 |
 |
 |
 |
|
|
||||||||||||||||
| ||||||||||||||||
 |
||||||||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||
|
Home / Foreign office - Taxation Foreign office - Taxation
Basic Principles for Taxability of Foreign Companies:
Foreign Companies are essentially taxed on the income earned through a business connection in India or from other Indian sources. Therefore if a foreign company does not have any business connection in India, then the income of such company cannot be taxed. What is ‘Business Connection’? As per explanation to Section 9 of the Income Tax Act the expression “business connection” includes a person acting on behalf of the non-resident and who:
The business connection does not include cases where the business activity is carried out through a broker, general commission agent or any other agent having an independent status if such person is acting in the ordinary course of the business. A relation is treated as a “business connection” if the relation is real and intimate, and through or from which income must accrue or arise whether directly or indirectly to the foreign company. In order for a business to come within the ambit of Section 9(1)(i), it is necessary that the business relationship between the resident and the foreign company, should be a continuous one and not an isolated transaction. A business connection may take several forms: it may include carrying on a part of main business of the foreign company through an agent, or it may merely be a relation between the business of the foreign company and the activity in India, which facilitates or assists the carrying on of that business. It is important to note that, the expression ‘business’ does not necessarily mean trade or manufacture only and also includes within its scope a profession, vocation or any other calling. Double Taxation Avoidance Agreement: Double taxation is a situation in which two or more taxes may need to be paid for the same financial transaction due to overlap between different countries’ tax laws and jurisdictions. The tax payer may find that he is obliged by domestic laws to pay tax on income locally and pay again in the country in which the income was earned. Since this is inequitable, many countries make bilateral Double Taxation Avoidance Agreements with each other (hereinafter DTAA). In some cases, this requires that tax be paid in the country of residence and be exempt in the country in which it arises. In the remaining cases, the country where the gain arises deducts taxation at source and the taxpayer receives a compensating tax credit in the country of residence to reflect the fact that tax has already been paid.Section 90 of Income Tax Act empowers the Central Government to enter into agreements with foreign countries which are normally termed as Double Taxation Avoidance Agreement (DTAA). India has entered into DTAAs with about 70 countries. The provisions of these agreements take precedence over the provisions of the Income Tax Act, except insofar as the provisions of the Income Tax Act are more beneficial to the foreign companies. The agreements also provide for concessional rate of tax in respect of royalties, dividend, fees for technical services and interest. Tax Treatment of Foreign Offices Branch office A branch office would mean an establishment carrying on largely the same activity as its Parent office. The Branch Office in India is allowed to carry on only the limited activities as prescribed under the RBI Guidelines A branch office can undertake trading activities, but not manufacturing. However, a branch office of a foreign company is not treated as a separate legal entity but is considered to be a part of the foreign company and therefore is liable to tax at 42.23 (40% +2.5 % surcharge + 3% )education on income accrued in India. The only respite is if there exists a double taxation avoidance agreement with the country in which the foreign company is incorporated, the tax paid in India can be set off against the total tax payable by the parent company abroad. Project Office Foreign Companies can set up temporary Project/Site Offices in India to execute specific projects. Such offices cannot undertake or carry on any activity other than the activity relating and incidental to execution of the project. Like a branch office, a project office is also subject to income tax at the rate of 42.23 (subject to Double Taxation Avoidance Agreement). Project Offices may remit outside India the surplus of the project on its completion, general permission for which has been granted by the RBI. Liaison Office A Liaison Office is in the nature of a representative office which is essentially set up to explore market opportunities and understand the business and investment climate. A liaison Office is not permitted to undertake any commercial / trading/ industrial activity, directly or indirectly and therefore it cannot earn any income in India. It is required to maintain itself out of inward remittances received from abroad through normal banking channels and is therefore not liable to any income tax in India. However, the Liaison Office would be required to withhold tax from certain payments and hence to comply with the requisite tax withholding requirements under the domestic tax law.
|
|
||||||||||||||||
|
|||||||||||||||||||
