa-for-companies
> Publisher: Krystal7 Consultants (Krystal7 Innovations Private Limited), Gurugram, India
> Author: CA Nandini
> Published: 01 Mar 2026; updated 24 Oct 2026
> Summary: The India Canada DTAA caps Indian tax on a Canadian parent at 15 percent on dividends, interest and most royalties, and 10 percent on equipment hire.

*Written by CA Nandini Hasija, Krystal7 Consultants. Last updated 23 October 2026.*

## AI Overview Summary

- The India Canada DTAA caps Indian tax at 15 percent on dividends to a Canadian company controlling at least 10 percent of the voting power, and at 15 percent on interest, under Articles 10 and 11.
- Royalties and fees for included services bear 15 percent, and equipment royalties 10 percent, under Article 12. Services that make nothing available are business profits, taxed only through a PE.
- Canadian staff who work in India for the Indian subsidiary can create a service PE from the first day, because Article 5(2)(l)(ii) sets no day count for related enterprises.
- Article 13(2) lets India tax every gain on Indian shares under its own law, so a Canadian parent pays 12.5 percent on a long term gain on unlisted shares, plus surcharge and cess.
- Each claim needs a CRA certificate of residency and Form 41 under section 159(8) of the Income Tax Act, 2025. The MLI principal purpose test applies from 1 Apr 2020 for Indian withholding.

**The India Canada DTAA caps Indian tax on dividends at 15 percent for a Canadian company with at least 10 percent of the voting power. Other dividends bear up to 25 percent. Interest bears 15 percent. Royalties and fees for included services bear 15 percent, and equipment royalties 10 percent. Services that make nothing available are business profits, taxed only through a PE. Each claim needs a CRA certificate of residency and Form 41 under section 159(8) of the Income Tax Act, 2025.**

This page is for Canadian parent companies and the finance teams of their Indian subsidiaries. It covers the rates, the fees for included services wording, PE, capital gains, the MLI, the papers and a worked example. Rupee amounts use Indian grouping, so INR 1,00,00,000 is one crore.

## What is the India Canada DTAA?

The India Canada DTAA is the income tax agreement signed at New Delhi on 11 Jan 1996. It entered into force on 6 May 1997, and India notified it by S.O. 28(E) of 15 Jan 1998. In India it applies to income of years beginning on or after 1 Apr 1998. It replaced the agreement signed on 30 Oct 1985.

A protocol signed on the same day forms part of the treaty. It has five paragraphs:

1. **Fiscal year.** For India it means the "previous year", now the tax year.
2. **Immovable property.** It applies Article 6(1) to income, other than capital gains, from the alienation of immovable property.
3. **The 30 day rule.** It covers a project or service PE under Article 5(2)(j), (k) or (l) that spans two years. No PE exists in a year with fewer than 30 days of activity.
4. **Alienation.** It says "alienation" in Article 13 includes a "transfer" under Indian law.
5. **Partnerships, trusts and foreign affiliates.** Each country keeps its own rules for taxing a resident on income from these.

The treaty page on incometaxindia.gov.in lists no amending protocol after 1996, when we checked it on 23 Oct 2026. The MLI then modified the treaty, with effect in India for withholding from 1 Apr 2020.

From 1 Apr 2026, section 159 of the Income Tax Act, 2025 gives effect to the treaty. It replaced section 90 of the Income Tax Act, 1961. Under section 159(4) the Act applies only where it is more beneficial to the taxpayer. Section 159(6) keeps Chapter XI, the General Anti Avoidance Rule (GAAR), above the treaty.

Our [Canada country guide](/insights/company-registration-in-india-from-canada) covers setting up the Indian company itself. This page starts where that one ends, with money flowing between the two companies.

## What withholding rates apply under the India Canada DTAA?

India may tax dividends at 15 percent where the Canadian company controls at least 10 percent of the voting power. Other dividends bear 25 percent. Interest bears 15 percent. Royalties and fees for included services bear 15 percent, and equipment royalties 10 percent. Each cap needs the Canadian company to be the beneficial owner.

| Income from India | Canada treaty article | Treaty cap (%) | Condition | Domestic rate for a foreign company, tax year 2026-27, before surcharge and cess (%) |
|---|---|---|---|---|
| Dividends to a company controlling at least 10% of the votes | 10(2)(a) | 15 | Beneficial owner; holding kept for 365 days (MLI Article 8) | 20, section 207(1) |
| Dividends in other cases | 10(2)(b) | 25 | Beneficial owner | 20, which is lower, so section 159(4) keeps it |
| Interest on foreign currency loans | 11(2) | 15 | Beneficial owner | 20, section 207(1) |
| Interest on rupee loans | 11(2) | 15 | Beneficial owner | 35, as any other income |
| Interest on loans made, guaranteed or insured by the Export Development Corporation | 11(3)(b)(i) | Nil in India | Loan or credit backed by that body | 20 or 35 |
| Equipment royalties, and FIS ancillary to them | 12(2)(b), 12(3)(b) | 10 | Beneficial owner | 20, section 207(2) |
| Other royalties and FIS | 12(2)(a)(ii) | 15 | Beneficial owner | 20, section 207(2) |
| Managerial and other services outside Article 12 | 7 | Nil without a PE | No PE in India | 20, section 207(2), where section 9(7) applies |
| Gains on shares of an Indian company | 13(2) | No cap | Indian law applies | 12.5 long term; 35 short term (unlisted) |
| Directors' fees from the Indian company | 16 | No cap | Indian law applies | Domestic rates |

Sources: India Canada DTAA and protocol of 11 Jan 1996; MLI synthesised text; sections 197 and 207 of the Income Tax Act, 2025; Finance Act, 2026, First Schedule.

