An Indian subsidiary can return cash to its foreign parent as dividend, interest on parent loans or ECBs, royalty or service fees — each with a different tax cost. Dividends paid to a foreign company are taxed by withholding at 20% plus surcharge and cess under section 207 of the Income-tax Act, 2025 (old section 115A), reduced by treaty to 5%–15% (India–US 15% for a 10%+ corporate shareholder; India–Singapore 10%; India–Mauritius 5%; India–Netherlands and India–UK 10%); dividend is not deductible for the subsidiary and is freely repatriable under FEMA once tax is paid. Interest is deductible (subject to the 30%-of-EBITDA cap in section 177) and withheld at 20% or the treaty rate (commonly 10%–15%). Every remittance is declared in Form 145, with Form 146 where the taxable payments to the payee exceed ₹5 lakh in the year, and is processed by the bank against Form A2 with the appropriate purpose code.
Key facts
| Provision | Old reference (to 31 Mar 2026) | New reference (from 1 Apr 2026) | Rate / threshold | Timing | Form |
|---|---|---|---|---|---|
| Dividend — tax in hands of foreign company shareholder | s. 115A: 20% + surcharge + cess (DDT abolished from 1 Apr 2020) | s. 207: 20% + surcharge + cess | Treaty: 5%–15% | Withheld on payment | Forms 145/146 |
| Dividend — Companies Act conditions | s. 123 Companies Act, 2013; Companies (Declaration and Payment of Dividend) Rules, 2014 | Unchanged | Out of current/accumulated profits after depreciation; interim and final | Paid within 30 days of declaration | Board/AGM resolution; MGT-14 where applicable |
| Dividend — FEMA | FDI Policy; NDI Rules 2019 | Unchanged | Freely repatriable net of tax | — | Form A2; CA certificate on tax paid |
| Interest to non-resident | s. 195; s. 115A | s. 393(2), Sl. 17; s. 207 | 20% + surcharge + cess; treaty 10%–15% | At credit or payment | Forms 145/146 |
| Interest deductibility cap | s. 94B: 30% of EBITDA; interest > ₹1 crore to AEs | s. 177 | Excess carried forward 8 years | — | — |
| Royalty / service fees | s. 9, 115A, 195 | s. 9, 207, 393 | 20% + or treaty; TP benchmarked | — | Forms 145/146; Form 48 |
| Buy-back consideration | Deemed dividend in shareholder's hands (1 Oct 2024 – 31 Mar 2026) | Capital gains in shareholder's hands from tax year 2026-27 (Finance Act, 2026) | Treaty capital gains article; s. 395 certificate common | — | Forms 145/146 |
Choosing the channel
| Channel | Deductible for Indian company? | Indian tax cost | Constraints |
|---|---|---|---|
| Dividend | No | Corporate tax on profits (25.17% typical) + withholding 20%+ or treaty 5%–15% | Distributable profits; Companies Act process; freely repatriable |
| Interest on parent loan / ECB | Yes, within section 177 cap | Withholding 20%+ or treaty 10%–15%; deductible against 25.17% | ECB framework (minimum maturity, pricing); thin-cap cap; arm's length rate |
| Royalty for parent IP | Yes | Withholding 20%+ or treaty 10%–15% | Must reflect genuine IP use at arm's length; GST reverse charge |
| Service / management fees | Yes | Withholding 20%+ or often nil under 'make available' treaties | Benefit test; no shareholder costs; GST reverse charge |
| Buy-back / capital reduction | n/a | Capital gains to shareholder (from 2026-27); treaty may exempt or tax | Companies Act limits; FEMA pricing; see capital-account pages |
Dividends are the cleanest and the most expensive; interest and fees are deductible but must survive transfer pricing and treaty scrutiny. Most groups use a blend: arm's length fees and royalties for what the parent genuinely provides, and dividends for the residual profit.
Dividends in detail
Company law. Section 123 of the Companies Act, 2013 permits dividend out of profits of the year after depreciation, or out of accumulated profits transferred to free reserves (with conditions in the Dividend Rules if the company is drawing on past reserves while making a loss). Interim dividends are declared by the board; final dividends are recommended by the board and declared at the AGM. The dividend must be paid within 30 days of declaration into the shareholder's account. A company that has defaulted on deposits or certain other obligations cannot declare.
Income tax. Since the abolition of dividend distribution tax in 2020, dividends are taxed in the shareholder's hands. For a foreign-company shareholder the rate under section 207 is 20% plus surcharge (2% or 5%) and 4% cess, collected entirely by withholding under section 393(2). Treaty rates apply with a TRC and Form 41: India–US 15% where the recipient company holds at least 10% of voting stock (25% otherwise); India–Singapore 10% (15% in some cases); India–Mauritius 5% for a 10%+ holder; India–Netherlands 10% (the MFN-based 5% claim was rejected by the Supreme Court in Nestlé, 2023, absent notification); India–UK 10% for a 10%+ corporate holder (15% otherwise); India–Germany, Japan and UAE 10%. Beneficial ownership and the principal-purpose test apply.
FEMA. Dividends on FDI shares are freely repatriable after tax. The bank processes the remittance on Form A2 with the dividend purpose code, a board resolution, the CA certificate on tax deducted, and Forms 145/146.
