Corporate Income Tax: Taxability of Specified Income Earned by Foreign Company in India
Generally, a foreign company is required to pay tax in its home country, that is, the country of residence. It may earn income from a source in another country, in which case it may also be required to pay tax in the source country. We wish to assist in corporate tax compliances related to the taxability of specified income earned by a foreign company in India. This area falls within broader taxation advisory services and specialized direct tax advisory services for cross-border transactions and inbound tax positions.
Taxability of Specified Income in the Hands of a Foreign Company in Source Country
The following specified incomes may be taxable in the hands of a foreign company in the source country:
- Royalty
- Fees for Technical Services (FTS)
Key Concerns of Taxability of Specified Income Earned by Foreign Company in India
1. Applicability
Specified income is taxable in the hands of a foreign company at the applicable rates.
2. Withholding Tax Requirement
The rate shall be as per the Income Tax Act or the tax treaty rate, whichever is more beneficial, in the case of a foreign company.
3. Compliances and Documentation
- Form 10F
- Few declarations
- Tax Residency Certificate
- Filing of income tax return, etc.
4. Deductibility of Expenses
Specified income is taxable on a gross basis. No expenses are allowable as deduction against specified income.
Challenges
- Satisfaction of tax treaty entitlement conditions, including tax residency, beneficial ownership, and other anti-abuse provisions
- Tax compliance obligations for foreign company, i.e. tax registrations and return filing, etc.
- Cash flow challenges where tax is deducted at a higher rate as compared to the tax treaty rate
Opportunities
- Tax credit may be available in the home country for the foreign company
- Lower cash flow challenge where tax is deducted at a lower rate as compared to the income tax rate
MBG in India’s Approach
- Analysis of taxability of specified incomes
- Examining availability of tax treaty benefit for lowering the tax rate on specified income
- Looking at the option of obtaining lower withholding tax certificate from revenue authorities
- Listing out the compliance requirement, including obtaining tax registration, return filing, etc.
- Checking the availability of tax credit in the home country of the foreign company
Scope of Assistance
The area of assistance would be customized as per your specific requirement.
The tax vertical of MBG in India offers the following:
- Case-based opinion
- Documentation support
- Assisting in Indian tax compliances
- Support on legal aspect
Additional Resources
To further understand the broader framework around foreign company taxation in India, withholding tax exposure, treaty eligibility, and related compliance obligations, the following resources provide relevant context: