Taxation of Foreign Income Earned by Companies

Indian resident companies which earn global income or income from another nation are charged taxes. The companies need to pay tax for their foreign income in India regardless of the fact whether their income is remitted in India or overseas.
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The taxing of overseas income basically means taxing the income earned by a resident of one country in another nation. Most nations that are in their initial phases of development rely in some way or the other on foreign capital for the purpose of industrial growth and development. The Indian government has also made efforts to bring in foreign capital to further develop the economy. As a result, the country has offered tax concessions to overseas investors, and there are plans to introduce some more concessions to those who make investments in India in the future.

Foreign investors could be Indian nationals residing abroad or other overseas investors such as corporations. The term given to individuals who reside abroad is ‘non-residents’. An individual’s residential status is not based on the domicile or nationality of the individual but on his/her stay in the country over the course of the previous year. For assessees apart from individuals, the location from where the affairs of the entity are managed and controlled will determine the place of residence. In case the management of the entity from an overseas location over the course of the preceding year was based wholly out of India, the entity will be considered as an Indian resident. In case the management of such an entity was partly based out of India, such an entity shall be considered a non-resident company.

  • Tax is charged to Indian resident companies on the global income earned, regardless of whether the income is remitted to India or not.
  • Domestic profits can be used to set off losses in foreign branches.
  • Foreign affiliates’ income can be included in the taxable income of the Indian company only in case it is distributed in the form of dividends.

Definition of ‘Company’ Under Section 2(17) of the Income Tax Act, 1961

A “company” is defined as:

(i) any Indian company, or (ii) anybody corporate incorporated by or under the laws of a country outside India, or (iii) any institution, association or body which is or was assessable or was assessed as a company for any assessment year under the Indian Income Tax Act, 1922 (11 of 1922), or which is or was assessable or was assessed under this Act as a company for any assessment year commencing on or before the 1st day of April, 1970, or (iv) any institution, association or body, whether incorporated or not and whether Indian or non-Indian, which is declared by general or special order of the Board to be a company: Provided that such institution, association or body shall be deemed to be a company only for such assessment year or assessment years (whether commencing before the 1st day of April, 1971, or on or after that date) as may be specified in the declaration 

Foreign Income

Any income that is not received within the country, and does not arise or accrue, or deemed to arise or accrue in the country, is classified as foreign income. Basically, any income that arises or accrues or is deemed to arise or accrue outside the country, or received outside the country, is foreign income.

The following are included in foreign income:

  • Income from profession if the profession was established in India.
  • Income from business if the business is partly or fully controlled in India.
  • Income from business if the business was fully controlled from anywhere outside the country.
  • Income from profession if the profession was established outside the country.
  • Any other income (dividend, salary, or rent)

Taxability of Foreign Income for Residents and Ordinarily Resident, Resident but Not Ordinarily Resident, and Non-Resident

Foreign Income Residents and Ordinarily Residents Residents but Not Ordinarily Residents Non-Residents
Income from business where the business is partly and fully controlled in the country This is included and it is taxable This is included and it is taxable This is not included and it is not taxable
Income from profession where the profession was set up in the country This is included and it is taxable This is included and it is taxable This is not included and it is not taxable
Income from business where the business was controlled from outside the country This is included and it is taxable This is not included and it is not taxable This is not included and it is not taxable
Income from profession where the profession was set up outside the country This is included and it is taxable This is not included and it is not taxable This is not included and it is not taxable
Any other income (dividend, rent, salary, etc.) This is included and it is taxable This is not included and it is not taxable This is not included and it is not taxable

Residential Status of Companies

According to Section 6(3) of the Income Tax Act, 1961, a company shall be considered to be resident in India in any previous year, in case:

(i) It is an Indian company; or (ii) During that year, the control and management of its affairs is situated wholly in India. For deciding the residential a status of a company, a company is of two types (i) Indian Company- always resident in India irrespective of control and management of its business affairs (ii) Foreign Company – resident in India if control and management of its affairs is situated wholly in India during relevant previous year.

Moreover, if “the control and management of the business affairs” of a company happen at the location where board meetings take place, it shall be considered as resident in India. Foreign companies shall be considered as Indian residents in case their board meetings usually take place in India, and crucial decisions relating to the management are made in India.

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