{"id":700,"date":"2023-03-04T11:36:25","date_gmt":"2023-03-04T06:06:25","guid":{"rendered":"https:\/\/raaas.com\/blog\/?p=700"},"modified":"2024-03-12T12:12:52","modified_gmt":"2024-03-12T06:42:52","slug":"hello-foreign-parent-company-what-tax-you-will-pay-on-receiving-dividend-from-your-indian-subsidiary","status":"publish","type":"post","link":"https:\/\/raaas.com\/blog\/hello-foreign-parent-company-what-tax-you-will-pay-on-receiving-dividend-from-your-indian-subsidiary\/","title":{"rendered":"Hello foreign parent company – what tax you will pay on receiving dividend from your Indian Subsidiary"},"content":{"rendered":"\n

Meaning of Foreign Subsidiary Company<\/strong>
A foreign subsidiary company<\/strong> 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.<\/p>\n\n\n\n

As per section 2, clause 22, “dividend” includes<\/strong>–<\/p>\n\n\n\n

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  1. Distribution of accumulated profits to shareholders entailing release of the company’s assets; <\/li>\n\n\n\n
  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;<\/li>\n\n\n\n
  3. Distribution made to shareholders of the company on its liquidation out of accumulated profits; <\/li>\n\n\n\n
  4. Distribution to shareholders out of accumulated profits on the reduction of capital by the company; and <\/li>\n\n\n\n
  5. Loan or advance made by a closely held company to its shareholder out of accumulated profits.<\/li>\n<\/ol>\n\n\n\n
    \"Diagram\"<\/a>
    Diagram<\/figcaption><\/figure>\n\n\n\n

    Taxability of Dividends before AY 2020-2021: <\/strong>
    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%.<\/p>\n\n\n\n

    Taxability of Dividends paid by Indian company to Foreign Parent Company<\/strong>

    Tax Withheld u\/s 195 on the Dividend paid to Foreign Parent Company: <\/strong>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<\/sup> of the next month (except in case of Tax Deductible in March, the due date is 30th<\/sup> April of the next year.  <\/p>\n\n\n\n

    Section 90- Avoidance of Double Taxation Avoidance Agreement<\/strong>
    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 (\u2018DTAA\u2019) 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:<\/p>\n\n\n\n

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    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.<\/li>\n\n\n\n
    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%.<\/li>\n\n\n\n
    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.<\/li>\n<\/ol>\n\n\n\n

      Documents required by the non-resident shareholder to avail the DTAA benefits:<\/strong><\/p>\n\n\n\n