Growing interest in India UK investment corridors has surfaced a recurring concern among foreign businesses: fiscal uncertainty arising from mismatched tax rules. Companies often discover late in the cycle that their income could be assessed in both jurisdictions, affecting cash flow and compliance timelines.
This concern is reflected in HMRC’s 2025 compliance outlook and its Annual Report and Accounts 2024-25, which highlight intensified cross-border tax audits and increased scrutiny of multinational groups. Such trends indicate that businesses need stronger safeguards when moving capital or services across borders.
The India UK Double Taxation Avoidance Agreement provides that safeguard by defining how various categories of income is taxed and by creating mechanisms for relief. It helps companies avoid duplicated liabilities, reduces administrative disputes, and enables strategic planning without unexpected tax surprises. For decision makers, understanding this treaty is no longer optional but integral to sound cross-border structuring.
Background and Legal Framework
India UK Double Taxation Avoidance agreement establishes a legal framework that recognises the boundaries of taxation rights and liabilities for individuals residing in both countries and, ultimately, helps to prevent fiscal evasion while facilitating transparency between tax administrations.
Treaty inception and amendments:
DTAA was initially signed in New Delhi on 25 January 1993 and thus came into force through official notifications in 1993-94. It was amended by a Protocol signed on 30 October 2012, which came into force on 27 December 2013. The amendment added new anti-abuse provisions and updated several articles to align with modern global tax practices.
MLI integration:
In 2019, India joined the Multilateral Instrument under the OECD’s Base Erosion and Profit Shifting initiative, which covers the DTAA too, and may override certain treaty articles with MLI provisions in order to counter treaty abuse.
Legal implementation:
It works in India under Section 90 of the Income Tax Act, 1961, and in the UK via the framework under the Income and Corporation Taxes Act. If this treaty proves more beneficial to the taxpayer, its provisions override domestic law.
What is the Purpose of the DTAA?
DTAA makes sure that the income arising in one country and derived by residents of another country is fairly and without duplication taxed. It facilitates cross-border trade, investment, and mobility on account of clear tax rules and dispute resolution mechanisms.
The main objective is to avoid double taxation and fiscal evasion on income and capital between the two countries for individuals and enterprises.
- Coverage:
The agreement is in respect of taxes on income and capital gains imposed by both countries. For India, it includes income tax and surcharges; for the UK, it covers income tax, corporation tax, and capital gains tax.
- Beneficiaries:
The agreement benefits residents, companies, and other entities of both countries that are liable to tax by reason of domicile, place of management, or other similar criteria.
Residence and Tiebreaker rules
Establishing residency is an essential part of applying the DTAA, as it would determine the country that has priority in imposing its taxes. The tie-breaker rules of the treaty resolve cases where a person or entity qualifies as a resident of both countries.
- Residency definition:
A resident is a person or entity that is liable to tax in one country due to domicile, residence, or place of management.
- Tie-breaker mechanism:
In cases of dual residency, the treaty applies sequential tests like permanent home, centre of vital interests, habitual abode, and nationality for determining residency for treaty purposes.
- Corporate residency:
For companies, residency is usually identified by the location of its place of effective management, which is essential for a multinational group operating across India and the UK.
Permanent Establishment and Business Profits
The concept of a Permanent Establishment is what defines whether or not business profits, earned in one country by an enterprise of another country, can be taxed within the source country.
- Definition of PE:
A PE is a fixed place of business through which the enterprise conducts its operations in the other country. It includes branches, offices, factories, or building sites that remain for more than a minimum period.
- Allocation of business profits:
The source country may only tax the profit attributable to PE. Correct attribution of profits and documentation is important for avoiding disputes.
- Practical importance:
The companies providing consultancy or technical services in the UK or India have to determine whether such activities amount to a PE, as it has direct implications for corporate tax liability and reporting requirements.
Withholding Taxes on Passive Income
It prescribes different limits for withholding tax on various income, such as dividends, interest, royalties, and fees for technical services. These rates have been prescribed to reduce tax barriers on cross-border transactions.
- Dividends:
The withholding tax on dividends cannot exceed 10% or, in specific cases, 15%, according to shareholding and ownership structures.
- Interest:
Interest payments to residents of one country from sources in the other are normally subject to tax at 10-15%, with concessional rates for interest paid to banks or financial institutions.
- Royalties and FTS:
The treaty limits taxes on royalties and technical service fees to 10-15%, provided the “make available” condition is fulfilled, such that knowledge or technical know-how is imparted for prospective use.
- Compliance requirement:
The taxpayer has to provide a tax residency certificate, along with all supporting documentation, to the withholding agent to avail reduced rates.
