Navigating Indian tax compliance requirements for foreign companies: A strategic guide

published on 22 January 2025 | reading time approx. 5 minutes

International tax landscape is growing dynamic, with ever-increasing focus of jurisdictions on ensuring appropriate share of tax liability is discharged by taxpayers and increased scrutiny from tax authorities to ensure the same. This poses challenges for multinational corporations (MNCs) looking to engage in business activities in the international markets. MNCs often engage in diverse business transactions with entities in other jurisdictions, including own subsidiaries/affiliates, and hence, need to navigate a complex array of tax obligations in respective jurisdictions.

Tax Residency Certificate and Online Form 10F »
Annual Tax Return compliance obligations »
Indian Tax registration number »
Transfer Pricing (TP) Compliance requirements »

These cross-border interactions generate various income streams, each potentially subject to India's tax regime. Typical revenue avenues for foreign companies include:

Sale of Goods
Licensing and Royalties towards technology, trademarks, or other intellectual property
Technical Services such as consulting, engineering, and IT support, to Indian companies.
Income from financing through loans, or other financial instruments
Dividends from Investment in shares

Given India’s multifaceted tax framework, India is no exception to this rule. Hence, foreign companies generating income in India while operating from outside India need to understand the critical compliance requirements in India to minimize risks and ensure adherence to local tax regulations. This article provides an explanation on the routine tax obligations that foreign companies must navigate, when operating in India. These compliance requirements in India may arise for foreign companies regardless of whether they have a formal presence in India or not, so far as income is accruing to foreign entity from India.

Tax Residency Certificate and Online Form 10F

Indian payers are required to withhold taxes if the underlying income is subject to tax. As per Indian tax laws, one of the conditions to claim Double Taxation Avoidance Agreement (DTAA) benefits for non-residents is to obtain a tax residency certificate (TRC) issued by tax authorities in their home country. This certificate confirms the company’s residency status and includes crucial information such as the non-resident’s status, nationality, tax identification number, period of residence, and address outside India.

The Income tax laws also require information in the prescribed Form, if the TRC lacks these details (Form 10F).

Form 10F is an essential document used by non-resident taxpayers to claim tax benefits under an applicable DTAA with India. Non-compliance with the Form 10F requirement will result in denial of DTAA benefits to non-resident by payer, while withholding taxes from payments to non-residents.

Filing Form 10F Electronically

The Income Tax Department has simplified the process for non-residents to file Form 10F electronically. For filing Form 10F electronically, non-residents were previously required to register themselves on the Income Tax Portal with their Indian Tax registration number in India (PAN). However, the income tax department has provided a functionality on the portal to allow non-residents without a PAN to register themselves.

To register on the Income Tax Portal, non-residents need to furnish the following details:

Basic Details: Name of the taxpayer, date of incorporation, tax identification number, and country of residence
Key Person Details: Full name of the key person, date of birth, tax identification number, and designation
Contact Details: Primary mobile number and email ID, secondary mobile number and email ID, and postal address. The primary mobile number and email ID will be verified by OTP
Attachments: Non-residents must upload ID proof, address proof, and a copy of the TRC on the Income Tax Portal. The ID and address proof must be valid documents in the non-resident’s country of residency

Once non-residents have provided all the details and verified the OTP, they will receive a user ID sent to their registered email. This will allow them to log in to the Income Tax Portal. After that, they can upload Form 10F electronically by submitting their TRC and verifying the OTPs sent to their mobile and email. With this, even the need for a Digital Signature Certificate (DSC) to furnish TRC electronically has also been done away with.

Annual Tax Return compliance obligations

In India, the withholding tax rate on royalties, fees for technical services (FTS), interest, and dividends is set at 20 percent, plus surcharge and cess under the domestic tax law.

However, foreign entities can benefit from reduced withholding tax rates under India’s DTAAs with their country of residence, generally lowering the tax burden to 10 percent or 15 percent.

For example, sample withholding tax rates as per DTAA between India and some of the countries are as follows:

Country	Dividends	Interest	Fees for technical services	Royalities
Germany	10%	10%	10%	10%
UK	15%/10%	10%/15%	10%/15%	10%/15%
USA	15%/25%	10%/15%	10%/15%	10%/15%
Italy	15%/25%	15%	20%	20%
Switzerland	10%	10%	10%	10%
Romania	10%	10%	10%	10%
Spain	15%	15%	10%	10%
Czech Republic	10%	10%	10%	10%
France	10%	10%	10%	10%

It’s important to note that the withholding tax rate may escalate to 35 percent (plus surcharge and cess) if income is effectively connected to a Permanent Establishment (PE) in India, as explained in the ensuing paragraphs.

Consequential compliance requirement for foreign companies to file an Indian tax return arises, if a lower withholding tax rate under DTAA is applied. This tax return essentially allows the Indian tax authorities to verify eligibility for DTAA benefits and confirm proper income reporting, if tax is withheld and offered at the lower DTAA rate. The entire process of filing tax return is online.

Indian Tax registration number

As detailed above, the non-resident who will be claiming the benefits under the DTAA would be required to file the tax return in India. To file a tax return in India, it will be imperative for the non-resident to obtain the Indian tax registration (PAN) in India as without the same, one cannot file the tax return.

Transfer Pricing (TP) Compliance requirements

Foreign companies entering into international transactions such as technical services, royalty/license fees, interest, guarantee commission, etc. with its Associated Enterprises that give rise to taxable income in India must adhere to TP compliance requirements under Indian tax laws. To comply with these compliances, foreign companies must maintain adequate documentation to substantiate the pricing of inter-company transactions. This documentation typically includes a thorough analysis of the pricing methodology, a functional and economic analysis, and benchmarking studies that demonstrate the arm's length nature of the transactions. The documentation requirements have a threshold, meaning that only those entities exceeding certain transaction limits are obligated to maintain such documentation. Furthermore, ensuring proper financial planning is essential, as the lack of comprehensive transfer pricing documentation can result in substantial TP adjustments. Additionally, a TP audit report is mandatory for foreign companies, and failure to comply with the same can lead to potential penalties.

Understanding PE and Non-PE Scenarios

Foreign companies often encounter complex tax issues related to PE status. The determination of whether a foreign company has a PE in India is pivotal for tax compliance.

If a foreign company establishes a PE in India, it becomes liable to Indian taxes on net income directly linked to the PE. Understanding these tax implications is critical to avoiding penalties and ensuring proper financial planning. Non-compliance with the requirement of filing returns in India could lead to several consequences including withholding of taxes at higher rate on payments made to foreign company. Therefore, ensuring compliance with PE return filing is crucial to avoid higher tax deductions, potential penalties, and complications with Indian tax authorities.

The Importance of Timely and Accurate Documentation

Staying abreast of India’s evolving tax requirements is essential for foreign companies seeking to maximize performance while ensuring full compliance. Key documentation, such as tax registration numbers, TRCs, Form 10F, and accurate reporting/declaration of PE status, plays a crucial role in navigating India’s tax landscape.

In conclusion, foreign companies operating in India must carefully manage tax compliance processes to benefit from favorable DTAA provisions, risk management, and ensure smooth business operations. By staying well-informed and leveraging local expertise, foreign enterprises can unlock the full potential of their ventures in India, enhancing profitability and minimizing tax-related pitfalls.