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Foreign Company Tax Rates & Filing Guide AY 2025-26 India
Comprehensive Income Tax Guide | cmaknowledge.in
1. Introduction
Foreign companies deriving income in India face a unique tax regime that is distinct from domestic companies. For the Assessment Year (AY) 2025-26, it is essential for foreign enterprises and their advisors to have a thorough understanding of India’s income tax provisions applicable to foreign companies.
This detailed guide covers definitions, tax rates, surcharge, minimum alternate tax (MAT), Permanent Establishment (PE) provisions, filing requirements, tax deductions, and compliance obligations. Multiple case studies and practical insights are provided to simplify complex rules for easier application.
2. Definition and Overview of a Foreign Company
According to Section 2(23A) of the Income Tax Act, 1961, a foreign company is a company that is not a domestic company. This means:
- It is not incorporated in India, or
- If incorporated abroad, its place of effective management (control and management) is outside India.
Foreign companies are liable to pay tax on income that is received, accrues, or arises in India or deemed to accrue or arise in India under the Income Tax Act.
The distinction between a foreign and domestic company determines the taxation rates, compliance requirements, and filing procedures.
3. Tax Rates Applicable to Foreign Companies for AY 2025-26
From AY 2025-26, the Income Tax Act provides distinct tax rates for foreign companies as follows:
| Nature of Income | Applicable Income Tax Rate |
|---|---|
| Royalty or Fees for Technical Services (FTS) received from Government of India or an Indian concern under agreements made before 1 April 1976 and approved by the Central Government | 50% |
| Any other income, including business profits | 35% |
Prior to AY 2025-26, the standard corporate tax rate for foreign companies was 40%. The reduction to 35% reflects the government’s intent to remain competitive globally while encouraging foreign investment.
Special provisions apply to certain incomes under tax treaties or specific circumstances.
Illustration of Tax Rates:
- A foreign company receiving royalty income under old agreements must pay 50% tax on that royalty income.
- A foreign company earning business profits through its Indian PE is subject to the 35% tax rate on those profits.
4. Surcharge on Foreign Companies
In addition to the base tax, foreign companies must pay surcharge on income tax payable, which varies with the income level:
| Total Taxable Income (₹) | Surcharge Rate on Income Tax |
|---|---|
| Up to ₹1 crore | Nil |
| ₹1 crore to ₹10 crore | 2% |
| Above ₹10 crore | 5% |
These surcharge rates on foreign companies are significantly lower compared to domestic companies where the surcharge may go up to 12%.
Marginal Relief
Marginal relief applies if the surcharge payable exceeds the additional income over the threshold. This relief limits the surcharge to not surpass the actual additional income on which it is charged, preventing undue financial burden on near-threshold taxpayers.
5. Health and Education Cess
Health and Education Cess is levied at 4% on the aggregate of income tax and surcharge payable. This cess funds government programs in health and education and must be factored into total tax liability.
6. Minimum Alternate Tax (MAT) for Foreign Companies
MAT is a mechanism designed to ensure companies pay minimum tax, even if their tax liability under normal provisions is low due to exemptions.
- MAT rate is fixed at 15% of book profits as computed under Section 115JB, plus applicable surcharge and education cess.
- MAT applies to foreign companies with a PE in India unless they opt for presumptive taxation under Sections 44B, 44BB, 44BBA, or 44BBB.
- Foreign companies without a PE or with income under presumptive schemes are exempt from MAT.
Book profits are computed by adding back to net profits any tax-exempt income or expenses disallowed under tax laws.
7. Permanent Establishment (PE) and Its Tax Implications
A Permanent Establishment is a fixed place of business or a business presence through which a foreign company carries on its business in India. The existence of PE makes the business profits attributable to it taxable in India.
Common forms of PE include:
- Fixed Place PE: An office, factory, workshop, mine, or oil/gas installation.
- Construction PE: A building site or construction project lasting more than a specified duration (generally 180 days).
- Agency PE: Dependent agents empowered to conclude contracts on behalf of the foreign company.
Income attributable to PE must include only profits from activities directly connected with that establishment.
8. Filing Requirements for Foreign Companies
Foreign companies earning income in India or having a PE are required to file income tax returns. The relevant forms and deadlines are:
| ITR Form | Applicability | Mode of Filing | Due Date |
|---|---|---|---|
| ITR-7 | General foreign company, PE holders, companies with charitable trusts | Electronic filing with Digital Signature Certificate (DSC) | 31 October of AY |
| ITR-6 | Some foreign company cases not required to file ITR-7 | Electronic with DSC | 31 October of AY |
It is critical to file accurate returns to avoid penalties, including late filing fines and interest.
9. Tax Deducted at Source (TDS) on Payments to Foreign Companies
Under Section 195 of the Income Tax Act, any person responsible for paying to a foreign company must deduct tax at source on payments such as:
- Royalties
- Fees for technical services
- Interest
- Professional and consultancy fees
The rate of TDS generally aligns with the income tax rate applicable to foreign companies or as per applicable Double Tax Avoidance Agreements (DTAA). Failure to deduct TDS can result in penalties.
