Corporate Tax for Foreign Companies: Tax Rates & Income Tax Return in India

The taxation landscape in India can get overwhelming for even the most experienced professionals in India. For foreign companies that are conducting commercial activities within India, we have listed out crucial information that will be useful when they file a return of income in India.

In the following sections, the leading tax consultant in Gurgaon will explain the taxability of foreign companies in India and how to navigate them with ease.

What Does the IT Act Mention about the Taxability of Foreign Companies in India?

According to the Income Tax Act, 1961, the residential status of the company determines the taxation of the income. So, if the foreign company is considered a resident in India, the income will be taxable in India under the Income Tax Act.

Recommended: Residential Status and Its Impact on Taxability in India

What are Domestic Companies and Foreign Companies in India?

A domestic company is considered to be a resident in India and needs to file returns for income in India, as stated by the Income Tax Act. Meanwhile, foreign companies in India may or may not be considered resident in India. The foreign company will be considered a resident of India if it fulfills the following conditions under the Place of Effective Management(POEM) rules in 2017:

• If the company does not actively engage in business outside India.
• If the persons who make vital managerial decisions related to the conduct of the foreign company's business are made within India, and not out of India. 

Taxation of Non-Resident Foreign Companies in India

The foreign companies that do not fulfill the conditions stated under POEM will be considered non-resident foreign companies in India. The company will need to file taxes to the Indian tax department only based on the income that arises within India. The non-resident foreign companies can also choose between the benefits Income Tax Act in India or DTAA agreements as stated under section 90 of the Income Tax Act.

Residential Status and How it Affects Income Tax in India

The residential status of the company will determine the taxability of the company in India. Take a look at this table to learn more: 

Corporate Tax Rates Applicable to the Foreign Company in India

The corporate income tax rates applicable to a foreign company in India are as follows: 

Minimum Alternative Tax (MAT) rates applicable to a foreign company are as follows:

What are Permanent Establishments?

According to Indian law, a fixed place of business that is used by a foreign company to fully or partially carry out business activities is known as a Permanent Establishment(PE). The tax liability of foreign companies is determined through PE in India.

Read Also: What is the Reverse Charge Mechanism for Import of Services in GST?

Implications of PEs in Foreign Companies in India: Effect on Corporate Tax

Article 5 of the Tax Treaties in India has laid down details for PEs. According to the IT Act, there are three types of PEs:

Fixed place PE

• The foreign company has a physical place or a fixed place of business.
• The commercial activities should be partially or wholly carried out in this fixed place with regularity.
• Examples: factories, sales outlets, branch offices, and more.

Agency PE

• If there is an Indian representing the foreign company and entering into contractual agreements.
• If the agent does not have an independent status.
• If the agent receives directions from a foreign entity, represents them on behalf of the entity to carry out activities, and is subject to control.

Service PE

• The control and management are exercised by the PE.
• The commercial activities have a connection with the place of business.
• The place of business has regularly conducted commercial activities for more than 6 months. 

The business income of the PE that is attributable to India will be subject to taxation once the PE of the foreign company is determined. Foreign companies with a PE usually have to pay a minimum tax of 15% for income tax in India, while a non-resident company needs to pay around 40%, as stated under the Income Tax Act. There are more special provisions mentioned under the DTAA(Double Taxation Avoidance Agreement) for income earned and received in India by foreign companies.

Read More: ⁠Disclosures and Penalties of Foreign Assets in Income Tax Return

Conclusion

The Income Tax Department mentions a set of conditions to determine the taxability of foreign companies in India. Once you can identify the conditions, navigating the complex taxation landscape becomes easier.