Direct & International Taxes

Indian Income Tax Act Specialists

Much like the field of medicine, the domain of taxation is replete with specialists who focus on specific section/ provision experts, each uniquely intricate and requiring an in-depth understanding of the Indian Income Tax Act. These tax professionals—akin to doctors—apply their expertise to distinct spheres, ensuring compliance, planning, and resolution for an array of taxpayers. Let us dive into the landscape of these tax specialists and the key sections they traverse daily, making sense of India’s labyrinthine tax regime.

1. Personal Taxation - Family General Physicians: Personal tax practitioners, like family doctors, cater to individuals and Hindu Undivided Families (HUFs). Their toolkit includes filing ITRs while offering relief and deductions for salaried employees, senior citizens, and individuals with disabilities. They decode the maze of exemptions, such as house rent allowance (HRA) and leave travel allowance (LTA), and ensure adherence to TDS compliances, Tax Audits and replying to tax notices, providing technical aid during investigations or searches & seizures. For HUFs, these specialists guide clients through tax-saving avenues like the creation of corpus funds and the application of clubbing under Section 64 and gifts under 56, ensuring proper income attribution and tax efficiency. They function as gatekeepers to ensure that taxpayers maximize benefits while staying compliant. Most of the Indian general population deals with these tax practitioners.

2. Corporate Taxation - Internal Medicine Physicians: Corporate tax specialists are akin to internal medicine physicians, delving deep into the financial health of corporate entities. These professionals ensure businesses adhere to the provisions of corporate tax laws offering reduced tax rates and MAT provisions. Reviewing voluminous tax compliance, guiding clients through intricate tax provisions like specific adjustments/ disallowance in tax audits, filing Net or Gross ITRs for foreign and domestic corporations, handling end-to-end litigation for tax demands, and advisories on topics like IndAS adjustments, Beneficial Ownership (BO), Significant Economic Presence (SEP), and Permanent Establishment (PE), etc is their bread and butter. Their role extends to advising on now abolished dividend distribution tax, Equilisation levy etc.

3. International Taxation - Epidemiologists of Jurisdictional Health: If corporate tax specialists are internal medicine physicians, international tax experts are the globe-trotting epidemiologists of the tax world analyzing the spread and impact of financial flows across jurisdictions. They work at the cutting edge of globalization, ensuring multinational corporations stay compliant while minimizing tax burdens. International taxation professionals operate at the intersection of domestic and international tax regimes, guiding multinational corporations through the complexities of cross-border taxation. These experts delve into OECD guidelines, Base Erosion and Profit Shifting (BEPS) pillars, and Advanced Pricing Agreements (APA) under Section 92CC. These strategists untangle tax treaties (DTAA) governed by Section 90 and look keenly at Most Favoured Nation (MFN) clauses therein, ensuring that taxpayers can claim the most beneficial rates. As BEPS initiatives evolve, these experts serve as the policy architects who structure tax plans that minimize risks and optimize taxation across jurisdictions. With the introduction of BEPS Pillars 1 and 2, focusing on digital economy taxation and global minimum taxes, these specialists help businesses navigate an increasingly complex international tax environment, ensuring their operations are compliant and tax-efficient.

3. • Cross-border Taxation - Oncologists: Cross-border taxation is a chess game played across multiple jurisdictions. Like an oncologist juggles between metastatic cancer, these specialists juggle treaty benefits under Section 90A, withholding taxes under Section 195 and equalization levies. To determine the source of income for royalty and fees for technical services (FTS) (Sections 9(1)(vi) and 9(1)(vii)) are their tactical moves, helping clients manage tax exposure. These strategists also deal with Foreign Tax Credit (FTC) rules, ensuring businesses do not suffer double taxation.

3. • Transfer pricing - Super Specialists of Diagnostic Benchmarking: At the heart of international tax—fall Sections 92 to 92F, requiring meticulous benchmarking to ensure arm’s-length pricing. Transfer pricing is the art of balancing related-party transactions. Guided by Sections 92 to 92F, these specialists ensure arm’s-length pricing while documenting compliance rigorously under Rule 10D. They delve into benchmarking, comparable analysis, and profit attribution, crafting arguments that stand up to scrutiny. The master file and country-by-country reporting (CbCR) requirements under Section 286 are their tools for demonstrating transparency in a globalized economy.