The Indian payer deducts tax under section 393(2), Table serial 17, at the "rates in force". That is the Finance Act rate or the treaty rate, whichever applies. A payer that holds the treaty papers deducts at the lower treaty rate. Our guide to [TDS on payments to non residents](/insights/tds-on-payments-to-non-residents) covers the mechanics.

### Domestic rate against treaty rate

Section 207 of the Income Tax Act, 2025 taxes dividends, foreign currency interest, royalties and technical fees of a foreign company at 20 percent. Surcharge and 4 percent cess come on top. A foreign company's surcharge is 2 percent where its income exceeds INR 1,00,00,000, and 5 percent above INR 10,00,00,000. So the effective domestic rate is 21.216 percent in the 2 percent slab and 21.84 percent in the 5 percent slab.

We apply the treaty rate flat, without surcharge or cess. Article 2(3)(b)(i) names Indian income tax "including any surcharge thereon" as a covered tax. Tribunal rulings treat cess the same way, but no CBDT circular settles the point. So Form 146 should state the article and the flat rate.

Each cap has a PE carve out. Articles 10(5), 11(5) and 12(6) remove the cap where the holding, debt or right is effectively connected with an Indian PE. Article 12(8) limits the royalty cap to an arm's length amount where a special relationship inflates the payment.

## How does the treaty treat dividends paid to a Canadian parent?

A Canadian parent that controls at least 10 percent of the voting power of the Indian company pays 15 percent under Article 10(2)(a). Since the MLI, it must also meet that holding for 365 days, including the payment date. A smaller or newer holding falls to 25 percent under Article 10(2)(b), and then the domestic 20 percent is lower.

MLI Article 8 applies to Article 10(2)(a). It looks at the 365 day period that includes the day the dividend is paid. A Canadian company that buys a stake and takes a dividend within a few months does not get the 15 percent rate. On our reading, it then pays the domestic rate, because 20 percent plus surcharge and cess stays below the 25 percent cap.

That makes the treaty worth little for portfolio holders. A Canadian fund with 4 percent of an Indian company gains nothing from Article 10, since 25 percent is above the domestic rate. It still needs the TRC and Form 41 only where it claims some other treaty benefit.

The test is control of voting power, not share capital. Preference shares and compulsorily convertible instruments can split the two. We check the voting rights in the articles of association before the Board declares a dividend. The company law steps are in our guide on [dividends from an Indian subsidiary](/insights/dividend-from-indian-subsidiary-to-foreign-parent).

## What interest rate applies on loans from a Canadian parent?

Article 11(2) caps Indian tax on interest at 15 percent of the gross amount for a Canadian beneficial owner. The cap is the same for related and unrelated lenders. Article 11(3) exempts interest paid by a government, interest to a central bank, and interest on credit backed by the Export Development Corporation.

The treaty matters most on rupee loans. Domestic law taxes interest on a rupee loan to a foreign company as any other income, at 35 percent plus surcharge and cess. The treaty cuts that to 15 percent. On a foreign currency loan the domestic rate is 20 percent, so the saving is about 6 points.

An intra group loan from Canada is usually an external commercial borrowing. FEMA 3(R)(5)/2026-RB of 9 Feb 2026 now sets the framework, including arm's length cost for related lenders. Our [ECB guide](/insights/ecb-loan-from-foreign-parent-india) covers the borrowing rules.

Article 11(7) caps the treaty rate at an arm's length amount of interest. Any excess is taxed under Indian law. The Indian borrower also reports the loan and its interest in the transfer pricing report in Form 48 under section 172.

## How does the India Canada DTAA define fees for included services?

Article 12(4) treats a technical or consultancy fee as fees for included services (FIS) only in two cases. The service is ancillary to a royalty, or it makes available technical knowledge, experience, skill, know how or processes. Developing and transferring a technical plan or design also counts. Other service fees are business profits.

This is the same "make available" approach as the India US treaty. Indian domestic law is wider. Section 9(7) of the Income Tax Act, 2025 covers any "managerial, technical or consultancy services". Section 159(4) lets the Canadian company use the narrower treaty test.

Article 12(5) excludes five kinds of payment from FIS:

1. **Services inextricably linked to a sale of property.**
2. **Services ancillary to renting ships, aircraft, containers or equipment** used in international traffic.
3. **Teaching** in or by educational institutions.
4. **Services for the personal use** of the individual who pays.
5. **Payments to an employee, or to an individual or firm** for professional services under Article 14.

Article 12(2) sets the rates. Equipment royalties under Article 12(3)(b), and FIS ancillary to them, bear 10 percent. Every other royalty and FIS bears 15 percent. The treaty set 15 or 20 percent for its first five taxable years, and those years ended long ago.

| Service or payment from a Canadian parent to its Indian company | Article 12 result, on our reading | Indian tax without a PE (%) | What we keep on file |
|---|---|---|---|
| Licence of a trade mark or know how | Royalty, 12(3)(a) | 15 | Licence agreement; royalty base |
| Hire of testing equipment, with technician support | Equipment royalty, 12(3)(b), and FIS ancillary to it | 10 | Hire agreement; asset list |
| Training that lets Indian engineers run a process alone | FIS that makes available, 12(4)(b) | 15 | Training plan and sign off |
| Design and handover of a technical plan | FIS, 12(4)(b) | 15 | The deliverable |
| Group finance, HR and legal support run from Toronto | Usually outside 12(4); business profits under Article 7 | Nil | Service logs; staff days in India |
| Group IT helpdesk run from Canada | Usually outside 12(4) | Nil | Tickets and service levels |
| Canadian staff working in India for the subsidiary | Article 7, with service PE risk under 5(2)(l)(ii) | Tax on PE profits | Day logs; secondment letters |

A fee outside Article 12 still goes on Form 145, with a written treaty analysis on file. Our [Form 145 and 146 guide](/insights/form-15ca-and-15cb-requirements-guide-2026) explains which part applies. The India US DTAA uses the same make available test.

