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Tax issues related to project, branch or liaison offices of foreigners
In order to establish commercial presence in India, a foreign entity may establish a branch/ project/ liaison office in India or invest in an Indian company by subscribing to its shares. The Indian company could either be wholly owned by the foreign entity, or it may have an Indian partner (who may have a majority or minority stake, depending on the commercial understanding and FEMA laws).
Tax implications of various business presence of a foreign entity in India have been discussed below:
  1. Branch or project office:
As discussed above, a branch or a project office of a foreign company in India is regarded as its PE in India, and therefore, the income of such company attributable to such PE will be taxed at 40% (plus surcharge and education cess) in India.
  • Sometimes, a foreign company conducting may have operations in India, and it may so happen that although the Indian activity is intricately connected with the business, it does not generate income in India. In such a scenario, although the operation does not actually generate revenues in India, under Indian income tax law a portion of the total income of the foreign business that is reasonably attributable to the Indian operations will be considered to have arisen or accrued in India, and income tax will be payable on that income.
  1. Liaison office: 
A liaison office of a foreign company in India is usually not considered a PE on the ground that it is set up to carry out preparatory or auxiliary activities (which do not constitute business activities). Although the Foreign Exchange Management Act, 1999 (FEMA) prohibits a liaison office from undertaking a commercial activity, for the purposes of tax law a liaison office may be held to be a PE if it is found to be engaged in a ‘core revenue generating activity’, in India. In such circumstances, the income attributable to the activities of the liaison office will be taxable in India at 40% (plus surcharge and education cess)
  1. Joint venture with an Indian company (including a subsidiary)
  1. If the investment is into an Indian company (i.e., a company registered under the laws of India or the control and management of its affairs is situated wholly in India) the income of such Indian company will be taxed at 32.45%(including surcharge and education cess).
Note that this rate will be applicable if the Indian company does not qualify as a PE of the foreign entity.
  1. Tax on distribution of profits
Typically, a company distributes profits to shareholders by declaring a dividend. Dividends distributed by an Indian company (joint venture or subsidiary) to its shareholders will attract a dividend distribution tax (DDT) of 15% (plus applicable surcharge and education cess) in the hands of such Indian company. Post DDT, dividends by an Indian company are exempt from tax in the hands of the shareholders irrespective of whether the shareholders are resident or non-resident, or individuals or corporate entities.
  1. Transfer pricing provisions (see below) need to be kept in mind for any transactions between the Indian joint venture entity and the offshore investor.

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