Treaty residence and treaty entitlement are separate conclusions
For a non-individual claiming India–US treaty benefits, Article 24(1) has two conditions: the specified qualified ownership test and an income-use or base-erosion test. For a company, qualified owners must hold more than 50% of the number of shares of each class, directly or indirectly. Passing an overall voting or value percentage is not a substitute. Failure under paragraph 1 does not end the enquiry: paragraphs 2–4 provide alternative routes with their own conditions.
This article addresses an Indian payer’s treaty-eligibility review for a US company in tax year 2026–27, using sources checked on 23 October 2026. It does not determine the royalty, included-service, interest or PE character of the payment. Entitlement must be established before the applicable income article and rate can be relied on.
What Article 24 actually tests
India–US DTAA Article 24 identifies the relevant qualified owners, including individual residents of a Contracting State, the States and specified public bodies, other individuals subject to tax in a Contracting State on worldwide income, and US citizens. A corporate shareholder’s US incorporation alone does not resolve the ultimate indirect-ownership enquiry. Preserve the chain and the status of the persons on whom the claim depends.
Paragraph 1(b) addresses income used in substantial part, directly or indirectly, to meet liabilities to persons outside its specified protected population. Interest and royalties are expressly included. Ownership and income use are cumulative conditions under paragraph 1, not alternative boxes. The treaty does not set a simple numerical safe harbour for the word substantial.
The US Treasury Technical Explanation, Article 24 discussion describes ownership and base erosion, explains indirect ownership and discusses income and deductible payments. It says payments below 50% will generally not be substantial, but acknowledges that a lower percentage can be substantial in appropriate circumstances. That explanatory discussion must not be converted into an unconditional statutory 49.99% safe harbour. The treaty is the operative legal text; the Technical Explanation is an official interpretive aid.
| Route | Main enquiry | Evidence |
|---|---|---|
| Article 24(1) | Qualified ownership plus the separate income-use condition. | Share-class registers, ownership tracing and liability/payment analysis. |
| Article 24(2) | Indian income connected with or incidental to active US trade/business. | Operating substance and income-specific business connection. |
| Article 24(3) | Principal share class substantially and regularly traded on a recognised exchange. | Class identification, exchange status and actual trading evidence. |
| Article 24(4) | Benefits granted by the source-State competent authority. | Actual determination and its scope; not merely a request. |
The active-business route excludes making/managing investments unless the relevant activities are banking or insurance activities carried on by a bank or insurance company. A registration certificate, office lease or group website is not proof that the particular Indian income is connected with an active business. The listed-company route likewise requires actual substantial and regular trading of the principal class, not just a listing of some security.
Use current-year Indian documentation
Section 159 of the Income-tax Act, 2025 governs current agreement relief: subsection (4) addresses more-beneficial treatment, subsection (6) preserves the specified domestic anti-avoidance provisions and subsection (8) requires government-issued residence certification and prescribed information for a non-resident’s claim. Rule 75 and Form 41 under the Income-tax Rules, 2026 specify the current other information. Match old section 90/Form 10F references to the period for which they are used.
The final file should identify legal recipient, beneficial owner where the income article requires it, tax-residence period, Article 24 route and its supporting evidence. A TRC supports residence; it does not certify every share class, pass-through payment or treaty income condition. Recheck material ownership, activity and contractual changes rather than carrying an old declaration forward indefinitely.
Worked illustrations
These illustrations use fictional facts and expressly stated assumptions. Amounts are Indian rupees unless a different currency or unit is specified. They are independent examples, not findings about any actual client.
Illustrative example 1: Exactly half is not more than half
A US company has one class of 1,000 shares, with 500 traced to Article 24(1)(a)-qualified owners. Their holding is 50%, which fails the more-than-50% ownership condition. A supported holding of 501 shares is 50.10% and passes that numerical condition, but paragraph 1(b) must also be met. Other routes remain separate.
Illustrative example 2: A majority overall can conceal a failing class
Class A has 9,000 shares, 5,400 qualified: 60%. Class B has 1,000 shares, 400 qualified: 40%. Overall qualified shares are 5,800 out of 10,000, or 58%, but Class B fails. Article 24(1)(a) for a company tests each class; a consolidated 58% headline cannot cure that result. Assume share classes and ownership status are legally established.
Illustrative example 3: Trace proportional indirect interests instead of counting the intermediary as an individual
Assume ordinary proportional interests, no special rights and one share class. An intermediary owns 60% of the claimant; qualified individuals beneficially own 80% of that intermediary. The corresponding traced indirect interest is 60% × 80% = 48%. Another 10% is held directly by qualified individuals: traced total 58%. This illustrates the arithmetic only; verify the actual beneficial rights, full chain and paragraph 1(b) before concluding eligibility.
