Introduction
India is now one of the top places for investors from around the world. The economy is growing quickly, the number of people who buy things is growing, and recent changes have made it easier to do business. Because of this, more global brands are setting up shop here. According to the Department for Promotion of Industry and Internal Trade (DPIIT), India received over USD 596 billion in foreign direct investment between 2000 and 2024.
There are many opportunities, but it is important to understand taxation before starting a company. The business structure you choose, the tax rate, and the compliance process can all affect your profits and growth.
The purpose of this blog is to simplify foreign corporations taxed in India. It will walk you through the main business structures, tax obligations, and key compliance requirements. So that you can make informed decisions right from the start.
Entity Options for Foreign Companies
There are multiple structures for Foreign investors to enter India. Here, we have different tax rules and compliance conditions. Therefore, it is very important to choose the right one for smoother operations and better tax efficiency.
1. Wholly Owned Subsidiary (WOS)
A Wholly Owned Subsidiary is an Indian company where all the shares are held by a single foreign parent company. As for the tax, it’s treated like a domestic entity and enjoys the same benefits as the Indian companies.
- Tax Benefit: You can get lower tax rates, like 25% (including surcharge and cess).
- Legal Protection: Because it is a separate legal entity, parents are not fully responsible for it.
- Flexibility in business: It can trade freely, make money, and bring profits back to its home country once certain legal requirements are met.
2. Branch Office / Project Office
A Branch Office or Project Office is like an extra office for the foreign parent company. It is not a separate legal entity.
- Tax Rate: From the beginning of April 2024, foreign companies (including branch offices) are subject to a tax rate of 35%. The previous tax rate was 40%.
- Scope of Work: A foreign company may conduct trading, consultancy, or project execution, but must obtain the approval of the Reserve Bank of India (RBI).
- Compliance: All income is subject to local tax in India.
3. Liaison Office (LO)
A Liaison Office can’t earn income in India. It acts mainly as a communication or coordination channel between the parent company and Indian clients.
- Permitted Activities: Market research, brand promotion, and coordination.
- Taxation: It is not taxed because there is no income earned.
- Limitation: It cannot enter contracts, raise invoices, etc..
Note: Many foreign companies start up with a liaison/project office and then convert to a subsidiary to give more flexibility and control.
✅Click here to read more about Company Registration for Foreigners & NRIs
Corporate Tax Rates (As per 2025)
The corporate tax rate in India changes based on whether your business is international or domestic..
- Foreign companies or branch offices are taxed at 35% (plus surcharge and cess) starting from April 2024, before this rate was 40%..
- Indian subsidiaries (domestic) can benefit from concessional regimes at 22% (plus cess) under Section 115BAA.
- New manufacturing companies are able to opt for a rate of 15% under Section 115BAB.
Additionally, if the book profits are more than taxable income, Minimum Alternate Tax (MAT) of 15% will apply.
Generally, subsidiaries will be taxed at a lower effective rate than the branch office, but the appropriate structure will depend on your goals for the business and the way it has been structured to operate.
Permanent Establishment (PE) & Business Connection
Permanent establishment (PE) is related to whether a foreign company's business presence in India is significant enough for taxation in India.
Common scenarios that create a PE include:
- Having an office, warehouse, or factory in India.
- Having an agent who regularly signs contracts on behalf of the foreign company.
- Running a construction or installation project in India for more than six months.
If a PE exists, the portion of income attributable to that PE becomes taxable in India. To avoid unexpected liabilities, foreign companies should review contracts and operations carefully before entering the market.
Withholding Tax on Cross-Border Payments
Whenever an Indian entity makes a payment to a foreign company, such as for services, royalties, or technical support. It must deduct tax at source (TDS) before sending the money abroad. This deduction is known as withholding tax.
Here are a few common payment types:
- Royalties based on intellectual property/software usage
- Interest on loans / other borrowings
- Technical / Consultancy fees
- Dividends distributed to foreign shareholders
India has Double Taxation Avoidance Agreements (DTAA) with over 90 nations in order to eliminate taxation on the same income at two levels. To take advantage of the treaties, companies should submit a Tax Residency Certificate (TRC) or Form 10F, if applicable.
For Example: an Indian subsidiary paying royalties payments to the parent company in the U.S. would only be subject to a 5% tax under the India-U.S. DTAA rather than the normal 10% tax.
GST (Indirect Tax) Implications
Foreign businesses should also evaluate GST (Goods and Services Tax) obligations.
A foreign company must register for GST if it:
- Supplies goods or services in India, or
- Offers online digital services (OIDAR) to Indian consumers.