10. Comprehensive Case Studies for Foreign Company Tax Calculations
Case Study 1: Foreign Company with PE – Business Income
Company: XYZ Ltd (Foreign company with PE)
Income from India (Taxable Business Profits): ₹20 crore
Book Profits: ₹25 crore
Tax Computation:
- Tax @ 35% = 0.35 × ₹20 crore = ₹7 crore
- Surcharge @ 5% (Income > ₹10 crore) = 5% × ₹7 crore = ₹35 lakh
- Total (Tax + Surcharge) = ₹7 crore + ₹35 lakh = ₹7.35 crore
- Health and Education Cess @ 4% = 4% × ₹7.35 crore = ₹29.4 lakh
- Total Tax Liability = ₹7.644 crore
- MAT check: 15% of Book Profit = 0.15 × ₹25 crore = ₹3.75 crore + surcharge and cess (less than normal tax) → Pay normal tax ₹7.644 crore
Case Study 2: Royalty Income under Pre-1976 Agreement
Company: ABC Ltd (Foreign company without PE)
Royalty Income (subject to 50%) : ₹5 crore
Tax Computation:
- Tax @ 50% = 0.50 × ₹5 crore = ₹2.5 crore
- Surcharge @ Nil (Income under ₹1 crore threshold – but here income ₹5 crore, so 2% surcharge applies) → Surcharge = 2% × ₹2.5 crore = ₹5 lakh
- Total (Tax + Surcharge) = ₹2.5 crore + ₹5 lakh = ₹2.55 crore
- Health and Education Cess @ 4% = 4% × ₹2.55 crore = ₹10.2 lakh
- Total Tax Liability = ₹2.652 crore
- MAT is generally not applicable to such income.
Case Study 3: Foreign Company Using Presumptive Tax Scheme
Company: DEF Ltd (Non-PE foreign company, presumptive taxation)
Presumptive income declared: ₹3 crore
Tax Computation:
- Tax @ 35% = 0.35 × ₹3 crore = ₹1.05 crore
- Surcharge @ Nil (Income ₹3 crore ≤ ₹10 crore threshold) → 2% surcharge applies = 2% × ₹1.05 crore = ₹2.1 lakh
- Subtotal = ₹1.071 crore
- Health and Education Cess @ 4% = 4% × ₹1.071 crore = ₹4.284 lakh
- Total Tax Liability = ₹1.113 crore
- MAT not applicable for presumptive income.
11. Tax Planning Strategies for Foreign Companies in India
- Utilize Double Tax Avoidance Agreements (DTAA): Claim reduced tax rates or exemptions available under treaties between India and the foreign company’s country of residence.
- Proper Structuring of PE: Allocate profits and expenses accurately to minimize taxable PE income in India.
- Transfer Pricing Compliance: Maintain appropriate documentation for transactions with related parties to avoid disputes and penalties.
- Timing of Royalty/Fees Payments: Plan payment timings to optimize tax liability and TDS obligations.
- Use of Tax Residency Certificates (TRC): Ensure timely submission of TRCs to avail treaty benefits and avoid higher withholding rates.
12. Compliance and Documentation Requirements
Foreign companies must maintain and submit the following documentation:
- Books of accounts and financial statements as per Indian accounting standards or international equivalents.
- Details of income from India and related expenses.
- Transfer pricing documentation and audit reports if applicable.
- TDS certificates and challans for taxes deducted and deposited.
- Annual income tax returns filed electronically with Digital Signature Certificates.
- Documents supporting claims of treaties or exemptions such as TRC, Form 10F, and self-declarations.
Non-compliance can attract heavy penalties, interest charges, and potential litigation.
13. Recent Amendments Affecting Foreign Companies
- Reduction of foreign company tax rate from 40% to 35% effective AY 2025-26 onwards.
- Expanded MAT exemptions for foreign companies without PE or those under presumptive schemes.
- Clarifications in surcharge application and marginal relief for foreign entities.
- Implementation of digital reporting requirements for timely and transparent tax filing.
- Strengthening anti-avoidance rules to prevent treaty misuse.
14. Frequently Asked Questions (FAQs)
Q1: What is the main tax rate for foreign companies in India for AY 2025-26?
A1: The main tax rate is 35% on income taxable in India, with 50% applicable on royalties or fees for technical services under certain agreements before April 1, 1976.
Q2: What surcharge rates apply to foreign companies?
A2: 2% surcharge on income tax if income exceeds ₹1 crore but is not more than ₹10 crore, and 5% if it exceeds ₹10 crore.
Q3: Are foreign companies liable for Minimum Alternate Tax?
A3: Yes, MAT at 15% of book profits applies unless the foreign company has no PE or opts for presumptive taxation.
Q4: Which forms must foreign companies file for income tax?
A4: Generally, ITR-7 for foreign companies, with some exceptions filing ITR-6.
Q5: How does Permanent Establishment affect foreign company taxation?
A5: PE presence results in taxation of attributable business profits in India, and companies with PE must comply with full Indian tax filing requirements.
15. Conclusion
The tax regime for foreign companies in India has evolved to provide clarity, reduce rates, and strengthen compliance for AY 2025-26. By understanding applicable tax rates, surcharge, cess, MAT, and compliance obligations, foreign companies can effectively manage their India tax positions.
This comprehensive guide, with detailed tables, practical case studies, and planning insights, equips foreign enterprises and tax professionals to navigate India’s tax laws confidently and efficiently.
For fully bespoke advice and complex situations, consulting qualified Indian tax professionals or chartered accountants is always recommended.
