5 May 2024In the dynamic world of international trade and commerce, many Indian entrepreneurs are keenly exploring the idea of expanding their business horizons by setting up companies in foreign lands. Dubai, with its business-friendly environment and strategic location, emerges as a top choice for many. However, this venture abroad brings questions about tax implications in India and the applicability of foreign exchange restrictions. Let's simplify and delve into these aspects.
Understanding Tax Residency and its Implications
First and foremost, it's vital to grasp the concept of tax residency under Indian tax law. A company incorporated outside India is generally not considered an Indian resident. However, the scenario changes if the company's place of effective management (POEM) is in India. In such cases, the foreign company morphs into a tax resident of India, making its global income liable to taxation in India at the rate of 40%, along with the applicable surcharge and cess.
What is POEM?
POEM stands for the place where key management and commercial decisions necessary for the conduct of business are made. Determining POEM involves assessing several factors, including the location of the company's assets, the number and payroll expenses of employees in India, the nature of transactions with related parties, and the percentage of passive income. The Central Board of Direct Taxes provides detailed guidelines for this determination process.
It's worth noting that the POEM guidelines come into play only if the company's turnover or gross receipts exceed ₹50 crores in any financial year. Therefore, if the foreign company's management decisions are made outside India and its turnover is below this threshold, its income is not taxed in India, except for income that accrues, arises, or is received in India.
Foreign Exchange Management Act (FEMA) Restrictions
When an Indian resident sets up a foreign entity, certain restrictions under the Foreign Exchange Management Act (FEMA) come into the picture, particularly regarding the business activities that the entity can undertake. Specifically, a foreign entity owned by an Indian resident is permitted to engage only in those business activities that are allowed under Indian laws.
In the context of establishing a company in Dubai for merchanting trade, it is permissible provided the goods involved are allowed for merchanting trade under the Indian Foreign Trade Policy 2023. This means that the company can undertake the buying and selling of such goods without physically bringing them into India, adhering to both Indian and Dubai regulations.
Conclusion
For Indian residents considering incorporating a company in Dubai, it's crucial to navigate the intricacies of Indian tax laws and FEMA regulations carefully. While expanding and operating in a global marketplace is enticing, understanding and adhering to the legal framework ensures that your business venture remains compliant and profitable. Consulting with professionals like Chartered Accountants specialising in international tax and business laws is advisable to make informed decisions and navigate these complex waters smoothly.
This exploration offers a general overview and should not substitute for professional advice tailored to your specific circumstances.