Taxation of foreign companies in India
Table of Contents
Complete Understanding the taxation of foreign companies in India
Understanding the taxation of foreign companies in India involves navigating through various legal provisions, especially those pertaining to residency, types of income, and the applicability of Double Taxation Avoidance Agreements (DTAAs). Understanding the taxation regime in India for different types of companies and their residency status is crucial. For foreign companies operating in India, understanding the interplay between domestic tax laws, DTAAs, and various provisions concerning income and residency status is crucial. Resident companies are taxed on their global income, while non-resident companies are taxed only on income earned in India. The presence of a Permanent Establishment (PE) significantly affects the tax treatment of a foreign company’s income in India. Additionally, compliance requirements like obtaining a PAN are mandatory for companies with PE, ensuring proper filing and adherence to Indian tax laws.
1. Residential Status and Tax Liability- Importance of Residency Status for Companies in India
Taxation under the Income-tax Act, 1961, hinges on residential status, determined by PoEM for companies. Resident companies are taxed globally, whereas non-residents are taxed only on Indian income. PoEM involves detailed factors and guidelines to establish residency, posing practical challenges for foreign companies, especially in terms of depreciation claims, loss set-offs, and tax credit entitlements. The CBDT guidelines aim to mitigate these challenges, but additional regulations are necessary for comprehensive clarity.
The tax liability of a person under the Income-tax Act, 1961, is determined based on their residential status:
- Resident: Taxable on global income.
- Non-Resident: Taxable only on income received, accrued, or arising in India.
Resident Company: Taxed on worldwide income.
- Non-Resident Company: Taxed only on income received in India or income that accrues, arises, or is deemed to accrue or arise in India.
Residency and Taxation
- Resident Companies
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- Indian companies or those with POEM in India.
- Taxed on global income.
- Non-Resident Companies
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- Foreign companies with POEM outside India.
- Taxed only on income received, accrued, or arising in India.
PAN Requirement
- Mandatory PAN:
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- Foreign companies with PE in India.
- Required to file income tax returns in India.
- Not Mandatory for PAN:
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- Foreign companies without PE in India earning income through royalties or fees for technical services.
Detailed Criteria under Section 6(3)
- Indian Company (Section 6(3)(i)): Always resident in India.
- Foreign Company (Section 6(3)(ii)):
- Turnover exceeds INR 50 crore: Resident if POEM is in India.
- Turnover less than INR 50 crore: Non-resident.
2. Residency Criteria for Companies (Section 6 of Income Tax Act)
- A company is resident in India if:
- It is an Indian company.
- Its place of effective management (POEM) in that year is in India.
- Place of Effective Management (POEM): Location where key management and commercial decisions necessary for the business as a whole are made. Applicable for companies with turnover exceeding ₹50 crores in a previous year.
Historical and Current Determination of Residential Status
- Historical Basis: Previously determined by the ‘control and management’ test, where a company was resident if its control and management were situated in India during the whole of the previous year.
- Current Basis (Post Finance Act, 2017): Determined by the Place of Effective Management (PoEM). A company is resident if PoEM is in India.
PoEM Definition: The place where key management and commercial decisions necessary for the conduct of the business as a whole are made.
Factors to Determine PoEM
Based on judgments from Indian and foreign courts and OECD guidelines, the following factors help determine PoEM:
- Location and the business transacted.
- Identifying critical policy decisions versus routine operational decisions, who makes these decisions, and where.
- Intensity of deliberations on proposals.
- Location where executive officers exercise their functions.
- Location where records are kept.
- Jurisdiction of incorporation and its laws.
Additional Statutory Safeguards
- The test for control now emphasizes substance over form, incorporating court-affirmed practices legislatively.
- CBDT Guidelines: Circular No. 6 of 2017 provides administrative guidelines on determining PoEM, including analysis of active and passive income and the delegation of powers by the Board of Directors.
Effect of Having PoEM in India
If a foreign company is deemed a resident due to PoEM in India, it is taxed on its global income, but practical challenges arise, such as:
- Depreciation Claims: Based on tax records in the foreign jurisdiction or books maintained as per foreign laws.
- Loss Set Off: Based on brought forward losses as per tax records or books in the foreign jurisdiction.
- Treaty Entitlement: Entitlement to tax credits per DTAA or the Act.
- Different Financial Years: Foreign companies must align their financial year to match India’s April-March tax year.
Guidelines Issued by CBDT (Section 115JH)
- Depreciation Allowance:
-
- Assessed in Foreign Jurisdiction: WDV from tax records on the 1st day of the previous year.
