Taxation Rules for Foreign Subsidiaries in India

Introduction

India has emerged as a top destination for foreign companies looking to establish long-term operations. Whether you're a global SaaS provider, manufacturing conglomerate, or an NRI-backed venture, forming a foreign subsidiary in India gives you a robust legal and operational structure. But alongside the benefits comes the responsibility of tax compliance.

Understanding how foreign subsidiaries are taxed in India is essential not just to meet your statutory obligations but to ensure smooth repatriation, avoid legal penalties, and optimize your overall tax burden. This guide breaks down everything you need to know about the Indian tax framework as it applies to 100% foreign-owned subsidiaries.

How Foreign Subsidiaries Are Taxed in India

Once registered, a foreign subsidiary is considered a domestic company under Indian tax laws. This means it is liable to pay tax on its global income earned or accrued in India, irrespective of whether the income is repatriated abroad or retained in India.

This classification gives the subsidiary access to local incentives and legal rights, but also places it under India’s detailed income tax and indirect tax frameworks.

Corporate Income Tax Structure

As of current provisions under the Income Tax Act, 1961, foreign subsidiaries in India are subject to the following:

• Base Corporate Tax Rate: 22%
  
  

• Effective Tax Rate (including surcharge and cess): ~25.17%
  
  

• Alternative for New Manufacturing Units:
  If the subsidiary is engaged in manufacturing and incorporated after October 1, 2019, and begins production before March 31, 2024, it may opt for a 15% tax rate, with an effective rate of ~17.16%.
  
  

Companies opting for these concessional rates must forgo certain exemptions or deductions, including those under section 80C, 35AD, etc.

Transfer Pricing Rules

Any transaction between the Indian subsidiary and its foreign parent (or any associated enterprise) must follow Transfer Pricing guidelines. These transactions must adhere to the Arm’s Length Principle i.e., the pricing must match what would be charged to an unrelated party in similar conditions.

Key compliance includes:

• Filing Form 3CEB, certified by a Chartered Accountant
  
  

• Maintaining Transfer Pricing Documentation
  
  

• Conducting an annual Transfer Pricing Audit (if applicable)
  
  

These rules are strictly monitored, and non-compliance can attract significant penalties.

Other Taxation Aspects

1. Goods and Services Tax (GST)

If your subsidiary supplies goods or services in India, GST registration is mandatory upon crossing the turnover threshold (₹20 lakh for services and ₹40 lakh for goods in most states).

• Monthly/quarterly returns such as GSTR-1, GSTR-3B, and GSTR-9 (annual return) must be filed.
  
  

• Failure to comply can lead to input tax credit loss, interest, and penalties.
  
  

2. Withholding Tax (TDS)

TDS applies to various transactions such as salary payments, professional fees, technical services, or interest paid. Incorrect deduction or delayed deposits may result in disallowance of expenses and penal interest.

3. Minimum Alternate Tax (MAT)

If a foreign subsidiary declares book profits but pays lower income tax due to deductions, it may be subject to MAT at 15% (plus surcharge and cess).
However, MAT is not applicable if the company opts for the 22% or 15% concessional tax regime.

Dividend Taxation and DTAA Benefits

Since the abolition of Dividend Distribution Tax (DDT) in 2020, dividends declared by the subsidiary are taxed in the hands of shareholders.

If the shareholder (i.e., the foreign parent company) is based outside India:

• Withholding Tax may apply at a rate of 10% to 20%, depending on the Double Taxation Avoidance Agreement (DTAA) with the home country.
  
  

• To claim treaty benefits, the parent company must furnish a Tax Residency Certificate (TRC).
  
  

This makes international tax planning essential for optimizing cross-border payouts.

Filing & Documentation Requirements

Timely and correct tax filings ensure smooth operations and help avoid scrutiny. A foreign subsidiary must:

• File Income Tax Return (ITR-6) annually
  
  

• Submit Form 3CEB (if there are related-party transactions)
  
  

• Maintain books of accounts, audit reports, and transfer pricing files
  
  

• Conduct statutory audit if applicable (mandatory for most companies)
  
  

• File TDS returns quarterly if tax has been deducted
  
  

Proper documentation is not just a best practice it’s mandatory under Indian law.

Key Tax Challenges Faced by Foreign Subsidiaries

Some common pain points include:

• Misinterpretation of transfer pricing laws
  
  

• Delay in withholding tax deposits
  
  

• Errors in GST classification or ITC claims
  
  

• Non-compliance with FEMA/RBI reporting during repatriation
  
  

• Failure to furnish proper documentation during audits
  
  

Even unintentional non-compliance can lead to hefty penalties, legal notices, or reputational risk.

FAQs: Taxation of Foreign Subsidiaries in India

1. Is a foreign subsidiary treated as an Indian company for tax purposes?

2. Can a foreign subsidiary in India claim tax treaty benefits?

3. Are there any exemptions from MAT for foreign subsidiaries?

4. What if the Indian subsidiary doesn’t earn profit in a year?

5. Do all foreign subsidiaries need to follow transfer pricing rules?

Conclusion & Next Steps

Taxation in India can be complex, especially for foreign-owned entities navigating multiple layers of direct and indirect tax obligations. But with informed planning, compliance can become a strategic advantage not a burden.

If you're planning to set up or already operating a foreign subsidiary in India, having the right tax strategy and expert support is crucial.

👉 Let CA Vijay Singh & Co. simplify your tax journey.

📩 Contact us today for a free consultation.

Need more than tax clarity? Build a compliant foundation.

📘 Complete Guide to Setting Up a Foreign Subsidiary in India
📌 Recommended reads:

• Legal Steps to Register a Subsidiary

• Compliance Checklist for Foreign Subsidiaries

• Advantages & Disadvantages of Foreign Subsidiaries