International Taxation Compliances for NonResidents (NRIs) and Foreign Entities

1. Tax Residency Determination 

    Residential Status: Nonresident individuals and foreign entities must first determine their residency status under the Income Tax Act, 1961 (Section 6). This is based on the number of days spent in India during the financial year.

    Double Taxation Avoidance Agreement (DTAA): NRIs and foreign entities may claim relief under DTAA between India and the respective country of residence to avoid double taxation on the same income.

2. Taxable Income in India 

    Income Earned in India: Any income that is earned, accrued, or received in India is taxable in India for nonresidents. This includes:

      Salary income for services rendered in India.

      Rental income from property in India.

      Capital gains from the sale of assets in India.

      Interest income from Indian bank accounts or investments.

    Foreign Income: Nonresidents are not liable to tax on their foreign income, unless it is received in India.

3. Withholding Tax (TDS) on Payments to NonResidents 

    Section 195: Any payment made to a nonresident, including royalty, technical service fees, interest, dividends, etc., is subject to withholding tax under Section 195 of the Income Tax Act. The payer must deduct tax at source (TDS) at the prescribed rate, and the nonresident must comply with the tax filing requirements.

    Lower or Nil Withholding Tax: Nonresidents can apply for a lower or nil withholding tax certificate from the Assessing Officer if eligible under DTAA.

4. Foreign Income Reporting (Form 67) 

    Nonresidents and foreign entities claiming foreign tax credits (FTC) under DTAA must report foreign income and taxes paid in Form 67 while filing the Indian income tax return.

    This allows taxpayers to claim credit for taxes paid abroad and avoid double taxation.

5. Permanent Establishment (PE) Considerations 

    Foreign entities conducting business in India may create a Permanent Establishment (PE) under DTAA or domestic law. This would lead to taxation of business profits in India attributable to the PE.

    Compliance Requirements: Foreign entities with a PE in India must comply with local tax laws, file corporate tax returns, and withhold taxes on payments.

6. Filing of Income Tax Return (ITR) 

    Nonresidents and foreign entities earning taxable income in India must file Income Tax Returns (ITR) in India before the due date under Section 139(1).

    Form ITR2: For nonresidents having income from capital gains, property, and other sources.

    Form ITR3 or ITR5: For foreign entities and businesses.

7. Transfer Pricing Compliance 

    Crossborder transactions with associated enterprises (related parties) must comply with Transfer Pricing (TP) regulations under the Income Tax Act, ensuring transactions are at arm’s length.

    Documentation and Audit: Maintain detailed transfer pricing documentation and submit Form 3CEB, certified by a Chartered Accountant, if the threshold is crossed.

8. Goods and Services Tax (GST) on CrossBorder Services 

    Nonresidents providing services to Indian residents may be liable to register under GST if the service qualifies as import of service.

    Reverse charge mechanism (RCM) applies, requiring the Indian service recipient to pay GST on services received from nonresidents.

9. Foreign Assets and Income Reporting (Schedule FA) 

    Indian tax residents must report their foreign assets, bank accounts, and financial interests under Schedule FA while filing their income tax returns.

    NRIs need to report only their Indian income and assets in India.

10. Advance Pricing Agreements (APA) 

    Foreign entities can enter into Advance Pricing Agreements (APA) with Indian tax authorities to agree on the arm’s length pricing for crossborder transactions in advance, minimizing litigation risks.

11. FEMA (Foreign Exchange Management Act) Compliance 

    Any foreign remittance, investment, or payment related to cross border transactions must comply with FEMA regulations.

    Nonresidents investing in India must comply with sector specific FDI norms and obtain necessary approvals from RBI or FIPB (Foreign Investment Promotion Board) as required.

12. Tax Identification Numbers and Compliance 

    PAN (Permanent Account Number): Nonresidents and foreign entities earning taxable income in India must obtain a PAN for tax filings and compliance purposes.

    TRC (Tax Residency Certificate): Nonresidents claiming relief under DTAA must obtain a Tax Residency Certificate from their home country’s tax authority.