Whether income of the foreign subsidiary of an Indian Company will be taxable?

View 1: The foreign subsidiary is a non resident company and and hence the income will not be taxable in India. But the dividend received from subsidiary will be added in profit of the holding company and hence taxable.


View 2: As reading material may be helpful in understanding the intricacies of the issue involved.Which may be quoted as :"Modified tests to be applied for determining ‘residence' of a company and application of Controlled Foreign Company Rules (CFC Rules), being introduced for the first time in the country on the lines of such rules prevalent in the developed economies, in the revised Direct Taxes Code Bill, 2010 (the Code) will have far reaching implications on the tax liability of Indian companies having presence in multiple nations (Indian MNCs).

Variety of structures used by Indian MNCs to hold investments abroad or to retain profits abroad for reinvestment or for carrying on operations in multiple jurisdictions may satisfy the test of “residence” contained in S4 of the Code or be covered by the CFC Rules and income accruing, arising or received in foreign jurisdictions may attract tax liability in India.

Besides an Indian company (essentially, a body corporate, formed or established under an Indian law and having a registered or principal office in India), any company which has its place of effective management in India, at any time during the year, will satisfy the test of residence for taxation purposes.

At present, besides Indian company, a company, control and management of whose affairs is situated wholly in India during that year, satisfied the test of residence in India.

Effective management

The expression, “place of effective management” is explained in S 314(192) as:

“(i) the place where the board of directors of the company or its executive directors, as the case may be, make their decisions; or

(ii) in a case where the board of directors routinely approve the commercial and strategic decisions made by the executive directors or officers of the company, the place where such executive directors or officers of the company perform their functions.”

Take an example of a subsidiary of an Indian company located, say, in Germany. The German subsidiary has its own board of directors; holds board meetings in Germany and the board performs its normal functions in Germany.

Two officers of the Indian holding company, located in India, are directors of the German subsidiary. The board of directors of the German subsidiary generally endorses commercial decisions of the head quarters/officers located in India.

Such a case could satisfy both the tests set out in (i) and (ii) above. First condition refers, inter alia, to the place where its executive directors make their decisions. The term “executive director” is not defined in the Code and in common parlance, it would mean an executive who is serving on the board of directors.

The second condition could also be satisfied as the boards of directors of the German subsidiary routinely approve the decisions of the Indian directors who are located in India and who perform their functions in India.

Operating decisions

This could apply with greater force where the Indian directors participate in the board of directors meeting through video or audio calls from India since, in that case, it could be said that the board decisions are also taken in India.

This, of course, would be a debatable issue as to whether participation of directors in the meeting of board of directors through video or audio calls where such directors do not constitute majority of the board but, who, in reality, take such decisions would satisfy the second or, for that matter, even the first condition.

A distinction is, however, required to be made between operating decisions and commercial and strategic decisions. In common parlance, operating decisions relate to day to day operations, processes and procedures relating to business functions and like whereas, commercial and strategic decisions would refer to decisions relating to business at policy level.

So, what are the consequences? If the effective management is held to be in India, entire income of the foreign subsidiary would become liable to tax in India as it would be regarded as resident in India."