Dividend, Service Fee or Royalty? How Profits Move Between India and UAE/UK Group Companies

A dividend is a share of profit already taxed in the company that pays it, while a royalty and a service fee are business expenses paid for using an asset or receiving a service. Between India, the UAE and the UK, that difference decides withholding tax, treaty rates, transfer pricing scrutiny, FEMA reporting and GST on every payment.

Key points

• Dividends are paid from post-tax profit and are not deductible; royalties and service fees are deductible for the payer but must be priced at arm's length.

• India withholds 20% (plus surcharge and cess) on dividends, royalties and technical fees paid to non-residents, reduced to treaty rates: 10% for UAE dividends and royalties, 10% for UK dividends and 15% for most UK royalties and technical fees.

• The UAE and the UK generally levy no withholding tax on dividends, so most of the tax on an outbound dividend to India is Indian tax.

• An Indian company that imports services or pays a royalty to a group company abroad generally pays 18% IGST under reverse charge; dividends are outside GST.

• The right route follows what each entity actually does. A royalty needs an entity that owns and manages the IP; a service fee needs a team that delivers the service.

What is the difference between a dividend and a royalty?

A dividend rewards ownership; a royalty pays for the use of an asset. A company pays a dividend to its shareholders out of profit after tax, so the payer gets no deduction. A royalty is paid for using intellectual property such as a brand, patent, software or know-how, and the payer generally deducts it as a business expense.

A service fee pays for work done, such as management, IT, sales support or engineering, and the payer deducts it like a royalty.

Because royalties and service fees reduce taxable profit in the paying country, tax authorities test whether they are real and correctly priced. Dividends are not priced, but arrive only after corporate tax.

How does withholding tax differ for each route?

India's domestic rate on dividends, royalties and fees for technical services paid to non-residents is 20%, plus surcharge and cess, under section 393(2) of the Income-tax Act 2025, which has applied since 1 April 2026 and replaced section 195 of the 1961 Act. A non-resident can instead use the treaty rate if it is lower, by giving the payer a tax residency certificate and Form 41 under section 159 of the new Act.

Our guides to the India–UAE DTAA and the India–UK DTAA cover each article; the headline rates are below.

In the other direction, the UAE applies a 0% withholding rate on payments to non-residents under Article 45 of the UAE Corporate Tax Law, so a UAE subsidiary can pay its Indian parent a dividend, royalty or fee without UAE tax at source. The UK does not withhold tax on dividends or on most service fees, but it does withhold 20% on royalties paid abroad, reduced to the treaty rate of 15% or 10% for an Indian recipient.

Example: a ₹150 Cr Ahmedabad specialty-chemicals group owns a Dubai mainland trading company. The UAE company pays 9% corporate tax on taxable income above AED 375,000, and a dividend to the Indian parent is then taxed again in India. If the Indian parent instead charges an arm's length royalty for formulations it owns, the royalty reduces UAE taxable profit and is taxed once, in India.

How are these payments taxed when they arrive in India?

All three are generally taxable income of the Indian company at its normal corporate rate. The concessional 15% rate that once applied to dividends from foreign subsidiaries no longer applies, so a dividend from a UAE or UK subsidiary is taxed like other business income.

Two reliefs matter:

• Onward distribution. Section 148 of the Income-tax Act 2025, which replaced section 80M, lets a domestic company deduct dividends received from a foreign company to the extent it distributes dividends to its own shareholders at least one month before its return due date.

• Foreign tax credit. Tax withheld abroad, such as UK withholding on a royalty, is generally creditable in India under the treaty and India's foreign tax credit rules. UAE corporate tax paid by the subsidiary on its own profit is not a withholding tax, and India gives no credit for that underlying tax.

So a dividend from a UAE subsidiary can carry two layers of tax, while a genuine, correctly priced royalty or fee carries one.

Why does transfer pricing matter more for royalties and service fees?

Because they shift taxable profit from one country to another, every royalty and service fee between related companies must meet the arm's length standard in both countries. In India, that test now sits in sections 161 to 173 of the Income-tax Act 2025, with the accountant's report in Form 48.

The UAE applies Articles 34 to 36 and 55 of its Corporate Tax Law and the Federal Tax Authority's Transfer Pricing Guide; the UK applies Part 4 of TIOPA 2010.

The questions tax officers ask are predictable:

• Royalties: Who developed the IP, who controls its development and protection today, and who bears the cost? A UAE company charging India for a brand that Indian staff created and manage will struggle. Our article on IP placement and DEMPE explains the functions test.

• Service fees: Was a service actually received, did it benefit the payer, and is it a duplicate of something the payer already does? Shareholder activities, such as the parent's own board oversight, are not chargeable.

• Pricing: Is the mark-up supported by comparables? The UAE Guide allows a simplified 5% mark-up for low value-adding support services.

Our transfer pricing guide for India–UAE and India–UK groups covers methods, documentation and safe harbours.

What FEMA reporting applies to each route?

FEMA treats the routes differently depending on the direction of the payment.

Money coming into India from a foreign subsidiary. An Indian company that has made overseas direct investment must realise and repatriate all dues from the foreign entity, including dividends, royalties, technical fees and interest, within 90 days of their falling due, under the FEMA overseas investment framework. Those receipts also feed the Annual Performance Report, due by 31 December each year under the RBI Master Direction on Overseas Investment. Our ODI rules guide covers the full reporting calendar.

