Taxation of Foreign Subsidiaries in India:
Taxation of Foreign Subsidiaries in India:
In an earlier article we discussed ways available for foreign companies for investment in India and compliances related to that. In this article we will see taxation policy, rates and other tax related compliances in relation to foreign subsidiaries in India. As per Section 139(1) of Income tax Act 1961 Foreign Subsidiaries companies registered in India is required to file income tax return. However paying income tax in India depend on whether company earning profit in India. After preparation of books of account of Indian company then tax calculation can be done. First, the Indian government taxes the income of foreign companies at a rate of 40% is generally the corporate tax rate applied to foreign-owned firms in India. Taxation of company depended on its residential status.
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How to define residential status for Foreign Subsidiaries in India ?
As per Section 6(3), Residential Status and scope of total income, A company is said to be resident in India in any previous year, if (i) It is an Indian company; or (ii) Its place of effective management, (P.O.E.M.) in that year, is in India. Place of effective management means a place where key management and commercial decisions, that are necessary for the conduct of the business of an entity as a whole are, in substance made. However the provisions of Section 6(3)(ii) are not applicable on companies with turnover upto INR 500 million in a financial year.
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Meaning of Foreign Subsidiaries:
Foreign subsidiary company is a company where 50% or more of the company’s equity is owned by a company which is incorporated in another foreign nation . And such foreign company is called as holding company or parent company of Foreign subsidiary in India. For a company to be a Foreign subsidiary company in India it is mandatory to incorporate a company in India. Foreign subsidiary in India is a separate legal entity owned by its parent company.
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Income tax rate on Foreign Subsidiaries company in India:
Income tax rate applicable to foreign subsidiary companies in India is 40%. Also, Health and Education Cess (HEC)at the rate of 4% also needs to be paid by foreign subsidiary companies in India on the amount of Income tax and surcharge if any. But there are some specified special cases where the tax rate gets reduced if required conditions are fulfilled. Also, Indian income tax laws allow some deductions and exemptions such as research and development expenses,etc.
Important point to note is , branch profit taxation is applied to foreign companies. Which means profits of subsidiaries related to Indian operations are subject to income tax in India at rate of 20% after deducting expenses.
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Health and Education Cess on Foreign Subsidiaries company in India:
In addition to basic income tax,Health and Education Cess (HEC)at the rate of 4% also needs to be paid by foreign subsidiary companies in India on the amount of Income tax and surcharge if any.
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Surcharge rate on Foreign Subsidiaries company in India
Surcharge is an additional tax levied on income above specified limits and is calculated on the amount of income tax calculated as per applicable rates. For foreign subsidiary companies in India no surcharge is there if taxable income of foreign companies in India is less than or up to Rs. 1 crore. Whereas for foreign subsidiary companies in India surcharge at the rate of 2% is applicable for taxable income above Rs. 1 crore but below Rs. 10 crore & 5% for taxable income is above Rs. 10 crore.
To summarize the tax rate applicability of foreign company refer below table:
| Taxable Income → | Up to Rs. 1 Cr | Above Rs.1 Cr but less than Rs. 10 Cr. | Above Rs. 10 cr. |
| Basic Income tax rate | 40% | 40% | 40% |
| Surcharge | NO surcharge | 2% on Basic income tax | 5% on Basic income tax |
| Health & Education Cess | 4% on Basic income tax | 4% on Basic + surcharge | 4% on Basic + surcharge |
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Loss Set off for Foreign Subsidiaries company in India
Provisions related to set off and carry forward of losses are given in section 71, 72 of Income tax act, and section does not specify applicability of section. So, by referring to landmark case laws related to that and interpretations it can be concluded that foreign subsidiary company in India will be allowed to set off and carry forward its business losses.
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MAT applicability for Foreign Subsidiaries company in India:
Incase where, normal tax liability of foreign subsidiary companies in India is less than 15% of book profits except in specified cases as per section 115JB, MAT shall be applicable to the rate of 15% of book profits. Also In addition to that surcharge and cess will also be applicable. However, the Finance Act, 2018 has provided that MAT provisions shall not apply to foreign companies where their total income is solely derived from shipping business, exploration of mineral oils, business of aircraft, civil construction in turnkey projects and income thereon is offered to tax as per specific provisions provided under the Act.