On software, the Supreme Court ruled in Engineering Analysis Centre of Excellence Private Limited on 2 Mar 2021. It held that end user software licences are not royalty under India's treaties. Section 9(6) of the 2025 Act still treats software as royalty at home. So the Canadian certificate and Form 41 decide the result for a Canadian software vendor.

## When does a Canadian company have a PE in India?

A Canadian company has a PE in India if it has a fixed place of business here. A construction or installation project lasting more than 120 days also counts. So do services through personnel for more than 90 days in any twelve months. Services performed in India for a related enterprise count with no day count at all.

| PE trigger | Article | Threshold | Typical risk for a Canadian parent |
|---|---|---|---|
| Fixed place of business: place of management, branch, office, factory, workshop, sales outlet | 5(1), 5(2)(a) to (i) | No day count | Parent staff using the Indian office as their own |
| Installation or structure for exploring natural resources | 5(2)(j) | More than 120 days in any twelve month period | Mining and oil field services |
| Building site, construction, installation or assembly project, and supervision of it | 5(2)(k) | More than 120 days in any twelve month period | Plant installation for an Indian customer |
| Services through employees or other personnel | 5(2)(l)(i) | More than 90 days in any twelve month period | Consultants on a long project |
| Services performed in India for a related enterprise | 5(2)(l)(ii) | No day count | Parent staff working in India for the Indian subsidiary |
| Dependent agent | 5(4)(a), (b), (c) | Habitually exercises authority to conclude contracts, delivers from stock with other sales activity, or secures orders | Indian staff selling for the parent |
| Preparatory or auxiliary activity | 5(3) | Exempt | Storage, display, purchasing, information |
| Subsidiary | 5(6) | Control alone is not a PE | Holds while the subsidiary acts for itself |

Sources: India Canada DTAA, Article 5 and protocol paragraph 3; MLI synthesised text.

Domestic law applies a separate presence test, which our guide to [significant economic presence in India](/insights/significant-economic-presence-business-connection-india) covers alongside business connection.

### The related enterprise service PE

Article 5(2)(l)(ii) is the rule that catches Canadian groups. It covers services, other than FIS, furnished in India through employees or other personnel. Where the services are for a related enterprise under Article 9(1), the 90 day test does not apply. The Indian subsidiary is a related enterprise of its Canadian parent.

So a Canadian finance manager who spends three weeks in Pune running the Indian month end can create a PE. The services must be performed in India. Work done from Toronto for the Indian company does not count. Our [secondment guide](/insights/secondment-of-employees-to-india-pe-gst-tds) covers how to structure staff who stay longer.

The protocol softens the edges. Some activities under Article 5(2)(j), (k) or (l) span two taxable years. Then no PE exists in a year with fewer than 30 days of activity. In that case the PE exists only in the other year, and only that year's income is taxed.

### Dependent agents and the force of attraction

Article 5(4) has three agent tests. An agent who has and habitually exercises authority to conclude contracts creates a PE. So does one who keeps stock and delivers from it, where other activity in India contributed to the sale. So does one who habitually secures orders wholly or almost wholly for the enterprise.

An agent working wholly or almost wholly for one enterprise, on terms that are not arm's length, loses independent status under Article 5(5). The MLI does not apply MLI Article 12 to this treaty. So the "principal role" wording in Indian domestic law does not reach the treaty agent test.

Article 7(1) has a limited force of attraction. Once a PE exists, India may also tax profits from Indian sales of goods of the same or similar kind as the PE sells. The same applies to other business activities of the same or similar kind. Article 24(4)(b) lets India tax PE profits at a higher rate than an Indian company, within 15 percentage points.

Our guide on [how to avoid permanent establishment risk](/insights/how-to-avoid-permanent-establishment-risk-in-india) covers the controls, including day logs and signing authority.

## How are capital gains taxed under the India Canada DTAA?

Article 13 has only two paragraphs. Gains on ships and aircraft in international traffic are taxable only in the seller's country. Every other gain "may be taxed in both Contracting States" under Article 13(2). So India taxes a Canadian company's gain on Indian shares under its own law, with no treaty cap.

| Asset sold by a Canadian company | Treaty article | Who may tax | Indian rate before surcharge and cess (%) |
|---|---|---|---|
| Unlisted shares of an Indian company held more than 24 months | 13(2) | India and Canada | 12.5, section 197 |
| Unlisted shares held 24 months or less | 13(2) | India and Canada | 35 |
| Shares deriving more than 50% of their value from Indian immovable property | 13(2), with MLI Article 9(4) | India and Canada | Domestic rates |
| Buy back by the Indian company from 1 Apr 2026 | 13(2), on our reading | India and Canada | Capital gain; extra tax for promoters under section 69 |
| Shares of a foreign holding company that derive value substantially from Indian assets | 13(2), with section 9(10) | India and Canada | Domestic rates |
| Ships or aircraft operated in international traffic | 13(1) | Canada only | Nil |

Sources: India Canada DTAA, Article 13 and protocol paragraph 4; MLI synthesised text; sections 9, 69 and 197 of the Income Tax Act, 2025.

The treaty gives a Canadian seller less protection than most of India's treaties. There is no carve out for small holdings, debentures or listed shares. Canada then gives relief for the Indian tax under Article 23(2), as its own law allows.