Interest
Interest on a parent loan structured as an ECB, or on compulsorily convertible debentures, is deductible for the Indian company, subject to section 177 (old 94B): where interest paid to associated enterprises exceeds ₹1 crore, the deduction is capped at 30% of EBITDA, with the excess carried forward up to eight years. The rate must be arm's length for transfer pricing and within the ECB pricing framework. Withholding is 20% plus surcharge and cess under section 207, or the treaty rate — 15% under India–US and India–Singapore, 10% under India–Netherlands, Germany and Japan, with lower rates for bank lenders under several treaties.
Royalties and fees
Covered on the royalty and FTS page and the management fees page. Both are international transactions for transfer pricing and imports of services for GST.
Process for any outward remittance
- Classify the payment; determine chargeability under the Act and the treaty position; collect TRC, Form 41 and no-PE declaration.
- Obtain Form 146 from a Chartered Accountant where the taxable payments to the payee in the tax year exceed ₹5 lakh and no section 395 certificate exists; file Form 145 (correct Part).
- Deduct tax at credit or payment; deposit by the 7th of the next month; report in the quarterly statement.
- Submit Form A2, Forms 145/146 acknowledgements, invoice or resolution, and the bank's KYC documents; the bank remits under the purpose code.
- Report the transaction in Form 48 if it is with an associated enterprise; reconcile to the related-party note.
Worked example
An Indian subsidiary (profit after tax ₹10 crore) is wholly owned by a Singapore company with a TRC and Form 41 on file. Options for returning ₹5 crore:
| Option | Indian tax effect | Cash to parent |
|---|---|---|
| Dividend of ₹5 crore | Not deductible; withholding 10% under India–Singapore Art. 10 = ₹50 lakh | ₹4.5 crore |
| Interest of ₹5 crore on a parent ECB (if arm's length and within the 30% EBITDA cap) | Deductible — saves ₹1.26 crore corporate tax; withholding 15% under Art. 11 = ₹75 lakh | ₹4.25 crore, but group saves ₹1.26 crore of Indian corporate tax |
| Royalty of ₹5 crore for parent IP (if genuine and benchmarked) | Deductible — saves ₹1.26 crore; withholding 10% under Art. 12 = ₹50 lakh; GST 18% RCM creditable | ₹4.5 crore |
Each option requires Form 146 and Form 145 Part C before remittance, Form A2 at the bank, and (for interest and royalty) a defensible transfer pricing position. The dividend needs distributable profits and a board/AGM resolution; the interest needs an ECB structure with the loan registration number; the royalty needs an IP licence agreement and evidence of use.
Common mistakes we see
- Paying a dividend without checking distributable profits after depreciation, or beyond 30 days of declaration.
- Applying a treaty dividend rate without the shareholding-percentage condition (e.g. 15% under India–US requires a 10% corporate holding) or without beneficial ownership comfort.
- Using the India–Netherlands 5% MFN rate without a notification (Nestlé, 2023).
- Deducting interest to the parent in full when section 177 caps it at 30% of EBITDA.
- Treating a buy-back as a dividend for withholding under the 2024–26 rules after the Finance Act, 2026 moved it back to capital gains for tax year 2026-27 — or the reverse for earlier periods.
- Remitting without Form 146 because 'the bank only asked for Form 145'.
Frequently asked questions
What is the withholding tax on dividends paid to a foreign parent?
20% plus surcharge and cess under section 207 of the Income-tax Act, 2025, reduced by treaty — for example 15% under India–US for a 10%+ corporate shareholder, 10% under India–Singapore, India–UK and India–Netherlands, 5% under India–Mauritius — with a TRC and Form 41.
Is dividend distribution tax still applicable in India?
No. DDT was abolished for dividends declared on or after 1 April 2020. Dividends are taxed in the shareholder's hands and collected by withholding.
Can an Indian subsidiary freely remit dividends abroad?
Yes. Dividends on FDI are freely repatriable after Indian tax, through the bank on Form A2 with Forms 145/146 and a CA certificate on tax deducted.
Is interest paid to the parent deductible?
Yes, at an arm's length rate within the ECB framework, subject to section 177 which caps interest to associated enterprises at 30% of EBITDA where such interest exceeds ₹1 crore; the excess carries forward for eight years.
How is a buy-back by an Indian subsidiary taxed for the foreign parent?
For buy-backs between 1 October 2024 and 31 March 2026 the consideration was taxed as dividend in the shareholder's hands. For tax year 2026-27 onwards the Finance Act, 2026 restored capital gains treatment under the Income-tax Act, 2025; the treaty capital gains article then governs, and a section 395 certificate is commonly obtained to fix the withholding.
Do I need Form 146 for a dividend remittance?
If the dividend (together with other taxable payments to the same shareholder in the tax year) exceeds ₹5 lakh and there is no section 395 certificate, yes — Form 146 followed by Form 145 Part C.
Sources
Primary sources only. Statutory text is read from the official publication; where a provision has been renumbered, the pre-2026 reference is given alongside so older material can be reconciled.
- Income-tax Act, 2025 and Income-tax Rules, 2026 — Income Tax Department, Tax Laws & Rules
- Double Taxation Avoidance Agreements — Income Tax Department
- Companies Act, 2013 and rules — Ministry of Corporate Affairs
- RBI Master Directions — Reporting under FEMA; External Commercial Borrowings; Overseas Investment; Export of Goods and Services; LRS
- e-Gazette of India — Finance Act, 2026; Income-tax Rules, 2026; FEMA notifications
Last reviewed on 1 November 2026 by Vidushi Jhunjhunwala, FCA, VMS Jhunjhunwala & Co. Law stated as at that date; the Income-tax Act, 2025 and Income-tax Rules, 2026 apply from 1 April 2026.