- Not Assessed: WDV from books maintained as per foreign laws.
-
Set Off of Losses:
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- Assessed in Foreign Jurisdiction: Year-wise brought forward loss or unabsorbed depreciation.
- Not Assessed: Year-wise brought forward loss or unabsorbed depreciation as per books.
- These provisions assume foreign jurisdictions follow similar tax systems, which may not always be the case, necessitating further CBDT rules for divergent systems.
- Tax Credit for Foreign Taxes: Based on DTAA or the Act, foreign companies can claim credit for taxes paid in other countries.
3. Definition of a Foreign Company
- Foreign Company (Section 2(23A)): A company that is not a domestic company.
4. Tax Rates for Foreign Companies
- Basic Tax Rate: 40% on business income.
- Surcharge:
- 2% if income exceeds ₹1 crore but not exceeding ₹10 crore.
- 5% if income exceeds ₹10 crore.
- Health and Education Cess: 4% on the total of income-tax and surcharge.
- Effective Tax Rates:
- Between ₹10 million and ₹100 million: 42.432%
- Above ₹100 million: 43.68%
5. Minimum Alternate Tax (MAT)
- MAT does not apply to foreign companies from DTAA countries.
- MAT exemptions apply to royalties, fees for technical services, interest, and dividends even if no DTAA exists.
MAT Rates for Foreign Companies
Particulars | Income up to INR 10 million | Income between INR 10 million and INR 100 million | Income in excess of INR 100 million |
Foreign Companies | 15.60% | 15.912% | 16.38% |
(Breakdown) | (15% + 4% HEC) | (15% + 2% surcharge + 4% HEC) | (15% + 5% surcharge + 4% HEC) |
6. Taxable Income for Foreign Companies in India
- Income received in India.
- Income accrued or arising in India.
- Income deemed to be received, accrued, or arising in India.
7. Double Taxation Avoidance Agreement (DTAA)
- Foreign companies in DTAA countries can opt for provisions more beneficial under either Indian tax laws or DTAA.
- Requirements for DTAA Benefits:
- Tax Residency Certificate (TRC) from the country of origin.
- Permanent Account Number (PAN) in India.
8. Taxation on Specific Incomes
- Royalties and Fees for Technical Services (FTS):
- Tax rate: 20% from 1.4.2024.
- Dividends:
- Tax rate: 20%.
- For units in International Financial Services Centre (IFSC) from 1.4.2024: 10%.
9. Permanent Establishment (PE) in India
- Definition: A fixed place of business in another country that results in income tax liability in that country.
- Types of PE:
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- Fixed Place PE
- Service PE
- Agency PE
- Taxation with PE: Business income derived from PE is taxed as business income in India.
- Taxation without PE: Income such as royalties and fees for technical services is subject to TDS as per ITA or DTAA.
- PE Concept: Critical for determining tax obligations under DTAA.
- Business profits, royalties, and FTS are taxed at 40% if PE exists.
- Concessional rates apply if no PE exists (e.g., 20% for royalties and FTS).
10. Business Connection, Anti-Avoidance Rules, and Multilateral Instrument (MLI) Agreements
- These provisions ensure that DTAA benefits are utilized in good faith as per the intent of the Indian government.
- Business Connection: Relates to the presence and operations in India influencing tax liabilities.
- Anti-Avoidance Rules and MLI: Prevent tax evasion and ensure adherence to international tax agreements.
11. Tax Rates for Foreign Companies
Tax Rates for Different Types of Companies
- Wholly Owned Subsidiary (WOS) and Limited Liability Partnership (LLP)
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- Treated as resident companies in India.
- Taxed on their global income.
- Project Office, Branch Office, and Liaison Office
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- Treated as foreign companies.
- Taxed only on income received, accrued, or arising in India.
Foreign Companies –Income Tax Rates
Particulars | Income up to INR 10 million | Income between INR 10 million and INR 100 million | Income in excess of INR 100 million |
Foreign Companies | 41.60% | 42.432% | 43.68% |
(Breakdown) | (40% + 4% HEC) | (40% + 2% surcharge + 4% HEC) | (40% + 5% surcharge + 4% HEC) |
IFCCL provide the following Taxation and compliance Services in India.
Pan, Tan, IEC Registation, MSME Registration, LUT, GEM Registration, GST Registration, Shop & Established Registration, GST Registration, GST Return, TDS Return, INCOME TAX RETURN (INDIVIDUAL & COMPANY BOTH), All other compliances consultancy
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