An indirect sale is exposed too. Section 9(10) of the Income Tax Act, 2025 taxes gains on shares of a foreign company that derive value substantially from Indian assets. The test is Indian assets above INR 10,00,00,000 and at least 50 percent of total assets. Article 13(2) does not block that charge.

From 1 Apr 2026 the Finance Act, 2026 taxes a buy back as a capital gain, not a deemed dividend. Section 69 adds tax for promoters, and a holder above 10 percent of an unlisted company counts as one. A Canadian parent will usually be a promoter. The buyer of shares usually wants a lower deduction certificate first, covered in our note on [Form 128](/insights/lower-tds-certificate-non-residents-form-128).

## How does the MLI change the India Canada treaty?

The MLI entered into force for India on 1 Oct 2019 and for Canada on 1 Dec 2019. In India it has effect for withholding events from 1 Apr 2020, and for other taxes for taxable periods from 1 Apr 2021. In Canada it has effect for withholding from 1 Jan 2020, and for other taxes from 1 Jun 2020.

India deposited its instrument of ratification on 25 Jun 2019, and Canada on 29 Aug 2019. The later Canadian date sets India's 1 Apr 2021 start for non withholding taxes. That is one year later than for treaties with partners whose MLI was in force by 1 Oct 2019.

| MLI article | What it does to the India Canada treaty | Shown in the synthesised text |
|---|---|---|
| Article 6(1) | Adds a preamble against non taxation and treaty shopping | Yes |
| Article 7(1) | Principal purpose test, placed after Article 28 | Yes |
| Article 4(1) | Replaces Article 4(3) for dual resident companies | Yes |
| Article 8 | 365 day holding period for the 15% rate in Article 10(2)(a) | Yes |
| Article 9(4) | Land rich shares: more than 50% of value from immovable property in the 365 days before sale | Yes |
| Article 16 | Mutual agreement: three years to present a case, against two in Article 25(1) | Yes |
| Articles 10 to 15 and 17 | Third state PEs, saving clause, agent PE, preparatory activity, contract splitting, closely related enterprises, corresponding adjustment | No |

Source: Synthesised text of the MLI and the India Canada DTAA, incometaxindia.gov.in.

The PPT is the change with daily effect. A treaty benefit is denied where obtaining it was one of the principal purposes of an arrangement. CBDT Circular No. 01/2025 of 21 Jan 2025 guides officers on applying it. A Canadian holding company with staff, a board and real business in Canada usually passes.

In Tiger Global (2026 INSC 60, 15 Jan 2026) the Supreme Court allowed the revenue's appeals and set aside the Delhi High Court judgment. Commentators read the ruling as limiting reliance on a TRC alone. Our [Tiger Global note](/insights/tiger-global-supreme-court-ruling-treaty-benefits) covers what it means for holding structures.

The dual residence rule matters for a Canadian company run from India. Section 6(10) of the Income Tax Act, 2025 makes a company resident in India if its place of effective management is here. Under MLI Article 4(1) the competent authorities then decide residence. Until they agree, the company gets no treaty relief except as they allow.

## Which documents does a Canadian company need?

Section 159(8) of the Income Tax Act, 2025 needs a certificate of residence from Canada and the prescribed information in Form 41. The Canada Revenue Agency (CRA) issues the certificate of residency on request. The Indian payer also wants a PAN or the rule 217 details, declarations and a chartered accountant's Form 146.

| Document | Issued or filed by | What it supports | Timing |
|---|---|---|---|
| Certificate of residency | CRA, through the CRA account, by mail or by fax | Section 159(8); Article 4 | Must cover the date of each payment |
| Form 41 (old Form 10F) | Canadian company, online, with the certificate uploaded | Section 159(8)(b); rule 75 | Once per tax year, before the first payment |
| PAN, or the rule 217 details | Canadian company | Avoids the higher rate for payees without PAN | Before tax is deducted |
| Beneficial ownership and no PE declarations, with a log of staff days in India | Canadian company | Articles 5, 7, 10(2), 11(2) and 12(2) | Each year, updated on any change |
| Service agreement and evidence of what was made available | Both companies | Article 12(4) | Before the first invoice |
| Form 146 (old 15CB), then Form 145 (old 15CA) | Chartered accountant, then Indian company | Rate and article checked; remittance information | Before the money leaves India |
| Form 131 (old 16A) | Indian company, from TRACES | Credit for Indian tax in Canada | Within 15 days of the Form 144 due date |

### What the CRA asks for

The CRA page on certificates of residency, last modified on 17 Sep 2026, sets out the request. A corporation sends it through Submit documents in its CRA account, by mail to the Sudbury Tax Centre, or by fax. It gives its name, address, business number, the treaty or country and the tax years.

The CRA processes a request for a future year only on or after the start of that year. It asks corporations not to send such requests before 15 October of the current year. Its tax returns should be filed and up to date first. The CRA does not confirm beneficial ownership of a payment.

The CRA does not issue certificates to fiscally transparent entities. A Canadian limited partnership cannot get one in its own name. Each partner can request one, and a single certificate can cover all partners if all are Canadian residents.

### Matching the years

A Canadian company's tax year may not match India's tax year, which runs from 1 April to 31 March. Ask for a certificate that covers every Indian payment date, or for two certificates. The Form 41 guidance note says the form is filed once in a tax year and PAN is optional. It also says: "Benefit of DTAA is available only with filing of Form 41."

Our guide to [Form 10F and the tax residency certificate](/insights/form-10f-and-tax-residency-certificate-india) covers Form 41 step by step. If the certificate arrives late, deduct at the domestic rate, and the Canadian company claims the excess through its Indian return.