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Advance Tax for Foreign Subsidiaries company
According to section 208, every person including foreign subsidiary companies in India whose estimated total tax liability for the year is Rs.10,000 or more, shal pay his tax in advance in the form of advance tax. Hence it becomes mandatory to follow compliance and due dates of advance tax payments for foreign subsidiary companies in India as follows:-
- By 15th June – Minimum 15% of advance tax
- By 15th Sept – Minimum 45% of advance tax
- By 15th Dec – Minimum 75% of advance tax
- By 15th March – Minimum 100% of advance tax
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Income Tax Forms for Subsidiaries company:
- Form 26AS / AIS: It is a consolidated annual tax statement which contains details about advance tax, self assessment tax, TDS, specified financial transactions,etc. Nowadays, Annual Information Statement (AIS) is given by the income tax department which gives detailed information of tax, TDS and transactions.
- Form 16/16A: It is Tax Deducted at Source (TDS) certificate and issued on deduction of tax by deductor on behalf of deductee. This certificate provides details of TDS/TCS and is mandatory to issue these certificates.
- Form 3CA/3CD: It is required to be submitted by foreign subsidiary companies in India to whom audit under other law and under section 44B of income tax is mandatory. It is required to be submitted till 30th september.
- Form 3CE: It is required to be submitted by foreign subsidiary companies in India doing business in India who are required to obtain a report from accountant u/s 44DA. This should be furnished at least 1 month before the due date of ITR filing i.e. 30th september.
- Form 29B: It is required to be submitted by Foreign subsidiary companies in India who are required to obtain an accountant report u/s 115JB. This report certifies that book profit is computed as per provisions of 115JB.This should be furnished at least 1 month before the due date of ITR filing i.e. 30th september.
- Form 10 CCB: Incase Foreign subsidiary companies in India are claiming deductions u/s 80IA , 80IB, 80IC or 80IE , it is required to obtain a report from accountant and file form 10CCB at least 1 month before the due date of ITR filing i.e. 30th september.
Summary of applicable forms to Foreign subsidiary companies in India:
| Sr No. | Form | Provide details about: |
| 1 | 26AS / AIS | Advance tax , Self assessment tax, TDS, TCS, Specified Financial Transactions (SFT) , Demand, Refund,etc. |
| 2 | Form 16/16A | TDS certificate issued by deductor to deductee |
| 3 | Form 3CA-CD | To be filed by taxpayer who is required to do audit under any other law and income tax both |
| 4 | Form 3 CE | Accountants report on receiving royalties /fee for technical services by Foreign subsidiary companies in India |
| 5 | From 29B | to be submitted by a person whom 115JB applies to.
Report to verify that book profit is calculated as per provisions. |
| 6 | Form 10CCB | Mandatory to file audit report in 10CCB to claim deductions u/s 80IA , 80IB, 80IC or 80IE |
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Due Date for filing Foreign Subsidiaries company Tax Return :
Due date for tax filing for persons not covered under tax audit is 31st July whereas those to whom tax audit is applicable is 31st October. And incase where a person is also required to file Transfer pricing report then the due date will be 30th November. ITR 6 is required to be filed by foreign subsidiary company.
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How to repatriate Profit from India to Foreign Subsidiaries company:
In this financial world, repatriation occurs when a taxpaying entity transfers money overseas back to the country of its parent company. Investors should choose the right strategy for repatriation that reduces their tax liability and increases revenue. In India, profit from India to foreign can be repatriated by way of –
- Dividend
- Buyback of shares
- Interest on loan
- Reduction of share capital
- Fee/ Royalty for technical services,etc.
One of the popular methods of repatriation is using dividend repatriation mode. But now from April 2020, on dividends paid to non-resident shareholders tax is required to be deducted at a rate of 20%. Hence it becomes necessary to consider all factors while making a decision.
Another commonly used method is royalties. Indian companies pay royalty to foreign holding companies for technical collaboration. Royalty payments to foreign companies normally taxed at rate of 10-15% plus surcharge & cess as applicable. Further taxability of royalty is based on DTAA with foreign countries.
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Indian Policy With Respect To Double Taxation Avoidance Agreements :
The Double Taxation Avoidance Agreement or DTAA is a tax treaty signed between India and another country/countries so that taxpayers can avoid paying double taxes on their income earned from the source country as well as the residence country. There are many benefits of DTAA for taxpayers like lower withholding tax, tax credits, tax exemptions, etc.
The rates and rules of DTAA vary from country to country depending on the particular signed between both parties. The Provisions of DTAA override the general provisions of taxing law of a particular country. In India the provisions of the DTAA override the provisions of the domestic income tax.
To apply for DTAA-
- Determine whether transaction is within scope of DTAA
- Check that DTAA treaty is applicable for taxable period in consideration
- Apply relevant definitions, substantive articles, provisions
- Apply the provisions for elimination of double taxation
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