In practice, a UAE subsidiary cannot keep a declared dividend or an accrued royalty as working capital without creating a FEMA problem.

Money going out of India to a foreign parent or group company. Royalties and service fees are current account payments made through an authorised dealer bank. From 1 April 2026, the remitter files Form 145 and, where required, a chartered accountant's certificate in Form 146, which replaced Forms 15CA and 15CB. Dividends paid by an Indian company to a foreign shareholder are repatriable once tax has been withheld.

How does GST apply to imported services and royalties?

When an Indian company pays a UAE or UK group company for services or for the use of IP, the payment is generally an import of services, and the Indian company pays IGST at 18% under reverse charge. It can usually take input tax credit if it uses the service for taxable business.

Under Schedule I of the CGST Act, an import of services from a related person in the course of business can be a taxable supply even without consideration, so a free brand licence or unbilled support from a foreign parent can still attract GST. See the GST law on the CBIC portal.

The reverse is usually zero-rated: an Indian company serving its UAE or UK subsidiary can supply under a letter of undertaking without IGST if the export of services conditions are met. Our guide to export of services under GST explains the conditions.

Dividends are outside GST in both directions because they are not a supply of goods or services.

How does UAE corporate tax treat dividends, royalties and fees?

UAE corporate tax is 9% on taxable income above AED 375,000. Royalties and fees a UAE company pays are generally deductible if at arm's length; dividends are not. Income it receives is treated as follows:

• Dividends received. Under Article 23, dividends from a participating interest are exempt, broadly where the UAE company holds at least 5%, for at least 12 months, in a company taxed at not less than 9%. An Indian or UK operating subsidiary will usually meet the tax rate condition.

• Royalties received. A Qualifying Free Zone Person can treat royalty income as qualifying, and so taxed at 0%, only for qualifying IP (patents, copyrighted software and their equivalents) under the nexus approach in Cabinet Decision No. 100 of 2023. Trademarks and other marketing IP are excluded, so a free zone company licensing a brand to India pays 9% on that income.

• Service fees received. For a Qualifying Free Zone Person, fees from non-free zone persons, including an Indian parent, qualify only for activities listed in Ministerial Decision No. 229 of 2025, such as headquarter or treasury services to related parties, not general consulting. Non-qualifying revenue above 5% of total revenue or AED 5 million, whichever is lower, ends QFZP status for that period and the next four.

Our explainer on UAE corporate tax for free zone companies covers QFZP conditions, including adequate substance in the free zone.

Where does substance come in?

Each route needs a different kind of substance. Dividends need a recipient that is the beneficial owner; a UAE holding company with no decision-making in Dubai may be refused the 10% treaty rate under the Principal Purpose Test. Royalties need an owner that develops and controls the IP. Service fees need a team that delivers the service, with records to prove it.

The UAE withdrew its Economic Substance Regulations for financial years after 31 December 2022 (Cabinet Decision No. 98 of 2024), but substance still matters: QFZP status requires it, treaty residence requires management and control wholly in the UAE, and India can treat a foreign company managed from India as Indian resident. Our article on economic substance after 2022 explains why empty entities no longer hold up.

How do I receive money from Dubai to India, and is it taxed?

You receive money from Dubai to India as an inward remittance: a bank transfer or a transfer through a licensed exchange house into your Indian bank account, which may be an NRE, NRO or resident savings account. There is no tax on the transfer itself. Whether the money is taxable in India depends on what it is and on your residential status.

• Your own UAE earnings or savings as an NRI. Salary earned in the UAE by a non-resident is not taxed in India, and moving your own savings home does not create new income.

• If you are an Indian resident. A resident (ordinarily resident) is taxed on worldwide income, so Dubai business or investment income is taxable in India whether or not you bring it home.

• Gifts. Money from a relative, as defined in the Act, is not taxed. Gifts from non-relatives that total more than ₹50,000 in a year are taxable in full.

• Business receipts. Money paid to an Indian business for goods or services is business income, and the dividend, royalty and fee rules above apply.

Keep the bank's inward remittance advice, which shows the nature of the funds. For founders changing countries, our guide to moving to Dubai from India explains how residency, not the transfer, decides the tax.

The Greenwolf view

The route should describe the business, not create it. Commercial design comes first; tax follows functions, risks and substance. If India builds the product and Dubai sells it, the honest answer may be a distributor margin in Dubai and dividends home, not a Dubai royalty that Indian engineers' work cannot support.

The questions we work through with clients:

1. Who owns what? Which entity legally and economically owns the brand, the software, the customer contracts? Our guide on where group IP should sit frames this choice.

2. Who does what? Map the people in each country. A service fee needs a service; a royalty needs an owner.

3. What does each route cost end to end? Model corporate tax at both ends, withholding, treaty relief, credit availability and GST cash flow, not just the headline rate.

4. Can we evidence it, and will it scale? Agreements, transfer pricing files and FEMA filings should exist before the first payment. A route that works for a UAE subsidiary of an Indian company may need rethinking when a UK subsidiary of an Indian company or investors arrive.