## Does a Canadian parent have to file an Indian tax return?

Yes, whenever it takes a treaty rate below the domestic rate. Section 207(8) of the Income Tax Act, 2025 excuses a foreign company only on two conditions. Its Indian income must consist of section 207 items, and tax must be deducted at the section 207 rate or more.

A 15 percent or 10 percent treaty rate is below 20 percent, so the exemption fails. A Canadian parent paid a treaty rate dividend, interest, royalty or FIS files an Indian return for that tax year. It needs a PAN, and section 263 sets the due date. Capital gains and PE profits also need a return.

On the Canadian side, Article 23(2) gives relief for Indian tax on Indian income. It also deals with dividends that a Canadian company receives from a foreign affiliate in India. How Canadian law treats those dividends is a question for the Canadian adviser.

## How does the treaty handle transfer pricing?

Article 9(1) lets India adjust the Indian company's profits to an arm's length level. Article 9(2) requires Canada to make an appropriate corresponding adjustment, with competent authority consultation where needed. The mutual agreement procedure in Article 25 resolves disputes, now with a three year window under MLI Article 16.

Article 9(3) adds a time limit. A country may not change an enterprise's income after its domestic time limits expire. It may not do so after five years from the end of the year in which the income would have accrued. Article 9(4) lifts the limit for fraud, wilful default or neglect.

On our reading, a Canadian group can cite Article 9(3) against a late adjustment, through section 159(4). We would not rely on it without a written opinion. Our [transfer pricing documentation guide](/insights/transfer-pricing-documentation-requirements-in-india) covers the Form 48 and local file work that prevents most disputes.

## What changed in 2026

The treaty text did not change in 2026. The Indian law around it changed, with a new Act and new forms from 1 Apr 2026. Board papers, Forms 146 and bank letters should now cite sections 159 and 393, not sections 90 and 195.

| Item | Until 31 Mar 2026 | From 1 Apr 2026 | Instrument |
|---|---|---|---|
| Treaty relief and the more beneficial rule | Section 90(1) and 90(2) | Section 159(1) and 159(4) | Income Tax Act, 2025 |
| GAAR override of treaties | Section 90(2A) | Section 159(6) | Income Tax Act, 2025 |
| Certificate of residence and other papers | Section 90(4) and 90(5) | Section 159(8) | Income Tax Act, 2025 |
| Treaty information form | Form 10F, rule 21AB | Form 41, rule 75 | Income Tax Rules, 2026 (G.S.R. 198(E), 20 Mar 2026) |
| Withholding on payments to non residents | Section 195 | Section 393(2), Table serial 17 | Income Tax Act, 2025 |
| Rates on dividends, interest, royalties and technical fees | Section 115A | Section 207 | Income Tax Act, 2025 |
| Royalty and technical fees at home | Section 9(1)(vi) and 9(1)(vii) | Section 9(6) and 9(7) | Income Tax Act, 2025 |
| Remittance, statement and certificate forms | Forms 15CA, 15CB, 27Q and 16A | Forms 145, 146, 144 and 131 | Income Tax Rules, 2026 |
| Buy back by an Indian company | Deemed dividend from 1 Oct 2024 | Capital gain | Finance Act, 2026 |
| Year of income | Previous year | Tax year, section 3 | Income Tax Act, 2025 |

The other changes are mapped in [our note on the Income Tax Act, 2025](/insights/income-tax-act-2025-changes-for-foreign-owned-companies).

### What has happened since 1 Mar 2026

1. **March 2026.** Prime Minister Carney visited India, as both governments' readouts of 16 Jun 2026 record.
2. **20 Mar 2026.** CBDT notified the Income Tax Rules, 2026 as G.S.R. 198(E). Form 41, rule 75 and the new remittance forms took legal effect from 1 Apr 2026.
3. **1 Apr 2026.** The Income Tax Act, 2025 came into force. Payments from this date use section 393 and Forms 145 and 146.
4. **16 Jun 2026.** At the G7 summit in Evian, the leaders reaffirmed their aim to conclude a Comprehensive Economic Partnership Agreement in 2026. Neither readout mentions the tax treaty.

As of 23 Oct 2026 the treaty page and the synthesised text on incometaxindia.gov.in show no new protocol.

## Worked example

### A Canadian parent paid a royalty, an equipment fee, a management fee, interest and a dividend

CanCo Inc. is resident in Canada and owns 100 percent of IndiaCo Private Limited, a manufacturing company. A nominee holds one share for CanCo. In tax year 2026-27 IndiaCo pays CanCo five amounts:

1. **A trade mark and know how royalty of INR 80,00,000.**
2. **A hire fee of INR 10,00,000** for testing equipment.
3. **A management fee of INR 40,00,000** for finance, HR and legal oversight run from Toronto.
4. **Interest of INR 30,00,000** on a US dollar ECB from CanCo, priced at arm's length.
5. **An interim dividend of INR 2,00,00,000**, declared by the Board on 10 Nov 2026.

CanCo filed Form 41 for tax year 2026-27 in May 2026, with a CRA certificate covering every payment date. It holds a PAN and declarations of beneficial ownership and no PE. It has held 100 percent of the votes since 2019. No CanCo staff worked in India during the year.

The royalty bears 15 percent under Article 12(2)(a)(ii). The equipment fee bears 10 percent under Article 12(2)(b). The management fee makes nothing available. On our reading it is business profit under Article 7, and India does not tax it without a PE. The interest and the dividend bear 15 percent under Articles 11(2) and 10(2)(a).