Illustrative example 4: A payment ratio is evidence, not a mechanical safe harbour
Assume the reasoned relevant-income computation is ₹100 lakh, after ₹100 lakh cost of goods sold from ₹200 lakh receipts. Potentially relevant deductible payments to persons outside paragraph 1(b)’s protected population are ₹45 lakh. The ratio to the assumed relevant income is 45%, not 22.50% obtained by dividing by receipts. Neither ratio automatically settles substantiality. Validate the denominator, protected-person status, direct/indirect flows and circumstances; do not certify eligibility merely because 45% is below 50%.
Illustrative example 5: Active-business relief is tied to the income connection
A US enterprise has ₹30 lakh Indian income documented as connected with its active US manufacturing business, and ₹5 lakh unrelated investment income. Total Indian income is ₹35 lakh. A supported Article 24(2) conclusion for the ₹30 lakh connected income cannot automatically be copied to the other ₹5 lakh. Review the latter’s own entitlement route and income article. The amounts do not themselves prove active-business substance.
Illustrative example 6: A calendar-year TRC does not evidence every day of the Indian tax year
Tax year 2026–27 runs 1 April 2026–31 March 2027, 365 days. A TRC covering 1 January–31 December 2026 covers 275 of those days, leaving 90 days in January–March 2027 to be supported by appropriate residence evidence/certification for that period. This is a documentation-gap calculation, not permission to prorate the treaty tax rate or a finding that residence changed.
Ten-step verification table
| Step | Verification | Evidence to retain |
|---|---|---|
| 1 | Identify the exact claimant and period. | Contracting entity, tax status and payment period. |
| 2 | Obtain government-issued residence certification. | TRC and period coverage reconciliation. |
| 3 | Collect current prescribed treaty information. | Form 41 information and supporting documents. |
| 4 | List all share classes and relevant rights. | Registers, constitutional documents and cap table. |
| 5 | Trace qualified direct and indirect owners. | Full chain and status/residence evidence. |
| 6 | Calculate the ownership condition class by class. | Share-number denominators and boundary checks. |
| 7 | Analyse income use and direct/indirect liabilities. | Income computation, payment schedule and recipient status. |
| 8 | Assess any alternative Article 24 route. | Active-business nexus, trading evidence or actual authority determination. |
| 9 | Apply the separate income article and anti-avoidance review. | Characterisation, beneficial ownership and PE evidence as relevant. |
| 10 | Record a dated, qualified entitlement conclusion. | Scope, unresolved items, changes and compliance actions. |
Sixteen practitioner FAQs
1. Does a TRC prove Article 24 compliance?
No. Residence certification and the Article 24 entitlement conditions answer different questions.
2. Does exactly 50% satisfy paragraph 1(a)?
No. Its ownership condition is more than 50%, with the specified company share-class test.
3. Can voting power replace share numbers?
Not simply. For a company, the cited treaty wording refers to the number of shares of each class. Read the actual rights and classes.
4. Are non-voting classes irrelevant?
No automatic exclusion follows merely because a class lacks votes. The company test refers to each class of shares.
5. Can qualified interests be held indirectly?
Yes. Retain a supported tracing of ultimate beneficial interests and rights through the chain.
6. Is every US corporate shareholder itself a qualified individual?
No. Incorporation and individual status are different. Establish which specified qualified persons support the direct or indirect claim.
7. Are ownership and base erosion alternatives?
They are both required for paragraph 1. Paragraphs 2–4 provide different routes.
8. Does a 49% outbound-payment ratio guarantee benefits?
No. The treaty uses substantial part, and the official explanation recognises circumstances in which less than 50% can be substantial.
9. Do only interest and royalties matter?
They are expressly mentioned, but the review is not limited to those invoice labels. Analyse the relevant liabilities and indirect flows.
10. Is base erosion always measured against turnover?
Do not assume that. Document the relevant income definition and computation, including the official explanation’s discussion of gross income.
11. Can active business qualify despite a failed ownership test?
Article 24(2) is an alternative with its own active-business and income-connection conditions.
12. Does passive investment management qualify as active business?
The paragraph has a specific investment-business exclusion and a banking/insurance exception. Apply the exact conditions.
13. Does any stock-exchange listing establish paragraph 3?
No. Identify the principal class, recognised exchange and substantial and regular trading.
14. Is requesting competent-authority relief enough?
No. Paragraph 4 relief depends on the source-State competent authority’s determination; retain the actual decision and conditions.
15. Does passing Article 24 fix the withholding rate?
No. Income character, beneficial ownership where required, PE interaction, domestic treatment and payment compliance still need assessment.
16. What should trigger a fresh review?
Material ownership/class changes, new financing or royalty flows, altered business substance, changed recipient status or a new residence-certification period.
Conclusion
Document one defensible entitlement route, its precise scope and current evidence. Do not allow a TRC, a group ownership percentage or an unexplained payment ratio to stand in for the full treaty analysis.