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Knowledge Series · India Tax & Treaties

DEMPE and India: where should your IP sit when you build product or R&D there?

ATB Knowledge Series · 12 min read · Published October 2026

Short answer: DEMPE (the development, enhancement, maintenance, protection and exploitation of intangibles) decides which group company earns the return from IP; India has no DEMPE statute, but its safe-harbour rules and tribunals test where those functions really sit, on conduct, not just contracts. For most UK, US and European groups the cheaper default is to own IP abroad from creation and pay the Indian centre cost-plus as a contract R&D provider, which holds only if the parent genuinely directs, funds and bears the risk of the work. Owning IP in India suits a product genuinely run from India, but its profit bears 25.168% Indian tax plus dividend withholding, the 10% patent box is doubtful for a company, and moving the IP out later is taxed in India.

Who this is for: CFOs, group tax heads and general counsel of UK, US and European groups building product or R&D teams in India, usually through a global capability centre (GCC).

Three places the IP can sit

  1. Abroad, with India as a contract R&D provider (model A): the parent or a group IP holding company owns it; the Indian company is paid cost plus a mark-up.
  2. Abroad, licensed into India (model B): the Indian company uses group IP in its own business and pays a royalty.
  3. In India (model C): the Indian company owns the IP and keeps the residual profit.

DEMPE decides whether India accepts the choice; holding-company jurisdictions are compared in Invest in India: choosing a holding company jurisdiction (hub).

What DEMPE means in transfer pricing, and how India applies it

DEMPE comes from the OECD's 2015 BEPS work on intangibles, now Chapter VI of the OECD Transfer Pricing Guidelines (2017 edition onwards): the return from IP belongs to the group companies that perform and control those functions and bear the risks, not to a company with bare legal title [1][2].

India has not legislated DEMPE [1], but its transfer-pricing rules reach every IP dealing: an "international transaction" includes the purchase, sale, transfer, lease or use of intangible property, and any business restructuring (s.163) [3]. India applies DEMPE in substance in three ways:

  1. CBDT guidance, now in the safe-harbour rules. Circular 6/2013 (which replaced Circular 3/2013) judges whether a development centre is a low-risk contract R&D provider on "the totality of the facts" and "the conduct of the parties and not merely by the terms of the contract" [4]. Rule 87(2) of the Income-tax Rules 2026 uses the same factors: the foreign principal performs the significant functions, including conceptualisation, product design and strategic direction; provides the funds and intangibles; controls the work; bears the risks; and owns the results [5].
  2. Tribunal decisions. In Netflix (Mumbai Tribunal, 17 October 2025), an adjustment of INR 444.93 crore was set aside: the Indian entity was a limited-risk distributor with nil intangibles, and its caching servers' local presence "facilitates delivery efficiency, not value creation" [6].
  3. Marketing intangibles. The Delhi High Court rejects the "bright line test" for advertising, marketing and promotion (AMP) spending (PepsiCo, 2024; Suzuki Motorcycle, August 2026), but Supreme Court appeals in earlier cases are pending and tribunals want proof of DEMPE functions [7].

Model A: contract R&D in India, IP held by the parent or an IP holding company

In this usual GCC model, the mark-up is the Indian company's whole taxable profit, taxed at 25.168% (s.200) [8].

The 2026 safe harbour. From tax year 2026-27, India accepts a margin of at least 15.5% on operating expense for software contract R&D (classed as an information technology service under Rule 87(1)(a)(iv)), against 24% under the old Rule 10TD, for centres with up to INR 2,000 crore of operating revenue (about GBP 157m); generic-pharma contract R&D stays at 24% [5][9][10]. For IP planning the condition matters more than the rate: the option, made on Form 49, is open only to services "with insignificant risk" on the Rule 87(2) factors [5][9], so a centre that sets its own roadmap cannot use it. A centre outside the safe harbour can still get certainty through the multi-year option (s.166(9)) or an advance pricing agreement (s.168; the CBDT signed 219 in 2025-26) [11][12]; choosing between them is covered in transfer pricing, tax and employment for an India GCC.

Cash: from 1 October 2026, service-export proceeds must be realised within 9 months of the invoice, or 12 months if invoiced or settled in rupees (FEMA export regulations, amended on 22 September 2026) [13].

A centre paid at arm's length is not itself the parent's permanent establishment; secondees are the usual risk (see Permanent establishment in India (employees, EOR, agents)).

Model B: the Indian company licenses the IP and pays a royalty

This suits an Indian company selling into India with group IP, not a captive serving its parent. An arm's-length, documented royalty is deductible in India.

  • Withholding: 20% of the gross, or 20.8%–21.84% with surcharge and cess (s.207) [14]; with a tax residency certificate and Form 41, 15% for UK and US licensors (10% only for equipment rentals) and 10% for German, French, Dutch, Irish, Singapore and UAE ones [15]. The full grid is in India withholding tax rates 2026 and how to repatriate profits.
  • Software: Indian law treats the right to use software as royalty (s.9(6)(c)) [16], but the treaties do not reach end-user and distribution licence fees (Engineering Analysis, Supreme Court, 2 March 2021; the Revenue's review petitions were dismissed on 23 April 2024 and 11 May 2026) [17].
  • Exchange control: royalties need no approval, but consultancy services bought from abroad above USD 1m per project need prior RBI approval [18].

