Tax residence and fiscal domicilei Corporate residence
A company is said to be resident in India in a financial year, if (1) it is an Indian company (i.e., incorporated in India), or (2) its place of effective management (POEM) is in India. The phrase 'place of effective management' has been explained to mean 'a place where key management and commercial decisions that are necessary for the conduct of business of an entity as a whole are, in substance made'. With effect from 1 April 2018 the concept of 'significant economic presence' (as defined) has been introduced into the definition of 'business connection'. Also, transactions or activities (yet to be prescribed) undertaken by the non-resident shall constitute 'significant economic presence' in India, irrespective of whether the non-resident has a residence or place of business in India or renders services in India. The CBDT has issued guidelines for the determination of POEM of a company. POEM is, however, not applicable to companies having turnover or gross receipts of 500 million rupees or less in a financial year. If a foreign company's POEM is considered to be in India, its global income shall be chargeable to tax in India at the rate of 40 per cent.
As per the Guidelines, (based on the average data of the relevant year and two years prior to such relevant year) in case of a company that is engaged in 'active business outside India', its POEM shall be presumed to be outside India, if the majority of meetings of the board of directors of the company are held outside India and the board of directors of the company exercise their powers of management and do not stand aside enabling either their holding company or such other person resident in India to exercise the said power. However, if the company is not 'engaged in active business outside India', then the determination of POEM for such company shall be to:
- identify or ascertain the person or persons who actually make the key management and commercial decisions for conduct of the company's business as a whole; and
- identify the place where these decisions are in fact being made.
A non-resident entity may set up branch, liaison or project offices in India. While a liaison office acts as a representative office of its parent company in India, a branch office is an establishment of the parent entity and can carry out the same or substantially the same activities as its parent company. A project office is permitted for specific projects to be undertaken in India, by the person resident outside India. Although these vehicles may be used by a non-resident, their use is not particularly popular given that the activities that such offices may undertake are heavily regulated and restricted by the RBI.
A branch of a foreign company is taxed as a foreign company in India at the rate of 40 per cent.
Activities carried out by foreign companies should be carefully examined to determine the existence of a permanent establishment (PE) of the foreign company in India. In the case of a PE, income of the foreign company that is attributable to the activities of the PE in India will be subject to tax at the rate of rate of 40 per cent.
Typically, the kinds of PEs common to India's tax treaties are fixed place PE, service PE and dependent agent PE.
For the purpose of attribution of profits, the Indian PE is considered as a fictional entity separate from the foreign enterprise dealing with the latter on an arm's-length basis. No specific rules for attribution of profits are provided under Indian laws, and such attribution is a complex determination.
Further, in keeping with Action Plan 1 on tax challenges of the digital economy, India introduced an equalisation levy of 6 per cent in respect of certain specified digital services in the online marketing and advertising space rendered by non-residents who do not have a PE in India. However, such income shall not be taxable in the hands of the recipient.