If an Indian individual incorporates a company in Dubai for merchanting trade, will it have any tax implications in India? Will it have any foreign exchange restrictions as happens in India?
—Name withheld on request
Typically, a company incorporated outside India is not considered to be a resident of India under the Indian tax law. However, if its place of effective management (POEM) lies in India, then such foreign company would also be considered as a tax resident of India and consequently, all its global income would become subject to tax in India at 40% + surcharge and cess.
POEM refers to the place where key management and commercial decisions that are necessary for the conduct of its business are taken. There are elaborate guiding principles notified by the Central Board of Direct Taxes in this regard which provide for determination of POEM for a company.
These guiding principles take into consideration a variety of factual data points such as value determination of the foreign company’s assets situated in India, the number of employees situated in India along with payroll expenses, whether transactions are conducted with related parties, percentage of passive income earned by the company, etc.
Also, there is a relaxation provided for applicability of POEM guidelines where under these guidelines would apply to a foreign company only if its turnover/gross receipts exceed ₹50 crore in any financial year.
If POEM determination concludes that it is outside India and company turnover is below ₹50 crore, then the company’s worldwide income would not be taxed in India except that which accrues or arises or is received in India which anyway becomes subject to tax under Indian tax law.
Since the foreign entity would be formed by a person resident in India, there are some amount of restrictions under Foreign Exchange Management Act on the type of business activity that it can undertake. One of the restrictions is that a foreign entity owned by an Indian resident can conduct only that business activity which is permissible under Indian laws too. Thus, in your case, your Dubai company would be able to do merchanting trade in goods that are permitted for merchanting trade under the Indian Foreign Trade Policy 2023.
Harshal Bhuta is partner at P.R. Bhuta & Co. Chartered Accountants.
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Published: 01 Apr 2024, 05:53 PM IST