Model C: IP developed and owned in India

The Indian company keeps the residual profit, taxed at 25.168% [8], and dividends then bear 10%–15% treaty withholding [15], usually a final cost. India offers little to offset this:

  • The 22% regime removes the s.45(2) deduction for approved in-house R&D facilities, which covers only biotechnology and manufacturing companies [8].
  • The patent box taxes royalty from a patent developed (at least 75% of spending in India) and registered in India at 10% of the gross, if opted for on Form 65 (s.194). But it goes to a resident "patentee", defined as "the true and first inventor" on the patent register: the CBDT's Form 65 FAQ lists companies among possible filers (Q3) yet says only that inventor is eligible (Q14), and a company holding patents assigned by its engineers is not the inventor. No ruling settles the point [19], and India does not patent a "computer programme per se" [20]. Take advice before relying on the patent box.

Moving IP out of India later: the exit cost

An Indian company is always resident (s.6(10)) and cannot migrate, so the tax point is the transfer of the IP [21]. An assignment to a foreign group company must be priced at arm's length (s.163) [3] and is a transfer of a capital asset; the cost of a self-developed intangible is nil (s.90(3)) [22]. Characterisation of the gain and any claw-back of earlier deductions are unsettled, so model a range: about 14.3% of the value as a long-term capital gain (12.5% plus surcharge and cess), up to 25.168% as business income. Under-pricing can also trigger a secondary adjustment: repatriation of the shortfall or an additional 18% tax (s.170) [23].

IP that vests abroad from creation, under contract clauses set at the start (see GCC operating model and entity in India), avoids this. In CUB Pty (formerly Foster's Australia, 2016), the Delhi High Court held that an intangible is sited where its owner is, putting a brand developed in India but owned in Australia outside India's tax [24][25]. Only consideration taxable as capital gains is carved out of the royalty definition (s.9(6)(b)), so a price paid as a share of future revenue risks royalty treatment [16]. Selling the Indian company itself is covered in Selling your Indian subsidiary: exit planning for foreign parents.

India's digital levies: abolished, but significant economic presence remains

India's 6% equalisation levy on online advertising (from 1 June 2016) ended from 1 April 2025, and its 2% levy on e-commerce supplies and services (from 1 April 2020) ended for consideration received from 1 August 2024 [26]. Significant economic presence remains: INR 2 crore (about GBP 157,000) of payments from persons in India in a tax year, or systematic interaction with 300,000 users there, creates a business connection [27]; treaty residents keep their treaty's permanent-establishment protection.

Home-country rules: headline points only

Confirm with home-country advisers.

Home country IP regime What matters for an Indian centre
UK Patent Box: 10% [28] Relief falls where the company paid connected parties for R&D (the R&D fraction, applied to all Patent Box companies since 1 July 2021), as with an Indian GCC on cost-plus [28]
US FDDEI (foreign-derived deduction eligible income, formerly FDII): about 14% effective, tax years beginning after 31 December 2025 [29] Contributing intangibles to a foreign company triggers a s.367(d) deemed royalty over the IP's useful life [29]
Ireland Knowledge Development Box: 10% from 1 October 2023 [30] Budget 2027 (6 October 2026) announced an extension to accounting periods beginning before 1 January 2032, to be legislated in the Finance (No. 2) Bill 2026, due for publication on 15 October 2026 [30]
Netherlands Innovation box: 9% effective [31] Needs an R&D declaration (S&O-verklaring) from the Netherlands Enterprise Agency (RVO) [31]

Pillar Two: rarely decisive with an Indian centre taxed at about 25%; it matters where a 9%–10% IP box pulls a country below 15%, and domestic top-up taxes survive the January 2026 side-by-side package [32].

Decision table: where should the IP sit?

A. Contract R&D in India; IP abroad B. Indian company licenses IP in C. IP developed and owned in India
Indian taxable profit Cost-plus mark-up Profit after an arm's-length royalty Residual profit
Indian tax 25.168% on the mark-up; safe harbour 15.5% 25.168%; royalty withholding 10%–15% (treaty) or 20.8%–21.84% 25.168%, then 10%–15% on dividends; patent box doubtful for a company
Cash to the group Service fees, realised within 9 months Royalties, deductible in India Dividends
Main transfer-pricing risk Conduct not matching Rule 87(2) Benefit and rate of the royalty; AMP Value of any later transfer
Indian tax if the IP moves later None if it vests abroad from creation None Tax on the arm's-length value
Fits when The parent directs, funds and bears the risk Group IP is sold into India The product is run from India

Worked example (illustrative)

Hypothetical; tax year 2026-27; INR 127 = GBP 1 (rounded exchange rates, October 2026). Residual profit, IP value, UK tax and the 10% surcharge on the exit gain are assumptions. A UK software group's Indian GCC costs INR 60 crore a year (about GBP 4.72m).

