A: Scope of Taxability on Non resident companies in India

In India, companies are taxed on their income according to their residential status. A company with residential status in India will be taxed on its global income whether earned in India or outside India whereas a non resident company will be taxed only on income received, accrued or arise 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.

Section Type of company Residential Status Taxability
6(3)(i) Indian company Always resident in India Tax on global income
6(3)(ii) A Non resident company whose turnover exceeds INR 500 million Will be deemed to be a Resident in India Global Income attributable to the company will be taxed in India.
6(3)(ii) A Non resident company whose turnover is upto INR 500 million Always Non resident in India Tax only on Income received, accrued or arise in India

B:Taxation Rate

  • Non resident or foreign companies are taxed at 40% of the total income
  • Plus: An additional surcharge @2% of tax where total income exceeds INR 10 million but do not exceed INR 100 million or additional surcharge @5% of tax if total income exceeds INR 10 million
  • Plus: Health & Education Cess: An additional cess of 4% of such tax and surcharge shall be added.

C: Minimum Alternate Tax

MAT provisions are not applicable to foreign companies that do not have a permanent establishment (PE) in India. 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.

Capital gains from transfer of securities, interest, royalties, and fees for technical services accruing or arising to a foreign company (which has a PE in India) have been excluded from chargeability of MAT if tax payable on such income is less than 15% (exclusive of surcharge, education cess, etc.). Further, expenditure, if any, debited to the profit and loss account corresponding to such income shall be added back to the book profit for the purpose of computation of MAT.

Income * Indian company Foreign company (other than exempted)
Rate of MAT (%)
Basic ** Including surcharge, health  and education cess (effective tax rate) Basic Including surcharge, health and education cess (effective tax rate)
Less than INR 10 million 15 15.6 15 15.6
More than INR 10 million but less than INR 100 million 15 16.692 15 15.912
More than INR 100 million 15 17.472 15 16.38

* Surcharge is payable only where total taxable income exceeds INR 10 million.

** Basic rate of MAT is 9% of book profits in case of a corporate and non-corporate taxpayer located in an international financial services centre and deriving income solely in convertible foreign exchange.

D: Taxability of Royalty and fees for technical services in hands of Foreign company

Royalty and fees for technical services are taxed differently than a flat rate of 40% .

Its taxability depends whether the foreign company has a Permanent establishment in India or performs professional services through a fixed place of profession situated in India

(i) If  the foreign company has a P.E. or a fixed place of profession and the right, property or contract in respect of which royalties or fees for technical services are  effectively connected with such P.E. or fixed place of profession then such income shall be taxed as per Section 44DA as per which income is taxed @ 40% (after deduction of expenses) (plus 2% or 5% surcharge) plus 4% education cess

(ii) If foreign company does not have a P.E. or fixed place of profession then such income shall be taxed as per Section 115A taxed @10% (without any deduction of expenses) (plus 2% or 5% surcharge) plus 4% education cess

The author is part of team of M/s One Stop Consultants & Services L.L.P. , who specialises in solving the problems faced by non resident investors in matters of accounts , taxation , cross border transactions etc. Determination of P.O.E.M. and taxability of foreign company is a complex exercise and a foreign company should seek professional assistance in determining it. Contact us  at [email protected]

 

Author Bio

Qualification: CA in Practice
Company: www.consultantsonestop.com
Location: DELHI, New Delhi, IN
Member Since: 12 Mar 2020 | Total Posts: 4
CA Onam aggarwal is the Managing Partner at ONE STOP CONSULTANTS AND SERVICES LLP. She is an associate member of the Institute of Chartered Accountants of India. Earlier, She was associated with Deloitte India in Audit and Assurance division. She is an alumni of Shri Ram College of Commerce ranked a View Full Profile

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8 Comments

  1. Howard Miyahara says:

    Hello. I have a question with regards to 2 non-resident companies and a local company in India. One of the non-resident (Company A) sells all of its shares to another non-resident (Company B) I am curious as to who is responsible for payment to the Indian tax authorities of withholding tax earned by the local company in India, if the local company is originally owned by non-resident, Company A? Can you please help? There are no other shareholders except Company A and Company B.
    Thank you.

  2. Shrujal Patel says:

    “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.”
    INR 500 million in a financial year refers to turnover of forin company owned by Indian company or the turnover of Indian parent company.. please clarify.

    1. Mohit Mittal says:

      “INR 500 million in a financial year refers to turnover of foreign company owned by Indian company or the turnover of Indian parent company. please clarify.”

      It is applicable on the turnover of the company which is incorporated/registered in India and not the parent company

  3. Shivani Rawat says:

    I have a query regarding TDS under section 195, an Indian NGO are taking cloud services from the foreign companies which do not have any establishment in India. Is it will be taxable or not

    1. Mohit Mittal says:

      Dear Shivani
      As per the query the applicability of TDS on cloud services depend on the country in which the foreign company is established
      (To check the FTS clause of DTAA)
      2. Depends on the agreement and the nature of service being provided.(Cloud services is a very broad term )

  4. Sahil Bakshi says:

    Dear MAM,

    Please kindly can you please tell that what are the rules regarding opening a bank account in INDIA by a foreign company? I would be very grateful to you. 🙂

    Regards,
    Sahil Bakshi

  5. jay says:

    Madam,
    What are the tax liabilities for a brokerage firm based in india, for their income earned from cross trading outside india( brokerage margin of around 2% on shipments).
    Is it better to have a foreign partner for less tax liability or not.

    Thank you

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