Without the treaty papers, every payment bears 20 percent under section 207. The year's total to CanCo is INR 3,60,00,000, in the 2 percent surcharge slab. The domestic effective rate is 21.216 percent.

| Payment (INR) | Treaty route (INR) | Domestic route at 21.216% (INR) |
|---|---|---|
| Royalty, 80,00,000 | 12,00,000 (15%) | 16,97,280 |
| Equipment hire, 10,00,000 | 1,00,000 (10%) | 2,12,160 |
| Management fee, 40,00,000 | Nil (Article 7, no PE) | 8,48,640 |
| Interest on the ECB, 30,00,000 | 4,50,000 (15%) | 6,36,480 |
| Dividend, 2,00,00,000 | 30,00,000 (15%) | 42,43,200 |
| Total tax withheld | 47,50,000 | 76,37,760 |
| Net amount remitted from 3,60,00,000 | 3,12,50,000 | 2,83,62,240 |

The domestic dividend line builds up in three steps. Tax at 20 percent of INR 2,00,00,000 is INR 40,00,000. Surcharge at 2 percent adds INR 80,000. Cess at 4 percent on INR 40,80,000 adds INR 1,63,200, for INR 42,43,200. On the treaty route CanCo receives INR 28,87,760 more.

IndiaCo deposits each deduction by the 7th of the next month under rule 218(2), and files Form 144 under rule 219. For the management fee it still files Form 145 with a Form 146 that states the Article 7 analysis. It reports all five payments in Form 48 under section 172. CanCo files an Indian return, because the treaty rates are below the section 207 rates.

### Two finance managers fly to Pune

Now suppose two CanCo finance managers spend 40 days in Pune in September and October 2026. They run IndiaCo's half year close and handle audit queries. CanCo charges IndiaCo INR 25,00,000 for the work. The services make nothing available, so they are not FIS.

IndiaCo is a related enterprise of CanCo, so Article 5(2)(l)(ii) applies with no day count. CanCo has a service PE in India for this work. Suppose INR 18,00,000 of CanCo's costs relate to it, leaving a profit of INR 7,00,000 attributable to the PE.

The tax on that profit builds up in four steps:

1. **Tax at 35 percent** on INR 7,00,000 is INR 2,45,000.
2. **Surcharge at 2 percent** adds INR 4,900, because CanCo's Indian income exceeds INR 1,00,00,000.
3. **Cess at 4 percent** on INR 2,49,900 adds INR 9,996.
4. **Total Indian tax** on the PE profit is INR 2,59,896, filed through CanCo's Indian return.

Had the same managers done 40 days of work for an unrelated Indian customer, there would be no PE. Article 5(2)(l)(i) needs more than 90 days in a twelve month period for unrelated work. Had they done the work from Toronto, there would be no PE either, because the services must be performed in India.

### CanCo sells IndiaCo

Finally, suppose CanCo sells all its IndiaCo shares to a US buyer in December 2026 for INR 25,00,00,000. It bought them in 2019 for INR 10,00,00,000, so the long term gain is INR 15,00,00,000. Article 13(2) leaves India free to tax it.

Tax at 12.5 percent under section 197 is INR 1,87,50,000. The gain takes CanCo's Indian income above INR 10,00,00,000, so surcharge at 5 percent adds INR 9,37,500. Cess at 4 percent on INR 1,96,87,500 adds INR 7,87,500. Indian tax is INR 2,04,75,000, or 13.65 percent of the gain.

The buyer withholds under section 393(2) unless CanCo holds a Form 128 certificate. CanCo then claims relief in Canada under Article 23(2). The share transfer also needs Form FC-TRS under FEMA.

## Common mistakes

1. **Using 15 percent on a dividend paid soon after buying the stake.** Fix: check the 365 day holding period under MLI Article 8.
2. **Treating every service fee as FIS.** Fix: test each service against Article 12(4); a fee that makes nothing available is business profit.
3. **Sending Canadian staff to work at the subsidiary without a PE review.** Fix: apply Article 5(2)(l)(ii) and keep day logs.
4. **Assuming the treaty protects a share sale.** Fix: Article 13(2) lets India tax the gain. Plan the tax and a Form 128 certificate.
5. **Adding surcharge and cess to the treaty rate.** Fix: apply the treaty rate flat and cite the article in Form 146.
6. **Asking for a CRA certificate in the name of a Canadian limited partnership.** Fix: collect a certificate for each partner, because the CRA does not certify transparent entities.
7. **Relying on the Canadian certificate alone.** Fix: file Form 41 each tax year and keep beneficial ownership and substance evidence for the PPT.
8. **Telling the parent the treaty rate ends its Indian filings.** Fix: plan a PAN and an Indian return under section 207(8).

## Checklist

1. Confirm the Canadian company holds a CRA certificate of residency covering each payment date.
2. File Form 41 once for the tax year before the first payment.
3. Obtain a PAN, or collect the rule 217 details.
4. Check that the parent has controlled at least 10 percent of the votes for 365 days before any dividend.
5. Classify each payment as dividend, interest, equipment royalty, other royalty, FIS, business profit or capital gain.
6. Test each service fee against Article 12(4) and record what, if anything, was made available.
7. Log Canadian staff days in India, and flag any work done in India for the subsidiary under Article 5(2)(l)(ii).
8. Collect beneficial ownership and no PE declarations, and keep the substance file for the PPT.
9. Deduct tax at the earlier of credit and payment, at the flat treaty rate.
10. Obtain Form 146 and file Form 145 before each remittance, including for fees outside Article 12.
11. Deposit the tax by the 7th of the next month, file Form 144 and issue Form 131.
12. Apply for a Form 128 certificate before any share sale or buy back.
13. Remind the Canadian company to file its Indian return.

