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India: Domestic Corporate Taxation

Taxation of a Liaison Office

If a liaison office receives no income, then nominally it will not have to pay tax. If, however, income is attributed to the office, tax will be due at 40% plus surcharges and education 'cess' (totalling 42.02% in 2012/13). The Direct Taxes Code would reduce the tax rate on non-resident business to 30%, but would impose a 15% branch profits tax, thus worsening the existing position for foreign companies, since there is little scope to set foreign expenses against the income attributed to a local operation. The Direct Taxes Code was due to be introdued in April 2012. It was then delayed for at least a year, and put off yet again in early 2013. The situation is therefore highly uncertain.

If a liaison office pays its staff, it must comply with withholding tax and social security obligations.

There are a number of ways in which a liaison office may be found liable to pay corporate tax. The most basic situation is one in which the liaison office is deemed to be a 'business connection' of its foreign parent, which effectively constitutes it as a permanent establishment, leading to an apportionment of the parent company's income to its Indian activities.

The governing legislation is section 9(1)(i) of the Income Tax Act, and provided that the liaison office stays strictly within this wording, if will probably be immune from taxation. But the authorities are quite aggressive in their interpretation of the Act, and advance rulings may be advisable if there is any danger that the liaison office can be associated with significant Indian-source income, even though it does not pass through the bank accounts of the liaison office.

There are a number of relevant cases, including Angel Garment Ltd (287 ITR 341), Motorola Inc and Others v DCIT (95 ITD 269), Gutal Trading Est (278 ITR 643), Western Union Financial Services Inc (101 TTJ 56), IAC v Mitsui and Co Ltd (39 ITD 59) and UAE Exchange Centre LLC (268 ITR 9). Most of these support the immunity of liaison offices from taxation, but the last one in particular is worrying.



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