Establishing a foreign subsidiary in India opens the doors to one of the world’s largest and most dynamic markets. However, along with the growth potential comes the complexity of navigating India’s multifaceted tax landscape. Proper tax planning is essential for foreign subsidiaries to ensure regulatory compliance, minimise tax liabilities, and maximise profitability.
In this guide, we outline key tax planning strategies that foreign subsidiaries can adopt when operating in India.
A foreign subsidiary in India is typically incorporated as a private limited company under the Companies Act, 2013. It is treated as a domestic company for tax purposes and subject to Indian tax laws, including:
Corporate Income Tax (CIT): Applicable on global income earned by the subsidiary in India.
Dividend Distribution Tax (DDT): Abolished from FY 2020-21; dividends are taxable in the hands of shareholders.
Minimum Alternate Tax (MAT): May apply if book profits are higher than taxable profits.
Withholding Tax (WHT): Deducted on certain cross-border payments like royalties, fees for technical services, and dividends.
Goods & Services Tax (GST): Applicable on supply of goods and services in India.
Carefully structuring the capital mix of debt and equity can help foreign subsidiaries minimise tax outflows:
Interest on debt is generally deductible, while dividends are taxed at shareholder level.
Thin capitalisation rules under Section 94B of the Income Tax Act should be considered, which limits interest deductibility on certain related party loans.
Evaluate whether funding through External Commercial Borrowings (ECBs) or inter-company loans is tax-efficient.
Transactions between the Indian subsidiary and its foreign parent or related entities must comply with Indian transfer pricing regulations.
Maintain robust documentation to demonstrate that prices are at arm’s length.
Conduct regular benchmarking studies to avoid adjustments and penalties.
Proper transfer pricing planning ensures smooth intra-group transactions while mitigating the risk of costly tax disputes.
India has an extensive network of Double Taxation Avoidance Agreements (DTAAs) with several countries. Key benefits include:
Reduced withholding tax rates on dividends, royalties, and fees for technical services.
Elimination or reduction of double taxation on the same income.
Proper structuring of contracts and payments can help foreign subsidiaries lawfully claim treaty benefits under the applicable DTAA.
Structure supply chains to minimise GST costs and maximise input tax credit (ITC).
Analyse place of supply rules to determine GST applicability on cross-border transactions.
Ensure timely GST compliance to avoid penalties and interest.
Proactive GST planning can substantially enhance cash flow and compliance efficiency for foreign subsidiaries.
India offers several tax incentives that can benefit foreign subsidiaries:
Section 80JJAA deduction for employment generation.
R&D incentives under Section 35 for certain eligible expenditures.
State-specific incentives in Special Economic Zones (SEZs) or Industrial Parks.
Evaluate eligibility and structure operations to take maximum advantage of such incentives.
Structure payments to parent company efficiently to manage withholding tax costs.
Consider the timing and manner of dividend repatriation based on the applicable tax treaties and domestic tax rules.
Explore alternative profit repatriation methods such as royalty, interest, or technical service fees where appropriate.
A well-planned repatriation strategy ensures that after-tax profits are returned to the parent company in the most tax-efficient manner.
Indian tax laws and international tax standards (e.g. BEPS, MLI) are evolving rapidly.
Monitor changes in regulations, judicial rulings, and global tax trends that may impact subsidiary operations.
Engage with expert tax advisors like TAXAJ to stay compliant and identify new opportunities.