Setting up foreign subsidiaries in India is a crucial move for International entities to explore and prosper in this highly dynamic global business environment. Apart from giving the opportunity of a market with the highest growth, the subsidiaries also offer to enhance financial performance via tax-efficient reconfiguration of liabilities.
In this post we look at the significance of foreign subsidiaries in India and outline necessary tax planning steps that could help in protecting businesses from threats allowing them to improve their net profit.
What is a Foreign Subsidiary?
A foreign subsidiary company is a company by which the 50 % plus equity belongs to a company that is incorporated in another foreign country. Such a foreign company is termed a holding company or parent company of a foreign subsidiary in India. For a company to become a foreign subsidiary company in India, it is binding to incorporate a company in India. A foreign subsidiary in India is a distinct legal entity held by its parent company.
The manner in which your subsidiary is set up impacts your tax obligations. Pick whatever the tax results are and go with the objectives of business between:
Points for Consideration
Also, it should be kept in mind that the taxation of the foreign subsidiary under Indian law is on some of the important grounds. The Indian government charges a rate of 40% (the foreign-held firms corporate tax rate) on top of the income of foreign companies.
However, there are one or two regimes that this can actually be diminished below. For example, if the head office of the foreign company is in India, then one might also think of reducing it to 20%. Also, if the foreign company really sets and invests a lot of money in India then tax rate may come down further to 15%.
The other significant one is that the Indian subsidiary companies will have to reimburse tax paid on dividends received from a subsidiary firm at the parent level. Generally, it only deducts a withholding tax of 15%. However, this can be cut if the parent company is in a treaty country with India.
Ultimately there are many deductions and exemptions for the tax of foreign subsidiaries in India. For example, there will be no right to pay tax on the sale of goods or services earned through exports from a foreign company. Moreover, deductions may exist for expenses like interest payments or research and development.
Education and Health Cess on Foreign Subsidiaries Company in India
Besides basic income tax, Health and Education Cess (HEC) at the rate of 4% also requires to be paid by foreign subsidiary companies in India on the sum of Income tax and surcharge if applicable.
Surcharge Rate on Foreign Subsidiaries Company in India
The surcharge is an extra tax charged on income above fixed limits and is computed on the amount of income tax calculated as per prevalent rates. For foreign subsidiary companies in India, no surcharge is present if the taxable income of foreign companies in India is under or up to Rs 1 crore. However, a surcharge of 2% is relevant for taxable income over Rs 1 crore but under Rs 10 crore and 5% for taxable income over Rs 10 crore.
Loss Redemption for Foreign Subsidiaries Company in India
Sections 71 and 72 of the Income Tax Act specify provisions regarding carry-forward and set-off losses, but the section does not mention their applicability. Based on landmark case laws associated with that and interpretations, a foreign subsidiary company in India can be suggested to be permitted to carry forward and set off its business losses.
Advance Tax for Foreign Subsidiary Company
As per section 208, every individual, including foreign subsidiary companies in India whose assessed total tax liability for the year is Rs 10,000 or more, shall deposit his tax in advance as advance tax. So, it becomes binding to observe due dates and compliance of advance tax payments for foreign subsidiary companies in India as specified:
By 15th June – At least 15% of advance tax
By 15th September – Minimum 45% of advance tax
By 15th December – At least 75% of advance tax
By 15th March – Minimum 100% of advance tax
Summary of Relevant Forms to Foreign Subsidiary Companies in India
| Sr No. | Form | Provide Details About |
| 1 | 26AS / AIS | Self-assessment tax, Advance tax, TCS, TDS, Demand, Specified Financial Transactions (SFT), Refund, etc. |
| 2 | Form 3CA-CD | To be filed by a taxpayer who needs to perform an audit under income tax and any other law both |
| 3 | Form 16/16A | TDS certificate issued by the deductor to the deductee |
| 4 | Form 29B | To be deposited by a person to whom 115JB applies |
| 5 | Form 3 CE | Accountants report on getting fees/royalties for technical services by Foreign subsidiary companies in India |
| 6 | Form 10CCB | Compulsory to file audit report in 10CCB to demand deductions u/s 80IA, 80IC, 80IB or 80IE |
Due Date for Tax Listing Foreign Subsidiaries Company Tax Return
The due date for tax listing for persons not liable under tax audit is 31 July, while the due date for those whose tax audit is relevant is 31 October. In the event that a person also needs to file a Transfer pricing report, the due date is 30 November. ITR 6 needs to be filed by a foreign subsidiary company.
Taxation for Foreign Subsidiaries in India
Launching a foreign subsidiary in India – Taxation holds the key These subsidiaries are required to pay Indian tax under various heads like corporate income tax, withholding tax, Goods and Services Tax (GST), as well transfer pricing regulations etc. Some of the most important tax obligations here are:
1. Corporate Income Tax
As per the Income Tax Act, 1961, foreign subsidiaries in India need to pay tax on their income accrued globally. The corporate tax rates prevalent are:
- 22% (plus applicable cess and surcharge) for domestic companies preferring not to claim incentives or exemptions.
- 30% (plus cess and surcharge) for companies that prefer to claim exemptions under defined provisions of the Income Tax Act.
Furthermore, Indian subsidiaries need to file annual income tax returns together with the advance tax (if any) to be clear and not liable for penalties.
2. Transfer Pricing
Indias Transfer Pricing regulations are such that subsidiary dealings against its parent company (or different related parties) are performed at arm’s length, implying a fair market value. Transfer pricing compliance requires companies to keep detailed documentation or associated-party transactions and list proper reports with their annual tax returns.
- Transfer Pricing Documentation: Under the Income Tax Rules, subsidiaries involved in international transactions with related enterprises must keep exhaustive transfer pricing documentation.
3. Goods and Services Tax (GST)
GST comprises an indirect tax levied on the supply of goods and services throughout India. Subsidiaries that transact with goods and services in India must get GST registration and follow regular filing necessities. GST rates vary based on the nature and type of goods or services offered, with general rates ranging from 5% to 28%.
4. Withholding Tax (TDS)
Subsidiaries need to withhold tax at the source (TDS) on payments like royalties, interest, salaries, and technical service fees. Non-resident organizations can obtain tax relief under the Double Taxation Avoidance Agreements (DTAAs) of India, with preferential withholding tax rates
For example, if a non-resident is making the payment. Under technical services fees or royalties, the DTAA rates might be lower than changes in withholding tax between India and some other country on account of an agreement.
Wrapping Up
In India, the foreign subsidiaries offer a market with potential but efficient tax planning is the backbone to any successful venture. Knowledgeable in observing tax laws, selecting the best jurisdiction, drafting subsidiaries smartly, winning back transfer pricing, putting some money away from double tax and so on.
Is your foreign subsidiary in India ready to negotiate tax scheduling? Our professional advisory services can help you develop an effective tax strategy that ensures financial success and compliance. Contact us to embark on a tax-efficient venture to expand your business globally.
