Understanding Indian Companies and Foreign Companies under Indian Income Tax Law
The Income Tax Act of 1961 and subsequent amendments have established clear definitions for what constitutes an Indian company and a foreign company. This article aims to provide a comprehensive overview of these definitions and their implications on tax obligations and compliance requirements.
Key Definitions
Under the Income Tax Act, particularly Sections 222A, 223A, and 226, the definitions of Indian and foreign companies are unequivocal.
Indian Company
An Indian company is defined as a company that is:
Registered or incorporated in India, under the Companies Act 2013 or any earlier version. Controlled and managed from India. This means that even if a company is registered outside India, if its management and policy-making functions are based in India, it can be considered an Indian company.This classification is significant as it impacts the corporate tax obligations. Indian companies are required to pay tax on their global income, meaning they are subject to taxation on any profits made from their global operations.
Foreign Company
A foreign company is defined as a company that is:
Not registered or incorporated in India. This includes companies formed under the laws of a foreign country, even if certain aspects of their operations are conducted in India. Not controlled and managed from India. If a company's central management and control are located outside India, it will be considered a foreign company.Unlike Indian companies, foreign companies are only taxed on the income earned within India. This means they are exempt from paying tax on their non-Indian income.
Key Points
Taxation
The tax treatment for Indian and foreign companies differs significantly:
Indian Companies: Subject to tax on their global income, reflecting their international operations. Foreign Companies: Only subject to tax on income earned within India, with additional compliance requirements for transfer pricing and withholding taxes.Transfer Pricing and Compliance
Foreign companies, in particular, can face additional regulatory compliance requirements. These include:
Transfer Pricing: Ensuring that transactions between related companies are reported and valued according to defined standards. Withholding Taxes: Paying specific taxes on certain payments made to foreign entities, such as dividends, interest, and royalties.Resident and Non-Resident Classification
Under Section 226 of the Income Tax Act 1995, a company is classified as resident in India if it has its registered office in India. Otherwise, it is classified as a non-resident. This classification impacts tax obligations and compliance requirements as follows:
Domestic Company (Indian Company): This term covers companies that meet both the criteria of being formed in India and having their effective management within the country. Foreign Company: A company that is not a domestic company, i.e., not registered in India and not controlled from India.Additionally, Section 223A of the Income Tax Act defines a foreign company as one that is not a domestic company. However, a foreign company can still be considered a domestic company if it meets certain prescribed arrangements under Rule 27 of the Income Tax Rules 1962.
Regulatory Arrangements
For a foreign company to be considered a domestic company, it must meet the following arrangements under Rule 27:
The register of members must be maintained at the company’s place of business in India. The general meetings of the company must be conducted only in India. Dividend declarations must be made only to shareholders within India.These requirements are designed to ensure that foreign companies that operate in India maintain significant ties with the country, thereby facilitating compliance with Indian tax laws.
Conclusion
Understanding the definitions of an Indian company and a foreign company under Indian income tax law is essential for businesses operating in India. Proper classification and compliance can significantly impact a company's tax burden and operational strategy. It is advisable for companies to consult with tax professionals to ensure they meet all legal and regulatory requirements.