Paying a dividend to the foreign parent: company law, withholding tax and getting the money out

Short answer: an Indian subsidiary can pay a dividend to its foreign parent out of profits, without RBI approval, once it has deducted tax. The domestic rate is 20% plus surcharge and cess (20.8% to 21.84%). A lower treaty rate, commonly 10% or 15%, applies if the parent is the beneficial owner and has supplied a tax residency certificate and Form 41 before the dividend is credited. There has been no dividend distribution tax since 1 April 2020. The dividend must be paid within 30 days of declaration.

Company law first: can the dividend be declared at all?

Section 123 of the Companies Act 2013 sets the conditions. A dividend may be declared only:

• out of the profits of the year, arrived at after providing for depreciation;
• out of undistributed profits of earlier years, after depreciation; or
• out of both.

Transfer to reserves is optional. The company may transfer such percentage of its profits to reserves as it considers appropriate before declaring a dividend. There is no mandatory transfer.

Earlier losses come first. Losses and unprovided depreciation carried over from previous years must be set off against the current year's profit before a dividend is declared out of it.

Reserves are restricted. Only free reserves can be used, and a dividend out of accumulated profits in a year of inadequate profit is subject to the conditions in the Companies (Declaration and Payment of Dividend) Rules 2014, which cap both the rate and the amount drawn.

A deposit default blocks it. A company that has failed to repay deposits or interest in accordance with Sections 73 and 74 cannot declare a dividend on equity shares while the failure continues.

Final dividend or interim dividend

For a wholly-owned subsidiary the parent is the shareholder, so the AGM decision is a formality. The board recommendation is not: the directors, including the resident director, are the people answerable if the dividend was not covered by profits.

The payment clock

Missing the 30-day payment is an offence for every director knowingly party to the default, and the company owes simple interest at 18% a year for the period of default. For a foreign parent the usual cause of delay is not money but paperwork: the treaty documents were not ready, so the payment waited. That is avoided by collecting them before the board meeting, not after the AGM.

Withholding tax on the dividend

The Indian company deducts tax under Section 195 of the 1961 Act, which for tax year 2026-27 onwards is the non-resident table in Section 393(2) of the Income-tax Act 2025. The obligation under Section 195 attaches at the earlier of crediting the amount to the parent's account and paying it.

The domestic rate

Dividends paid to a foreign company are taxed at 20% of the gross amount under Section 115A of the 1961 Act (Section 207 of the 2025 Act). Surcharge and 4% cess are added:

Treaty rates

Where the parent is resident in a treaty country and is the beneficial owner of the dividend, the rate cannot exceed the treaty limit. The rates below are taken from the treaty texts published by the Income Tax Department and the treaty partners' own authorities:

Treaty rates are applied to the gross dividend, in practice without surcharge and cess added. For a wholly-owned subsidiary the shareholding conditions in the US and Singapore treaties are normally met; for a joint venture they need checking against the actual holding on the date of payment.

Beneficial ownership is a real condition, not a formality. A parent that is contractually or in substance obliged to pass the dividend straight on to another entity may not be the beneficial owner, and the treaty rate falls away.

The principal purpose test (PPT). Where India's treaty has been modified by the Multilateral Instrument (MLI), a treaty benefit is denied if obtaining it was one of the principal purposes of the arrangement, unless granting it is in line with the treaty's object. The CBDT's Circular 01/2025 of 21 January 2025 confirmed that the test applies prospectively from the date it took effect for each treaty. A trading parent that has owned its Indian subsidiary for years is rarely troubled by it; an intermediate holding company inserted shortly before a large dividend is exactly what it is aimed at.

What must be on file before the dividend is credited

1. Tax residency certificate (TRC) from the parent's home tax authority, covering the period in which the dividend is paid.
2. Form 41 (formerly Form 10F), filed electronically by the parent on the Indian tax portal.
3. A beneficial ownership declaration from the parent.
4. A no-PE declaration: the treaty dividend rate does not apply where the shareholding is effectively connected with a permanent establishment of the parent in India.
5. The parent's PAN. Without a PAN, the higher rate for missing PAN is avoided only if the parent furnishes the details and TRC prescribed in Rule 37BC (now Rule 217). And because the treaty rate is below 20%, the parent will usually have to file an Indian return, which needs a PAN in any case.

The treaty mechanics are set out in TRC, Form 10F and Form 41.

Getting the money out: FEMA and the bank

Dividends on shares held as foreign direct investment are freely repatriable. A dividend is a current account transaction; no approval from the Reserve Bank of India (RBI) is needed, and the remittance goes through the company's authorised dealer (AD) bank.

What the AD bank will typically ask for:

• the board resolution recommending (or declaring, for an interim) the dividend, and the AGM resolution declaring it;
• the audited financial statements showing the profits out of which it is paid;
• proof of tax deduction and deposit;
• Form 145 (formerly 15CA), and Form 146 (formerly 15CB), the chartered accountant's certificate, since a dividend to a foreign parent is chargeable to tax and almost always above ₹5 lakh;
• in some banks, confirmation that the FDI reporting on the underlying shares is in order.

That last point is where a dividend exposes an old problem. A bank asked to remit a dividend on shares whose FC-GPR was never filed will want the reporting regularised first, and that is a Late Submission Fee question. The filings concerned are in the FEMA filings foreign-funded companies miss, and the certificate itself in Forms 145 and 146.

Timing a dividend after a September AGM

Most Indian subsidiaries hold their AGM in September, because Section 96 requires it within six months of the 31 March year-end. The accounts then have to be filed on Form AOC-4 within 30 days of the AGM, as set out in the annual ROC filing cycle.

A worked timeline for a dividend declared at an AGM on 29 September 2026:

Two points on the timeline. If the dividend is credited to the parent's account in the books on declaration, the deduction falls in September and the tax is due by 7 October, even if the money leaves in late October. And the dividend is income of the parent for the tax year in which it is declared, so a September declaration falls in tax year 2026-27 and is governed by the 2025 Act throughout.

Dividend or something else?

A dividend is paid out of post-tax profits and carries withholding. A management fee or royalty is deductible for the Indian company but is tested for benefit and arm's length pricing, and interest on a loan from the parent is capped by the interest limitation rule. Which route suits a group depends on the tax rates at both ends, which is why dividends are usually compared with management fees and royalty paid to the parent and with debt funding from the parent before the board recommends anything.

This note sets out the general position as at 23 September 2026 for a dividend paid by an Indian private company to a foreign corporate shareholder. Treaty rates are quoted from the treaty texts; whether a particular parent qualifies depends on its residence, its beneficial ownership of the dividend, the principal purpose test where it applies, and the documents held at the time of payment. Company-law conditions on the source of the dividend should be checked against the audited accounts. Confirm all of these before the board recommends the dividend, not after it is declared.