Since the exporting services are a zero-rated supply, no GST will be collected, and the company can claim the input tax credits.
A business may also be obliged to GST Registration even when it does not have a physical presence in India, only by providing taxable services to the Indian customer. As long as you have registered and filed appropriately, you will be able to operate normally and avoid being penalized for inaction later.
Transfer Pricing Compliance
When a foreign company has an Indian subsidiary or branch, transactions between the two must follow the arm’s length principle. It means the price charged should be the same as it would be between unrelated parties.
Every foreign-owned entity must maintain:
- A Transfer Pricing Study Report that outlines pricing methodology.
- Inter-company agreements in place to define the responsibilities and payment terms.
- Form 3CEB certified by a CA confirming compliance.
If all criteria are not met, you risk a fine of up to 2% of the amount of the transaction. It is always advisable to have documentation to reduce compliance risks and regularly review your suppliers’ pricing policies, at least annually.
Common Mistakes & How to Avoid Them
Here are a few common mistakes that foreign entities make and how to mitigate the issue:
- Choosing the wrong entity type: Taxes on branch offices are much higher than on subsidiaries. Before making a decision, always look at all your options.
- Ignoring DTAA or TRC paperwork: You can't claim treaty benefits unless you have the right paperwork.
- Improper profit repatriation: If you send money abroad without following FEMA rules, you could face fines.
- Missing GST registration: Even service providers that don't have offices in India may need to sign up.
- Skipping transfer pricing documentation: To keep from being checked out, always fill out and file Form 3CEB.
Pre-Entry Tax Checklist for Founders
Every founder should go over this list before starting a business in India:
- Choose the best structure for your business.
- Look at the tax rates for different types of entities.
- Find out if you qualify for DTAA and get ready for TRC.
- Make deals between businesses.
- Go over your duties for GST and other taxes.
- Prepare transfer pricing documentation.
- Set a compliance calendar for all filings.
- For ongoing help, talk to a tax expert in your area.
If you plan ahead now, you'll save time, money, and stress later.
Strategic Importance of Proper Tax Planning
A good tax plan ensures that businesses can operate legally and positively benefit from the tax framework of their country. A strong tax structure helps to increase ROI, build stakeholder confidence, and establish regulatory consistency.
Long-term tax relationships tend to be smoother, more effective, and ultimately, better for the financial health of the businesses involved. When companies prioritize long-term relationships with their tax advisors instead of employing a short-term savings mentality.
Foreign tax clients can avoid disputes and improve their tax situations by working with experienced tax advisors from the start.
Conclusion
A good tax plan makes sure that businesses can legally run and use the tax system in their country. Every little thing matters when it comes to making money, from picking the right business structure to handling corporate taxes, GST, and transfer pricing.
At Juststart, we help foreign founders with all of their legal, tax, and compliance needs, from registering their business to sending their profits back home. Therefore, you can focus on growing your business in India with confidence because our experts can help you with hard tasks.
With careful strategizing and support, India’s dynamic economy can present a limitless market for foreign investors.
FAQs (Frequently Asked Questions)
1. Do foreign businesses that don't have an office in India have to pay taxes?
Yes, taxes may apply according to DTAA rules if the income comes from India, like royalties or service fees.
2. Why do branch offices pay more taxes than subsidiaries?
Branches are taxed at a higher rate (35%) than subsidiaries, which are taxed at a lower rate (22%).
3. How do taxes work on royalties or technical fees?
If you get payments like these, you might have to pay withholding tax, which is usually between 10% and 20%, depending on the DTAA.
4. How can profits be repatriated?
Dividends, royalties, and fees can all be used to move profits, as long as they follow FEMA and transfer pricing rules.
5. What does the GST mean for businesses owned by people who don't live in Canada?
You need to register for GST if your business sells goods or services to India, even if you don't have a store there.
6. What will happen if you don't follow the rules for changing prices?
You could get in trouble with the law, lose money, and face fines if you don't follow the rules.
7. Do new companies that make things get tax breaks?
Yes. Section 115BAB says that new manufacturing subsidiaries may be able to get a 15% tax rate.
8. Do businesses from other countries have to pay taxes in India?
Yes, they are taxed on that income if they make money in India or have a business connection there.
9. What can foreign businesses do to avoid paying taxes twice?
A valid Tax Residency Certificate (TRC) lets foreign companies get relief under the DTAA (Double Taxation Avoidance Agreement).
10. Do foreign businesses have to keep records of their transfer pricing?
Yes, if they do business with their parent or group companies, they must have the right transfer pricing paperwork.
