Understanding the Scope of International Taxation for Indian Companies Expanding Overseas

The ambition of Indian businesses is no longer confined to domestic borders. As companies expand overseas, they step into the complex world of international taxation. A proactive understanding of the rules governing cross-border transactions is essential to avoid double taxation and ensure tax-efficient repatriation of profits.

Double Taxation Avoidance Agreements (DTAAs)

India has signed DTAAs with over 90 countries. These agreements are the bedrock of international tax law. Their primary purpose is to prevent the same income from being taxed in both the source country (where the income is earned) and the residence country (where the company is based).

DTAAs allocate taxing rights between the two countries for various types of income, such as royalties, fees for technical services, interest, and dividends. They often provide for lower withholding tax rates than what is prescribed under domestic law.

Foreign Tax Credit (FTC)

When an Indian company earns income from a foreign country and pays tax there, it can claim a credit for those foreign taxes paid against its Indian tax liability on that same income. This is the mechanism that gives effect to the DTAA's goal of avoiding double taxation. Strict documentation and timelines must be followed to claim FTC successfully in the Indian tax return.

Structuring Overseas Operations: Branch vs. Subsidiary

The legal structure of your overseas presence has significant tax implications:

• Foreign Branch: A branch is treated as an extension of the Indian company. Its profits are directly taxed in India, with credit available for taxes paid in the foreign country.
• Foreign Subsidiary: A subsidiary is a separate legal entity incorporated in the foreign country. Its profits are generally not taxed in India until they are repatriated back to the Indian parent company in the form of dividends.

The choice depends on the business model, the tax rates in the foreign country, and the long-term strategy for repatriating profits.

International tax planning is not about tax evasion; it's about structuring your global operations in a compliant and efficient manner.

Navigating the web of DTAAs, FTC rules, and foreign regulations requires specialized expertise. As your business grows globally, partnering with an advisor who understands these nuances is critical for success.