Such taxes are already implemented in countries like the USA, where the income generated by foreign entities is subject to branch tax. The establishment of a branch office in India by an overseas company is governed under Section 6(6) of The Foreign Exchange Management Act (FEMA), 1999.
Let us have a look at four important things about this tax to understand it better-
1. What is Branch Tax?Branch tax is an additional tax which branches of foreign companies are required to pay on the profits they repatriate to their headquarter outside India. This tax is over, and above the standard corporate tax, such branches are subjected to.
This branch tax is equivalent to the dividends tax branches of foreign companies are required to pay when they distribute the profits in the form of dividends.
2. What is the Current Branch Tax Rate?The branch tax is divided into three different categories based on the income generated, and the tax rate varies in all the categories.
|Income||Branch Tax Rate|
|<Rs. 10 million||41.60%|
|<Rs. 100 million||42.43%|
|>Rs. 100 million||43.68%|
3. Can the Branches Make Use of DTAA?According to the Double Tax Avoidance Agreement (DTAA), a branch of a foreign entity is only subjected to taxes in India if it has a Permanent Establishment (PE) in the country. The DTAA defines PE as a fixed place from where a business is partly or wholly operated.
In case if India has not signed a DTAA with the country where the headquarter of the company is located, the branch would be required to pay taxes in India as well as its home country.
4. Why Do Foreign Companies Prefer Forming a Subsidiary Over a Branch Office?Most foreign companies prefer forming a subsidiary in the form of a private company to start their operations in India. With this, the subsidiary becomes eligible for all the deductions and exemptions that are available for domestic companies.
Even with regards to liabilities, branch offices are considered an extension of the parent company. So, the parent company is responsible for all the liabilities of the branch office. But a subsidiary is a private company with liabilities limited to the extent of shareholding. Even the process of setting up a subsidiary and repatriating funds to the parent company outside India is easier with a subsidiary.
Branch Tax in IndiaGlobally, India has one of the highest branch tax rates. But just as the Finance Ministry has recently reduced the corporate tax for domestic companies, it is expected that even the taxes on branch offices of foreign companies would be reduced soon to attract foreign investments.
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The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.
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