India: Domestic Corporate Taxation
Taxation of a Branch Office
This page was last updated on 13 Dec 2018.
If a branch office receives no income, 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%). 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. Since then, it has been delayed several times and has still not been implemented. 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 India-sourced income.