4. Corporate Restructuring - Orthopaedic Surgeons: Corporate restructuring experts function like orthopaedic surgeons, realigning the bones of a business to restore functional efficiency. Whether it's through mergers, demergers, or reorganizations either through Share Purchase, Slump Sale or Asset Sale - these specialists deal with provisions under Sections 230-234 of the Companies Act and Sections 47 and 2(19AA) of the Income Tax Act. Their role is to ensure tax-neutral treatment during reorganizations while taking advantage of deductions and allowances under Section 32 (depreciation) and Section 35 (deductions for capital expenditure). Like orthopaedic specialists ensuring the proper healing of a fractured bone, these experts ensure minimal disruption and maximum tax efficiency in business transformations, allowing companies to remain competitive and compliant. These experts balance between ensuring compliance and enhancing post-restructuring corporate health. 

5. M&A Corporate - Surgeons: M&A tax specialists are the surgeons of the corporate world, performing delicate operations on businesses undergoing mergers, demergers, and acquisitions. M&A tax experts are the precision surgeons of the taxation world, specializing in the clean and efficient restructuring of corporate entities. Their toolkit includes Sections 47, 50B, and 72A dealing with capital gains exemptions for amalgamations and the computation of gains on slump sales, respectively and valuation under Rule 11UA. Section 50D governs the fair market value of assets transferred, often forming the crux of disputes in valuation cases. Meanwhile, Section 56(2)(x) ensures that the transfer of shares and property at undervalued rates does not escape taxation. These experts craft tax-efficient restructuring plans that align with both corporate strategy and legal compliance. Sections 32 and 35 govern the allowances and deductions available for business reorganizations, akin to how orthopaedic surgeons assess the best path for healing broken bones—ensuring minimal disruption while maximizing long-term functionality. Their aim is to minimize tax leakage and ensure business continuity, much like a surgeon ensuring that a patient's recovery is swift and seamless. By leveraging tax-neutral provisions, M&A tax experts help businesses restructure without incurring excessive capital gains taxes, ensuring that transformations proceed smoothly. Just as a cardiovascular surgeon must ensure blood flows smoothly through newly connected veins, M&A specialists use provisions under Section 47 (exemptions for business transfers) and Section 50B (tax on capital gains) to ensure the smooth flow of assets and liabilities between entities.

6. NGOs, Trusts, and Charitable Organizations, the preventive health coach: In the realm of altruism, tax specialists play the role of healers. NGOs and trusts rely on Sections 11, 12, and 13 to claim exemptions for income applied towards charitable purposes. Section 80G, a favourite for donors, facilitates tax-deductible contributions, making philanthropy a win-win. Navigating compliance with Section 12AB (mandatory registration) and ensuring adherence to the limitations on business income require a deft touch. For trusts engaging in corpus donations, specialists ensure that tax benefits are maximized while maintaining transparency.

7. Startups, AIFs, and Venture Funds, the Innovators’ : For startups and investors, tax specialists function as enablers, helping them traverse the complexities of Sections 54GB (capital gains exemptions for reinvestment in startups) and 80-IAC (deduction for eligible startups). Venture capital funds and Alternative Investment Funds (AIFs) rely on Sections 115UB and 10(23FB) for pass-through taxation. Private equity deals bring specialists into the domain of Sections 56(2)(viib), tackling angel tax issues, and Sections 68 and 69, ensuring the legitimacy of funding sources. These professionals ensure that innovation thrives without getting bogged down by tax hurdles.

The Specialists Who Keep India’s Tax Health in Check - The Indian Income Tax Act, with its 298 sections and countless rules, remains a complex and evolving terrain. Tax specialists, much like doctors, bring clarity and precision to this landscape, ensuring that individuals, corporations, and institutions stay compliant while minimizing liabilities. Their expertise—ranging from personal tax to international transactions—not only addresses today’s needs but also anticipates tomorrow’s challenges. In a world where death and taxes remain the only certainties, these professionals provide a vital service—the tax equivalent of healing and prevention—ensuring that the economy’s veins remain open and its heartbeat steady.

As multinational enterprises (MNEs) increasingly leverage international tax treaties to minimize costs, governments worldwide grapple with curtailing treaty abuse through tactics like "treaty shopping." This strategy, often executed by third-country residents capitalizing on favorable treaties between other nations, presents a unique challenge to tax integrity.

The Mechanisms of Treaty Shopping Prevention

To counter treaty shopping, the OECD's Base Erosion and Profit Shifting (BEPS) Action 6 proposed a three-fold strategy: establishing treaty intent against abuse, introducing Limitation-on-Benefits (LOB) clauses, and applying the Principal Purpose Test (PPT). LOB provisions restrict treaty benefits to entities with substantive economic ties to the contracting countries, while the PPT, a broader anti-abuse rule, denies treaty benefits where achieving tax advantages was a principal purpose of the transaction.

