Taxation of Foreign Companies in India – Key Rules, Rates & Compliance
Foreign companies earning income from India are subject to specific taxation rules under the Indian Income Tax Act. Whether operating through a branch, project office, or having passive income sources like royalties or technical fees, understanding the applicable tax rates, permanent establishment implications, and compliance requirements is critical.
At Jain Prachi & Company, we help international businesses navigate India’s direct tax regime efficiently and stay compliant.
Who is Considered a Foreign Company under Indian Tax Law?
A foreign company is one that is incorporated outside India but earns income from Indian sources.
Common examples include:
- Branch offices of overseas companies
- Liaison offices with limited permitted functions
- Companies supplying goods/services to Indian customers without physical presence
- Offshore service providers having a Permanent Establishment (PE) in India
How Are Foreign Companies Taxed in India?
Foreign companies are taxed based on the source rule of taxation—i.e., income arising in India is taxable in India, regardless of the company’s country of incorporation.
Taxation depends on:
- Nature of income
- Existence of Permanent Establishment (PE)
- Applicability of Double Taxation Avoidance Agreement (DTAA)
Applicable Tax Rates for Foreign Companies (AY 2024–25)
Income Type | Tax Rate |
Business income (with PE) | 40% + surcharge + cess |
Royalty or technical fees (no PE) | 10% to 20% (as per DTAA) |
Capital gains on shares/securities | 10% to 20% (depending on STCG/LTCG) |
Interest on loans | 5% to 20% (subject to DTAA) |
Dividend income | 20% (may vary under DTAA) |
Note: Effective tax rate may go up to ~43.68% due to surcharge and cess.
Permanent Establishment (PE) – The Deciding Factor
If a foreign company has a Permanent Establishment in India, its business income attributable to that PE is fully taxable in India.
Common forms of PE:
- Fixed place of business (branch/project office)
- Agent conducting contracts on behalf of the foreign company
- Installation or construction sites exceeding specified duration
Without a PE, only passive income (like royalty, interest, dividend) is taxable under Section 115A, usually at lower flat rates.
Withholding Tax Obligations for Foreign Companies
When Indian entities make payments to foreign companies, withholding tax (TDS) applies.
Payment Type | TDS Rate (Subject to DTAA) |
Royalty/Fees | 10% to 15% |
Interest | 5% to 20% |
Technical Services | 10% to 20% |
Compliance Requirements for Foreign Companies
- PAN and TAN Application
To file tax returns and receive payments, a Permanent Account Number (PAN) is mandatory.
- Income Tax Return Filing
Even if TDS is deducted, filing ITR-6 is often mandatory, especially when PE exists.
- Tax Audit (If applicable)
If total turnover or receipts exceed ₹1 crore, a tax audit is required.
- DTAA Benefit Claims
To avail lower tax rates under DTAA:
- Obtain Tax Residency Certificate (TRC)
- Submit Form 10F and self-declaration
How Jain Prachi & Company Supports Foreign Companies in India
- Determination of tax liability based on income structure
- Strategic advisory on PE assessment and business model structuring
- DTAA planning to reduce effective tax rate
- End-to-end support in filing ITR, Form 3CEB, and Form 15CA/CB
- Representation during tax audits or queries from the Income Tax Department
Why Foreign Businesses Prefer Jain Prachi & Company
- Deep domain expertise in international tax
- Prompt and confidential handling of financial data
- Hands-on experience with over 50+ global clients
- Seamless compliance support from incorporation to remittance
Looking to Minimize Tax Exposure in India? We Can Help.
Ensure tax compliance while optimizing your global tax position. Speak with our experts to structure your operations and tax filings efficiently.
📧 Email: contactus@jainprachi.com
🌐 Website: https://jainprachi.com
FAQs – Taxation of Foreign Companies in India
Q: Do I need to file an ITR in India if TDS is already deducted?
Yes, particularly if your income is business-related or if you’re claiming refunds or DTAA benefits.
Q: Can I avoid taxation in both countries?
No. However, Double Taxation Avoidance Agreements (DTAA) help avoid being taxed twice on the same income.
Q: What if I only provide services from outside India?
If no PE is created in India, income is generally taxed at lower rates under Section 115A or DTAA.
