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India: Domestic Corporate Taxation

Taxation of a Branch Office

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

A branch office is deemed to be a 'business connection' of its foreign parent, which effectively constitutes it as a permanent establishment, possibly leading to an apportionment of the parent company's income to its Indian activities, even if the branch office receives no income of its own directly.

If a branch does have taxable income of its own, which will often be the case, expenses incurred by the parent company will be deductible only up to the level of 5% of total income. The status of employee salaries and expenses paid outside the country is not clear; they are however not likely to be deductible from Indian-source income.



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