Foreign Companies, their tax rates & filing of Income Tax Return in India

Picture of by Neha Raheja
by Neha Raheja

Senior Advisor - Direct & International Tax

Foreign companies are very enthusiastic about setting their footprint in India & establishing their commercial presence here. Foreign companies can set up a Wholly Owned Subsidiary in India, a Limited Liability Partnership, a Project Office, a Liaison Office, a Branch Office, etc.

A Wholly Owned Subsidiary & a Limited Liability Partnership are companies resident in India and accordingly, the tax rates applicable to domestic companies apply to them.  A Project Office, a Branch Office, and a Liasion Office are treated as foreign companies.

In India, companies are taxed on their income depending upon their residential status. A company resident in India is taxed on its global income. A non–resident company or a foreign company is taxed only on income earned in India and accrued in India.

A Company is treated as a resident of India in any previous year if :

  • It is an Indian Company;
  • Its Place of Effective Management (POEM) in that year is in India. POEM means a place where key management & commercial decisions that are necessary for the conduct of the business of an entity as a whole are, in substance made.

Residential Status of a Company:

Section

Company

Residential Status

Taxability

6(3)(i)

Indian Company

Resident in India

Global Income is taxed in India.

6(3)(ii)

A Foreign Company (turnover/gross receipts exceeds INR 50 crore)

Will be a resident in India if POEM is in India

Global income attributable to the foreign company is taxable in India

6(3)(ii)

A Foreign Company (turnover/gross receipts are less than INR 50 crore)

Non – Resident in India

Tax only on income received, accrued, or arising in India

A foreign company that does not have a POEM in India shall be considered a non–resident company and shall be taxable only on income that accrues or arises in India.

However, under s. 90 of the Income Tax Act 1961 (‘ITA’), a non–resident company is provided with the option to choose between the Income Tax Act 1961 (‘ITA’) and Double Taxation Avoidance Agreement (‘DTAA’) whichever is more beneficial to the taxpayer company. Hence, at this point, the concept of Permanent Establishment (‘PE’) is important.

What is a Permanent Establishment?

The term Permanent Establishment (‘PE’) in International Taxation means a fixed place of business in another country or state that results in income tax liability in that state/jurisdiction.

The business income of a non–resident company that arises directly or indirectly from its PE is taxed in India.

A Permanent Establishment is defined in every DTAA. Article 5 of a DTAA generally contains criteria for the establishment of a PE in India. A PE could be a Fixed Place PE, Service PE or Agency PE.

Once, it is established that a foreign company has a PE in India, then business income (i.e royalty, fees for technical services, etc. ) derived from a PE will be taxable in India as business income.

What happens if a foreign company does not have a PE in India?

If a foreign company does not have a PE in India, any income derived by way of fees for technical services, royalty etc. is deemed to accrue or arise in India & the company making payments to such foreign companies is required to deduct TDS as per the provisions of the ITA or DTAA which is more beneficial to the foreign company.

Here, it is important to note that since the foreign company does not have a PE in India, the provisions of MAT do not apply.

Tax Rates

The corporate income tax rates applicable to a foreign company in India for FY 2022 – 2023 are as under : 

Particulars

Income upto INR 10 million

Income between INR 10 million upto INR 100 million

Income in excess of INR 10 million

Foreign Companies

41.60%

(40% basic + 4% HEC)

42.432%

(40% basic + 2% + surcharge + 4% HEC)

43.68%

(40% basic + 5% + surcharge + 4% HEC)

Rates of MAT as applicable to a foreign company are as under:

Particulars

Income upto INR 10 million

Income between INR 10 million upto INR 100 million

Income in excess of INR 10 million

Foreign Companies

15.60%

(15% basic + 4% HEC)

15.912%

(15% basic + 2% + surcharge + 4% HEC)

16.38%

(15% basic + 5% + surcharge + 4% HEC)

Application of a Permanent Account Number (‘PAN’)

A Branch Office, Liaison Office & a Project Office are considered to be foreign companies in India. As these companies are required to file their income tax returns in India, it becomes essential for them to obtain a PAN in India. 

A foreign company having a PE in India is required to obtain a PAN since it is required to file its income tax return in India. However, a foreign company not having a PE in India which earns income in India by way of royalties or fees for technical services is not mandatorily required to obtain a PAN in India.

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