|Sl no.||Methods||Brief||Tax implication|
|1||Royalty||If the Indian company uses a technology or process that is patented by the parent foreign company, then the Indian company is liable to pay royalties to the foreign company for using the foreign company’s intellectual property.|
Commonly, Indian companies pay a royalty to either a holding company or the foreign owner company for technological collaboration. The payment is made for the right to use manufacturing processes, technical expertise, design, drawings, trademarks, and brand names
|Under the IT Act, the Indian company would need to withhold taxes at 10 percent plus any applicable surcharge and education cess. However, the payee should have a valid Personal Account Number (PAN) allocated by the IT department in India. The tax is calculated on a gross basis on the total royalty payments.|
The Indian company can access tax breaks of around 30 percent; however, this is subject to the arm’s length criteria as defined under the IT Act, and must be verified by a chartered accountant.
DTAAs generally prescribe the level of taxation for royalties. The taxes range from 10 to 15 percent.
Meanwhile, under FEMA, royalty payments are categorized as current account transactions and are permitted under the automatic route without any limits
|2||Services||A foreign company can provide services that its Indian counterpart uses. In turn, the Indian company makes a payment for the services used. This payment could be made in several forms, including service fees.||For instance, payments that qualify as Fee for Technical Services (FTS) will be taxed at 10 percent plus applicable surcharges and education cess. The Indian company may be able to get a tax break at 30 percent plus applicable surcharge and education cess; however, an accountant needs to testify that the Indian and foreign company fulfill the arm’s length criterion.|
Each DTAA defines the level of taxation, depending on the specific service offered.
|3||Dividend||A foreign company that makes an equity contribution to its Indian subsidiary often demands dividend payouts. The payout may be annual or at a predetermined time interval and is usually a share of the profits that the Indian subsidiary has earned.||The tax, namely the Dividend Distribution Tax (DDT), is currently charged at 15 percent plus applicable surcharges and education cess. Additionally, cesses and surcharges lead to approximate DDT rate of 20%|
In addition, the Companies Act, 2013, states that it is mandatory for a company to transfer a stipulated percentage of the profits to reserves prior to declaring and distributing dividends. The percentage generally ranges between 2.5 and 10 percent
It is important to note that a number of bilateral Double Tax Avoidance Agreements (DTAA) offer either tax credits or exempt foreign-sourced income from taxation
|4||Buy Back of shares||A foreign company could return the shares that it owns on its Indian counterpart, and in turn, the Indian company would have to pay the consideration for the shares. Both companies generally decide on a pre-decided number of shares that will be sold at a pre-determined price based on internationally accepted valuation methods which are in compliance with Indian foreign exchange regulations||There is a withholding tax of 20 percent on distributed income at the time of buyback. Distributed income is the difference between the amount paid at the time of buyback and amount received by the company at the time of issue of shares.|
DTAAs, in the event of share buybacks, operate diversely, and the tax liability depends on the specific tenets of each DTAA.
|5||Reduction share capital||The Companies Act, 2013 states that approval is required from the shareholders (as a special resolution), creditors, and the state High Court for capital reduction. In addition, businesses should note that the number of shares and the amount of funds are not restricted for capital reduction. This is one of the key differences between capital reduction and share buybacks.||Same as DDT(Dividend Distribution Tax)|