To have us review a Canadian payment, staff visit or share sale in advance, send the agreement and shareholding through our [contact page](/contact).

## Key terms

- **Double Taxation Avoidance Agreement (DTAA)**: A treaty between India and another country that divides taxing rights over cross border income and caps Indian withholding tax. Section 159 of the Income Tax Act, 2025 (old section 90) gives treaties effect. Where India has no comprehensive DTAA with a country, domestic withholding rates under the Income Tax Act, 2025 apply and no treaty documents are needed. (https://krystal7.com/glossary#double-taxation-avoidance-agreement)
- **Fees for Included Services (FIS)**: A category in Article 12(4) of the India US DTAA covering technical or consultancy fees that are ancillary to a royalty, make technical knowledge or skill available, or transfer a technical plan or design. India taxes FIS at up to 15 percent. Other service fees are business profits under Article 7. (https://krystal7.com/glossary#fees-for-included-services)
- **Permanent Establishment (PE)**: A permanent establishment is a fixed place of business, a long running project or a dependent agent through which a foreign company carries on business in India, as defined in Article 5 of each Indian tax treaty. India taxes the business profits attributable to a PE through a return, at 35 percent plus surcharge and cess for a foreign company. (https://krystal7.com/glossary#permanent-establishment)
- **Tax Residency Certificate (TRC)**: A TRC is the certificate a payee's home tax authority issues to confirm its tax residence there for a period. Section 159(8)(a) of the Income Tax Act, 2025 makes it a condition for treaty relief in India, alongside Form 41. An Indian resident applies for one in Form 42 and receives it in Form 43. (https://krystal7.com/glossary#tax-residency-certificate)
- **Form 41 (old Form 10F)**: Form 41 is the online statement a non resident files on the income tax portal to claim treaty benefits under section 159(8) of the Income Tax Act, 2025. It replaced Form 10F from 1 Apr 2026. Rule 75 of the Income Tax Rules, 2026 requires it once per tax year, and payers ask for it before the first payment. (https://krystal7.com/glossary#form-41-old-form-10f)
- **Multilateral Instrument (MLI)**: The MLI is the OECD convention that changes existing tax treaties to put in place measures against base erosion and profit shifting. India has signed and ratified it. Article 4(1) of the MLI replaces the tie breaker for a dual resident company with mutual agreement between the tax authorities, in treaties where both countries adopted it, such as India UK. (https://krystal7.com/glossary#multilateral-instrument)
- **Principal Purpose Test (PPT)**: The PPT is the anti abuse rule that the OECD Multilateral Instrument adds to covered Indian tax treaties. It denies a treaty benefit where obtaining it was one of the principal purposes of an arrangement, unless granting it matches the object and purpose of the treaty. CBDT Circular No. 01/2025 of 21 Jan 2025 guides officers on applying it. (https://krystal7.com/glossary#principal-purpose-test)

## Frequently Asked Questions

### What is the dividend tax rate under the India Canada DTAA?

It is 15 percent of the gross dividend under Article 10(2)(a), where the Canadian company controls 10 percent or more of the votes. MLI Article 8 adds a 365 day holding period. In other cases the cap is 25 percent, which is above the domestic 20 percent under section 207, so the domestic rate applies.

### What is the TDS rate on interest paid to a Canadian company?

Article 11(2) caps it at 15 percent of the gross interest for a Canadian beneficial owner. Interest on credit made, guaranteed or insured by the Export Development Corporation is taxable only in Canada under Article 11(3)(b). Domestic law charges 20 percent on foreign currency loans and 35 percent on rupee loans, plus surcharge and cess.

### What are fees for included services under the India Canada treaty?

Article 12(4) defines them as technical or consultancy fees for services ancillary to a royalty. Services that make available technical knowledge, experience, skill, know how or processes also count. Developing and transferring a technical plan or design also counts. Other service fees are business profits under Article 7, taxable only through a PE.

### What is the royalty rate under the India Canada DTAA?

Equipment royalties under Article 12(3)(b), and FIS ancillary to them, bear 10 percent under Article 12(2)(b). Other royalties and FIS bear 15 percent under Article 12(2)(a)(ii). The 15 and 20 percent rates for the first five taxable years ended long ago. Domestic law charges 20 percent under section 207(2).

### Are management fees paid to a Canadian parent taxed in India?

Not usually, if the services make nothing available and are performed outside India. Such a fee is business profit under Article 7, taxed only through a PE. If Canadian staff perform the services in India for the subsidiary, Article 5(2)(l)(ii) can create a service PE with no day count.

### Does a Canadian employee working at the Indian subsidiary create a PE?

It can. Article 5(2)(l)(ii) treats services performed in India for a related enterprise as a PE, with no 90 day threshold. The Indian subsidiary is a related enterprise of its parent. The protocol removes the PE only in a year with fewer than 30 days of activity, where the activity spans two years.

### What is the construction PE threshold in the India Canada treaty?

More than 120 days in any twelve month period under Article 5(2)(k). It covers a building site, a construction, installation or assembly project, and supervision of it. Article 5(2)(j) sets the same 120 day threshold for installations used to explore or exploit natural resources. The MLI does not change either rule.

### Does the India Canada DTAA exempt capital gains on Indian shares?

No. Article 13(2) lets both countries tax gains on any property other than ships and aircraft in international traffic. India taxes a long term gain on unlisted shares at 12.5 percent under section 197, plus surcharge and cess. Canada then gives relief under Article 23(2).

