Meaning of Foreign Subsidiary Company
A foreign subsidiary company is any company, where 50% or
more of its equity shares are owned by a company that is incorporated in
another foreign nation. For example, a company incorporated in USA (Parent
company) is executing the same business operation through an Indian subsidiary company.
However, this company should abide by the rules and regulations of the domestic
law of the corresponding country where it is situated, it should not follow the
laws applicable to its parent company.
As per section 2, clause 22, “dividend” includes–
1.
Distribution of accumulated profits
to shareholders entailing release of the company’s assets;
2.
Distribution of debentures or deposit
certificates to shareholders out of the accumulated profits of the company and
issue of bonus shares to preference shareholders out of accumulated profits;
3.
Distribution made to shareholders of
the company on its liquidation out of accumulated profits;
4.
Distribution to shareholders out of
accumulated profits on the reduction of capital by the company; and
5.
Loan or advance made by a closely
held company to its shareholder out of accumulated profits.
Taxability of Dividends before AY 2020-2021:
If a shareholder gets dividend from a domestic company on or before the 31st
day of March, 2020, then he/she shall be exempt from tax under section 10(34)
of the Act and the domestic company is liable to pay a Dividend Distribution
Tax (DDT) @15% (excluding surcharge and cess) under section 115-O of the Income
Tax Act. In case of dividend under Section 2 (22) (e), the DDT rate shall be
substituted from 15% to 30%.
Taxability of Dividends paid by Indian company to
Foreign Parent Company
Tax Withheld u/s 195 on the Dividend paid to Foreign Parent Company: In
accordance with the provisions of Section 195 of the Income Tax Act, tax is
required to be withheld @ 20% (plus applicable surcharge and cess) on the
amount of dividend payable to foreign parent company. The TDS withheld by the
payer must be deposited to the Government within 7th of
the next month (except in case of Tax Deductible in March, the due date is 30th April
of the next year.
Section 90- Avoidance of Double Taxation Avoidance
Agreement
As per section 90 of the Income Tax Act, a non-resident shareholder has an
option to be governed by the provisions of the Double Taxation Avoidance
Agreement (‘DTAA’) between India and the country of tax residence of the
shareholder, if such provisions are more beneficial to such shareholder to
avoid of double taxation of income under this Act and under the corresponding
law in force in that country. Here are the few examples:
1.
Tax treaty between India and Germany
determines that their bilateral withholding tax on dividends is 10%, then India
will tax dividend payment that are going to Germany at a rate of 10%,
and vice versa.
2.
In case of tax treaty between India
and Canada, the withholding tax on dividend is 15% if at least 10% of the
shares of the company paying the dividends is held by the recipient of
dividend. But in other cases, the withholding tax on dividend is 25%, hence the
India will tax divided payment at the rate of 20%.
3.
In case of tax treaty between India
and United Kingdom, the withholding tax on dividend is 10%. But in case the
dividends are paid out of income (including gains) derived directly or indirectly
from immovable property within the meaning of Article 6 by an investment
vehicle, the withholding tax on dividend is 15% of the gross amount of the
dividends.
Documents required by the non-resident shareholder
to avail the DTAA benefits:
·
Self-attested copy of PAN, if any,
allotted by the Indian tax authorities. In case of non-availability of
PAN, declaration is to be submitted.
·
Self-attested copy of valid Tax
Residency Certificate (‘TRC’) issued by the tax authorities of the country of
which shareholder is tax resident, evidencing and certifying shareholder’s tax
residency status.
·
Completed and duly signed
self-declaration in Form 10F.
·
Self-declaration certifying the
following points that the shareholder: –
1.
is and will continue to remain a tax
resident of the country of its residence during the FY
2.
is the beneficial owner of the shares
and is entitled to the dividend receivable from the Company.|
3.
qualifies as ‘person’ as per DTAA and
is eligible to claim benefits as per DTAA for the purposes of tax withholding
on dividend declared by the Company.
4.
has no permanent establishment /
business connection / place of effective management in India OR Dividend income
is not attributable/effectively connected to any Permanent Establishment (PE)
or Fixed Base in India.
5.
has no reason to believe that its
claim for the benefits of the DTAA is impaired in any manner
Relief under Section 91- Countries with which no
agreement exists
When there is no agreement under section 90 for the relief or
avoidance of double taxation, section 91
the Income Tax Act provides relief from double taxation in such cases.
If
any person who is resident in India in any previous year proves that, in
respect of his income is not deemed to accrue or arise in India and with which
there is no agreement under section 90, he shall be entitled to the
deduction from the Indian income-tax payable by as under:
A
sum calculated on such doubly taxed income at the Indian rate of tax or
the rate of tax of the said country, whichever is the lower or
At the Indian rate of tax if both the rates are equal.
