Given the India story, the question amongst the foreign companies is not “Why India” but “Why not India” – and hence we see that almost every multinational has a presence in India in some or other form
This brings us to the question of taxation – how will a foreign company be taxed in India? In this post, I am presenting a very basic overview of the scheme of taxation of foreign companies under the Indian income tax law.
Meaning of Foreign Company
The expression “Foreign Company” has been defined in Section 2(23A) as a company which is NOT a domestic company
So, we need to check the definition of “Domestic Company” u/s 2(22A) which says as follows:
(22A) “domestic company” means an Indian company, or any other company which, in respect of its income liable to tax under this Act, has made the prescribed arrangements for the declaration and payment, within India, of the dividends (including dividends on preference shares) payable out of such income ;
(26) “Indian company” means a company formed and registered under the Companies Act, 1956 (1 of 1956), and includes—
(i) a company formed and registered under any law relating to companies formerly in force in any part of India (other than the State of Jammu and Kashmir and the Union territories specified in sub-clause (iii) of this clause) ;
(ia) a corporation established by or under a Central, State or Provincial Act ;
(ib) any institution, association or body which is declared by the Board to be a company under clause (17) ;
(ii) in the case of the State of Jammu and Kashmir, a company formed and registered under any law for the time being in force in that State ;
(iii) in the case of any of the Union territories of Dadra and Nagar Haveli, Goa†, Daman and Diu, and Pondicherry, a company formed and registered under any law for the time being in force in that Union territory :
If we see the above definition, we can say that in case a company incorporated outside India makes arrangements to pay dividend in India (e.g. maintaining share register, conducting AGM and ensuring that dividends are paid out to Indian shareholders only) – in that case, the foreign company will qualify as a domestic company.
Tax incidence – when and how much is to be taxed?
Tax incidence will depend on the residential status of the company – I’ve separately written a post on the same here:
Rate of tax
Rate of tax for a foreign company having a taxable income in India is a flat 40% + SC + EHEC @ 3%. No exemption limit is available. Surcharge is based on net income or book profit, as follows:
- Upto INR 1 CR: NIL
- 1 CR to 10 CR: 2%
- > 10 CR: 5%
The above is apart from the incomes that are taxable at special rates for e.g. STCG from equity taxed at 15% u/s 111A etc.
Also, u/s 115BBD, if
Scheme of taxation
The tax has to be computed under the normal provisions as well as Minimum Alternate Tax (MAT) provisions – the tax payable is the higher of the two.
Note that MAT does not apply to foreign companies if:
- Assessee is a resident of a country with which India has a DTAA and there is no Permanent Establishment (PE) in India: or
- Assessee is a resident of a country with India does not have a DTAA and assessee is not required to register as per laws of that country
In such situations, a scope for tax planning exists whereby the MAT provisions do not trigger, however it needs to be checked from case to case basis.
As regards MAT, the adjusted book profit as per Schedule VI of the Companies Act has to be considered and MAT is 18.5% of such adjusted book profit.
This tax needs to be topped up with surcharge and education and higher education cess (EHEC) – (as explained above). It may be noted that for a company located at IFSC, the rate of surcharge is 9%
Detailed guidelines are in place on how to adjust the book profit for MAT computation purposes. Foreign company needs to also certify the MAT computation from a CA in Form 29B (download link). This report need to be furnished electronically.
Other points:
- In case dividend income received by individual/HUF, it may be noted that tax liability @ 10% on such income in excess of 10% u/s 115BBDA does not apply to dividend received from foreign companies. Such dividend income though is not exempt u/s 10(38) and is taxable for recipient as “Income from Other Sources”
- Provisions on Dividend Distribution Tax (DDT) are not applicable to foreign companies.
Tax pointers for Indian holding companies of foreign companies
Apart from normal provisions of taxation to such companies, if such a company receives a dividend income from foreign subsidiary (in which it holds > 26% of share capital), this income is taxable at a special rate of 15% + SC + EC+ SHEC u/s 115BBD
Tax pointers for Indian subsidiary company
- Generally, as per Section 79, the carry forward and set off of loss is disallowed in case of change in shareholding > 51% – however, a beneficial provision exists whereby if there is amalgamation/merger of foreign holding company as a result of which > 51% shareholders of erstwhile foreign company are same in new foreign company, then Section 79 will not apply. So, in such cases, this requirement needs to be ensured.
- Indian company will have to deduct DDT on any dividend payments. Also, TDS compliance of Section 195 need to be ensured before remitting dividend to foreign company
- If Indian holding company receives dividend from a foreign subsidiary, the same will be allowed to be reduced from the dividend for DDT calculation purposes provided that the dividend income from foreign subsidiary is taxable in hands of holding company in India (as discussed above, if holding > 26%, it is taxable at special rate of 15%)
Hope the post has been useful to you. Please share your thoughts/feedback.