Permanent Establishment in International Taxation

1. Permanent Establishment (PE) is a crucial concept in international taxation, determining when a foreign company becomes liable to pay taxes in a host country. In India, the concept of PE holds significant importance, given its thriving economy and attraction as a business destination. Understanding the rules and implications of PE is vital for multinational corporations operating in India. This article provides an overview of Permanent Establishment in India, including its definition, its types, and the impact of setting up PE in India. Concept of Permanent Establishment In India, a company incorporated within its borders is subject to taxation on its global income based on the "residential base" taxation principle. Moreover, India has the authority to tax the income of foreign companies to the extent that the source of that income lies within India. According to the Indian Income Tax Act, if a foreign company's income is received, accrued, or arises in India, India can tax such income under the "source base" taxation principle. When a foreign company sets up a long-term business presence in India, the income from that presence is taxed in India. This is where the term "Permanent Establishment" (PE) comes from.

2. Types of Permanent Establishments In India, there are several types of Permanent Establishments recognised under the tax laws. These types of PEs determine when a foreign company becomes subject to taxation in India. Here are some common types of PEs in India: 1. Fixed Location PE This refers to a physical location, such as an office, branch, factory, workshop, or other fixed premises, where the foreign company carries out its business activities in India. Criteria for fixed place PE in India: Fixed and consistent location, availability to foreign entities, and conducting proper commercial activity. ➔Fixed and consistent location: For a foreign enterprise to have a fixed place PE in India, the business location must be stable and consistent over a reasonable period, excluding passing or casual activities. Consistency and regularity are essential factors. ➔Availability to foreign entities: The foreign entity must have access to the location, even if it is within another company's premises, provided the access is regular. In such cases, the premises may be deemed as a PE in India. ➔Conducting proper commercial activity: A proper commercial activity must be conducted from the designated location. 2. Construction PE When a foreign company engages in construction, installation, or assembly projects in India for a specified duration, it establishes a Construction PE. If the project exceeds a prescribed threshold period, the company becomes liable for taxation in India. This type of PE is applicable to foreign companies involved in significant construction activities within the country, ensuring their income generated from such projects is subject to Indian taxation. 3. Service PE A Service PE is established when a foreign company provides services within India through its employees or personnel for a specific period. This can include activities such as consultancy, technical assistance, or other services rendered within India.

3. The presence of a Service PE in India may subject the foreign company to taxation on the income attributable to the services provided in accordance with India's tax laws and relevant double taxation treaties. 4. Dependent Agent PE Dependent Agent PE refers to a situation where a foreign company conducts business in India through an agent who negotiates contracts and has the authority to secure orders on behalf of the company regularly. The agent must be legally dependent on the company and act exclusively or almost exclusively for the company, leading to the establishment of a taxable presence for the company in India. 5. Subsidiary PE The presence of a subsidiary company in India does not automatically constitute a Permanent Establishment (PE) for the parent company. The subsidiary becomes a PE only if the parent company's operations are conducted through the subsidiary, meeting the criteria outlined in the PE provisions. The Impact of Setting Up PE in India Once a foreign firm is deemed to have a PE in India, the profits associated with its activities in the country will be subject to taxation as "Business Income" as per the provisions of Article 7 in tax treaties. ➔Profits Attribution: The profits attributable to the PE are calculated based on what the PE would have earned if it operated independently under similar conditions as the rest of the company. ➔Maintenance of Books of Accounts: Companies with a PE in India are required to maintain books of accounts in compliance with Indian accounting standards. ➔Registration and Compliance: Foreign companies with a PE in India must apply for Permanent Account Number (PAN) and Tax Deduction and Collection Account Number (TAN). They should also register under the regulations of indirect taxes such as Goods and Services Tax (GST).

4. ➔Tax-Deductible Expenses: Expenses incurred for the business purposes of the PE, whether in India or elsewhere, are allowed as tax-deductible expenses for determining the PE's earnings. ➔Taxation of Net Profits: The net profits of the PE, after deducting allowable expenses, will be subject to taxation as per the applicable tax rates and laws in India. ➔Withholding Tax (WHT) Compliance: Foreign companies with a PE in India must comply with the mandatory withholding tax requirements on payments made to non-residents, such as royalties, interest, dividends, or fees for technical services. Conclusion: Permanent Establishment (PE) is a crucial concept in international taxation, particularly in India, a thriving economy and attractive business destination. Various types of PEs, such as Fixed Location PE, Construction PE, Service PE, Dependent Agent PE, and Subsidiary PE, determine when a foreign company becomes liable to pay taxes in India. Setting up a PE in India has implications such as taxation of profits, maintenance of books of accounts, registration and compliance requirements, tax-deductible expenses, taxation of net profits, and withholding tax compliance. Understanding the rules and implications of PE is essential for multinational corporations operating in India to ensure compliance with Indian tax laws. Don't let PE complexities boggle your global expansion plans - contact your financial advisor or tax advisor today, and get expert guidance tailored to your unique business needs. Source:https://www.linkedin.com/pulse/permanent-establishment-international-taxation-ca- manish-gupta/