Step 1: the GCC as a contract R&D provider. At the 15.5% safe harbour, profit is 60 × 15.5% = INR 9.3 crore and Indian tax 9.3 × 25.168% = INR 2.34 crore (about GBP 184,000). At the old 24% margin tax would be 14.4 × 25.168% = 3.62, so the 2026 rules save INR 1.28 crore (about GBP 101,000) a year.

Step 2: where the residual profit is taxed. The product earns residual profit of INR 80 crore a year (about GBP 6.30m) after the GCC is paid.

IP owned by Tax on INR 80 crore (INR crore) Rate
UK parent, main rate [33] 80 × 25% = 20.00 25%
Indian company, profit paid to the UK as dividends (exempt in the UK) 80 × 25.168% = 20.13; dividend 59.87 × 10% = 5.99; total 26.12 32.65%

Indian ownership costs 26.12 − 20.00 = INR 6.12 crore (about GBP 482,000) a year more.

Step 3: moving the IP to the UK in year 5. The Indian company assigns the IP to the parent at an arm's-length value of INR 400 crore (about GBP 31.5m); cost is nil:

  • as a long-term capital gain: 12.5% × 1.10 × 1.04 = 14.3%; 400 × 14.3% = INR 57.2 crore (about GBP 4.50m)
  • as business income: 400 × 25.168% = INR 100.67 crore (about GBP 7.93m)

Reading: Indian ownership costs about INR 6 crore a year more, plus an exit charge of INR 57–101 crore; model A avoids both if the UK really directs, funds and bears the risk.

Risks and common mistakes, ranked

  1. Contract R&D on paper, owner in practice: no safe harbour, and a claim on the residual profit.
  2. IP not vested at creation: title stays in India, with an exit charge later.
  3. Relying on the patent box: company eligibility is doubtful and most code is not patentable.
  4. Royalties without benefit, or for IP India built: disallowance, and AMP claims.
  5. Ignoring the home side: UK Patent Box R&D fraction; US s.367(d).
  6. FEMA timing: invoices unrealised after 9 months; consultancy above USD 1m per project without RBI approval.

Checklist to forward internally

  • Who conceives, decides, funds and bears risk for each product line, by name, location and board record
  • Employment and intercompany agreements vest IP in the intended owner from creation
  • Safe harbour (Form 49), multi-year option or APA chosen for the GCC margin
  • Home-country sign-off on Patent Box, FDDEI, s.367(d), Knowledge Development Box or innovation box
  • Export invoices tracked against the 9-month deadline
  • Indian tax on any future IP transfer modelled as a range before it is proposed

How ATB Corporate can help

ATB Corporate advises companies and investors on entering, structuring and operating in India and the UAE: choosing the entry route and holding structure, tax and exchange-control planning, regulatory compliance, and setting up and running the local business. To discuss your plans, contact ATB Corporate.

FAQ

What is DEMPE in transfer pricing?

DEMPE stands for the development, enhancement, maintenance, protection and exploitation of intangibles, the functions that, since the OECD's 2015 BEPS work (now Chapter VI of its Transfer Pricing Guidelines), decide which group company earns the return from IP. Legal title alone earns little; the companies that perform and control those functions and bear their risks are entitled to the profit [1].

Does India apply DEMPE to transfer pricing?

India applies DEMPE in substance but has not legislated it: the Income-tax Act 2025 has no DEMPE rules, but CBDT circulars, the safe-harbour test in Rule 87(2) and tribunal decisions ask who conceives, directs, funds and bears the risk of development, and look at conduct, not just contracts [4][5].

Can an Indian R&D centre stay on cost-plus if it develops the group's IP?

An Indian R&D centre can stay on cost-plus while it develops IP if the foreign principal performs the significant functions, provides the funds and intangibles, controls the work, bears the risk and owns the results [5]. If the Indian team conceives and directs the product, expect India to refuse the 15.5% safe harbour and claim more than a routine mark-up.

Can an Indian company use India's 10% patent box?

It is doubtful that an Indian company can use India's 10% patent box: the CBDT's Form 65 FAQ lists companies among those who may file (Q3), but says only the "true and first inventor" whose name is on the patent register is eligible (Q14), and a company is not the inventor [19]. The patent must also be developed (at least 75% of the spending) and registered in India, and software as such cannot be patented.

Is there an exit tax when IP moves out of India?

India has no corporate exit tax, but it taxes an Indian company's transfer of IP to a foreign group company at an arm's-length price, with a nil cost for self-developed IP, at roughly 14% to 25% of the value. IP owned abroad from the day it is created is generally outside Indian tax when later sold.

Is India's equalisation levy still in force?

No, India's equalisation levy is no longer in force: the 2% levy on e-commerce operators ended from 1 August 2024 and the 6% levy on online advertising from 1 April 2025 [26]. A non-resident can still have a significant economic presence in India, but a treaty resident is taxed on business profits only through a permanent establishment.

Sources

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Disclaimer: This article is general information, not legal or tax advice. It reflects our understanding of Indian law, and a headline reading of UK, US, Irish and Dutch rules, at 15 October 2026; verify against current law and take advice on your specific facts, including from home-country advisers, before acting.

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