Capital Gains and Other Income
The taxation of capital gains under DTAA depends upon the nature and location of such an asset. This section is especially relevant to investors and property holders.
- Immovable property:
The income from immovable property is taxed in the country where the property is situated.
- Business assets:
Profits derived from the sale of assets which are attributable to a PE are taxable in the country in which the PE is located.
- Shares and securities:
Gains from the transfer of shares are generally taxable in the country of the seller’s residence, except where the value is derived substantially from immovable property located in the other country.
- Other income:
Income not dealt with in the specific articles is taxable in the country of residence of the taxpayer as per domestic law.
Avoidance of Double Taxation
To avoid taxing the same income of the taxpayer twice, DTAA provides relief either by way of credit or by exemption method.
- Foreign tax credit:
The foreign tax credit is allowed when the same income is taxed by both countries, and it is a credit against tax payable in the country of residence.
- Exemption method:
Under this method, the income in question may be wholly exempted from tax in one of the countries.
- Practical documentation:
The taxpayer should maintain on record evidence of foreign tax receipts, Form 67 in case of India, and certificate of residence.
Exchange of Information and Anti-Abuse Provisions
Transparency and the exchange of information are vital in preventing fiscal evasion and abusive treaty practices.
- Information sharing:
The information shared by both countries pertains to the enforcement of domestic laws and the administration of the treaty. This leads to the detection of tax evasion and an increase in compliance.
- Assistance in collection:
Each country may assist in the collection of taxes owed to the other, in accord with the conditions specified in the treaty.
- Limitation of benefits (LOB):
The LOB clause was introduced under the 2013 Protocol and prevents entities that are set up solely to exploit treaty benefits without substantial business purpose.
- Mutual Agreement Procedure:
In cases of double taxation or any dispute arising out of the interpretation of the treaty, it will be resolved by competent authorities of both countries under MAP.
Recent Policy Developments of India UK Double Taxation Avoidance Agreement
These two countries have amended their domestic laws and aligned their tax practices, keeping in view the global standards, so that the efficiency of the DTAA is ensured accordingly.
- MLI Incorporation:
The compiled text of the DTAA published by India embodies the MLI changes relating to treaty abuse, permanent establishment avoidance, and dispute resolution.
- Judicial precedents:
A decision by the Mumbai ITAT in 2024 explained that management services provided by a UK entity could not be regarded as fees for technical services unless these “make available” technical knowledge, illustrating the narrow interpretation being given to FTS under the treaty.
- Domestic changes:
India’s Finance Act, 2023 changed the rates for domestic withholding on royalties and FTS to 20% from the current 10%, thereby increasing the requirement of obtaining treaty relief to avoid excessive taxation.
- Trade relationship context:
Due to the signing of the India-UK Free Trade Agreement in mid-2025, the DTAA is now even more critical for investors and service providers seeking to simplify cross-border taxation issues.
Practical Implications for Businesses
For businesses involved in cross-border transactions between India and the UK, both domestic tax laws and treaty provisions must be considered to ensure compliance and cost efficiency.
- Determine PE:
Establish whether activities give rise to a permanent establishment; if so, ensure comprehensive documentation for profit attribution and filing tax returns.
- Withholding at source:
The payers are required to withhold tax at the rates mentioned in the respective treaties. However, this would be subject to proper documentation by the recipients in support of claiming such treaty benefits.
- Beneficial ownership:
Entities must have beneficial ownership and substantial economic activities to legally claim the treaty’s benefits.
- Record-keeping:
Retaining tax residency certificates, proof of the payments made, and agreements is important in providing substantive claims to audits.
Considerations for Expatriates and Mobile Employees
India UK Double taxation avoidance agreement thus provides relief to the expatriates deriving income in both countries against double taxation and clarifies the country where the income shall be taxable.
- Residence status:
Determine residence initially based on domestic rules and, in cases of dual residence, use the tie-breaker tests to determine a single treaty residence.
- Employment income:
Income obtained due to employment exercised within India is taxable in India unless the stay does not extend beyond 183 days and remuneration is paid by a foreign employer.
- Foreign tax credit:
UK residents working in India are allowed credit in the UK for taxes paid in India, and conversely, an Indian resident working in the UK is allowed a similar credit under Indian law.
- Documentation:
Support claims for relief during tax assessment by keeping pay slips, receipts of foreign taxes, and residence certificates.
Conclusion
Double taxation avoidance agreement between India and the UK continues to hold its ground as a practical framework for reducing tax conflicts and easing trade. By setting out how income should be taxed, it brings predictability to international transactions. The real challenge lies in implementation. Proper paperwork, awareness of treaty provisions, and regular review of rule changes are what help businesses avoid complications and make full use of the treaty’s protections.