### When did the MLI start to apply to the India Canada treaty?

The MLI entered into force for India on 1 Oct 2019 and for Canada on 1 Dec 2019. In India it applies to withholding events from 1 Apr 2020 and to other taxes for taxable periods from 1 Apr 2021. In Canada the dates are 1 Jan 2020 and 1 Jun 2020.

### Does the principal purpose test apply to Canadian companies?

Yes. MLI Article 7(1) applies to the India Canada treaty, with effect in India for withholding events from 1 Apr 2020. CBDT Circular No. 01/2025 of 21 Jan 2025 guides officers on it. A Canadian company with staff, a board and real business in Canada usually passes the test.

### How does a Canadian company get a tax residency certificate?

It asks the Canada Revenue Agency for a certificate of residency. It can send the request through its CRA account, by mail to the Sudbury Tax Centre, or by fax. It gives its business number, the treaty and the tax years. The CRA processes future year requests only once that year has started.

### Is Form 41 needed every year?

Yes, once in each tax year in which the Canadian company claims a treaty benefit. Form 41 replaced Form 10F from 1 Apr 2026. It sits under section 159(8)(b) of the Income Tax Act, 2025 and rule 75 of the Income Tax Rules, 2026. It is filed online with the TRC uploaded, and PAN is optional.

### Can a Canadian limited partnership claim the India Canada DTAA?

Not in its own name. The CRA does not issue certificates of residency to fiscally transparent entities. Each partner can request one, and an authorised representative can get a single certificate if all partners are Canadian residents. Treaty access then rests on the partners' residence and their share of the income.

### Does a Canadian parent need to file an Indian income tax return?

Yes, when it takes a treaty rate. Section 207(8) excuses a foreign company only where tax was deducted at the section 207 rate or more. A 15 or 10 percent treaty rate is below the 20 percent domestic rate. So the parent needs a PAN and files a return by the section 263 due date.

### Does India tax directors' fees paid to Canadian directors?

Yes. Article 16 lets India tax fees that a Canadian resident receives as a member of the board of an Indian company. The article sets no rate cap, so domestic rates apply. The Indian company deducts tax under section 393(2) and reports the payment in Form 144.

### Is there a time limit on transfer pricing adjustments under the Canada treaty?

Article 9(3) bars a change to an enterprise's income after domestic time limits expire. It also bars any change after five years from the end of the year the income would have accrued. Article 9(4) lifts the limit for fraud, wilful default or neglect.

## Sources

- Income Tax Department, India Canada DTAA and protocol (signed 11 Jan 1996; S.O. 28(E), 15 Jan 1998), read 23 Oct 2026, https://www.incometaxindia.gov.in/w/canada-comprehensive-agreements-1
- Income Tax Department, Synthesised text of the MLI and the India Canada DTAA, read 23 Oct 2026, https://www.incometaxindia.gov.in/documents/20117/6762840/Synthesised-Text-of-the-MLI-and-India-Canada-DTAA.pdf/e9360dfe-0934-bab7-bf23-8b1504b9d72a?t=1763029656107
- Income Tax Department, Section 159 of the Income Tax Act, 2025 (double taxation relief), https://www.incometaxindia.gov.in/w/section-159-89
- Income Tax Department, Section 207 of the Income Tax Act, 2025, read 23 Oct 2026, https://www.incometaxindia.gov.in/w/section-207-78
- Income Tax Department, Sections 9 and 197 of the Income Tax Act, 2025, https://www.incometaxindia.gov.in/w/section-9-1, https://www.incometaxindia.gov.in/w/section-197-78
- Income Tax Department, First Schedule to the Finance Act, 2026, https://www.incometaxindia.gov.in/w/first-schedule-104
- Income Tax Department, Rules 215, 217, 218, 219 and 220 of the Income Tax Rules, 2026, https://www.incometaxindia.gov.in/w/rule-215-1, https://www.incometaxindia.gov.in/w/rule-217-1, https://www.incometaxindia.gov.in/w/rule-218-1, https://www.incometaxindia.gov.in/w/rule-219-1, https://www.incometaxindia.gov.in/w/rule-220-1
- Income Tax Department, Guidance note on Form 41, https://www.incometaxindia.gov.in/documents/d/guest/fn-41
- Income Tax Department, FAQs and Guidance Notes on Forms as per Income Tax Rules, 2026 (form map), https://www.incometaxindia.gov.in/faqs-and-guidance-notes-on-forms-as-per-income-tax-rules-2026
- Central Board of Direct Taxes, Circular No. 01/2025, Guidance for application of the Principal Purpose Test, 21 Jan 2025, https://www.incometaxindia.gov.in/documents/d/guest/circular-1-2025-pdf
- Canada Revenue Agency, Certificate of residency, last modified 17 Sep 2026, https://www.canada.ca/en/revenue-agency/services/tax/international-non-residents/information-been-moved/certificate-residency.html
- Supreme Court of India, Engineering Analysis Centre of Excellence Private Limited v. Commissioner of Income Tax, 2 Mar 2021, https://api.sci.gov.in/supremecourt/2011/38137/38137_2011_33_1501_26629_Order_02-Mar-2021.pdf
- Supreme Court of India, Authority for Advance Rulings v. Tiger Global International II Holdings, 2026 INSC 60, 15 Jan 2026, https://api.sci.gov.in/supremecourt/2025/1251/1251_2025_7_1501_67552_Judgement_15-Jan-2026.pdf
- Prime Minister of Canada, readout of the meeting with Prime Minister Modi, 16 Jun 2026, https://www.pm.gc.ca/en/node/53121
- Prime Minister's Office of India, release on the meeting with Prime Minister Carney, 16 Jun 2026, https://www.pmindia.gov.in/?p=16863206

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