Evolution of the India-Mauritius Tax Treaty

Signed in 1983, the India-Mauritius treaty was overhauled in 2016, enabling India to tax capital gains on shares acquired after April 1, 2017. In 2024, a new protocol introduced two critical changes: an amended preamble and the insertion of Article 27B to align with BEPS standards. This revision shifts the treaty's focus from avoiding double taxation to preventing misuse, broadening India’s oversight over treaty benefits.

Article 27B: A More Intrusive Shield

The newly introduced Article 27B, with its non-obstante clause, gives the PPT priority over other treaty clauses. This allows Indian tax authorities to deny treaty benefits if any part of a transaction was intended to gain treaty advantages, subject to a "reasonable conclusion." This change brings all Mauritius-linked transactions, even those complying with LOB, under closer scrutiny.

Grandfathered Investments and Potential Retrospective Impact

Questions linger about whether the protocol will apply retrospectively, possibly affecting investments made before 2017 that were previously "grandfathered" under the old terms. This ambiguity, if resolved unfavorably for taxpayers, may lead to a wave of litigation. Additionally, Article 27B could end protections on pre-2017 investments, casting doubt on long-term security for investors relying on previous terms.

PPT and GAAR: India’s Double Guardrail

India's General Anti-Avoidance Rules (GAAR) already provide anti-abuse measures but only apply when tax benefits exceed INR three crores. The PPT, by contrast, lacks a monetary threshold and applies broadly, irrespective of transaction size. In cases overlapping both frameworks, GAAR may not apply if PPT applies, giving tax authorities enhanced power to challenge treaty benefits without GAAR’s limitations.

Implications for FDI from Mauritius

India’s decision not to apply the Multilateral Instrument (MLI) to the Mauritius treaty contrasts with its PPT-inclusive treaties with countries like Singapore and the UK. This leaves Mauritius-based investors particularly exposed, as any tax advantage perceived to have a principal purpose of reducing taxes could lead to scrutiny or withholding tax liabilities. Given Mauritius is India’s largest FDI source, this shift may dampen investment flows, as tax residency certificates alone might no longer suffice to secure treaty benefits.

In summary, India's reinforcement of anti-treaty shopping measures with Mauritius signals a stricter regulatory posture. By empowering tax authorities to scrutinize treaty benefits more rigorously, the amendment curtails loopholes, potentially reshaping foreign investment dynamics in India.

When a company as vast as TheraGenix spreads its roots across borders, the business strategies extend far beyond merely maximizing profits. They delve deep into the financial underworld where every penny saved is a victory in the battle against taxation. Based in the United States, this med-tech titan, generating $57 billion globally with an impressive EBITDA margin of 32%, finds itself at the heart of one of the most complex international tax mazes ever seen. The battlefield? India. And the stakes? Hundreds of millions of dollars in tax liabilities.

Act 1: Building the Financial Behemoth – The Anatomy of TheraGenix

TheraGenix entered India in 2008 by investing $600 million to establish a manufacturing plant in Gujarat, an R&D center in Delhi, and a corporate office in Gurugram. Due to FDI considerations at the time, a wholly-owned subsidiary (WOS) couldn’t be created, leading to the company holding a minority stake alongside an Indian investor.

TheraGenix’s global corporate structure is a chessboard, with entities located strategically across Switzerland, Ireland, the Cayman Islands, and India, each representing a knight or a rook carefully placed to checkmate the taxman. In India, the company operates through TheraGenix India Pvt. Ltd., a manufacturing powerhouse that churns out medical equipment valued at $2.4 billion annually. The subsidiary’s gross margin stands at 40%, making it a vital cog in TheraGenix’s global empire.

The Indian subsidiary plays a unique role—it supplies cutting-edge medical equipment across Asia while also outsourcing its R&D efforts to Israel and sourcing parts from a supplier in Ukraine. Managing this sprawling web from the American headquarters in New York is a task that requires careful navigation, as missteps could cost the company millions in tax penalties. The complexity doesn’t stop here. The Swiss holding company, an intermediary in this cross-border chain, holds the intellectual property (IP) rights for the technology used in India. The Irish subsidiary licenses this technology to TheraGenix India, earning hefty royalties for the parent company in the U.S. Finally, the Cayman Islands-based entity handles cash flows related to dividends and royalties, skillfully reducing the tax burden at every stage.

It’s a complex game of tax optimization, with every entity in TheraGenix’s structure serving a strategic purpose. The American management team, spearheaded by CEO Daniel Roberts, constantly weighs the risks of tax exposure against the rewards of tax savings. The stakes are too high for complacency. Every dividend repatriated, every royalty collected, and every fee for technical services (FTS) paid needs to fit perfectly into the grand tax minimization strategy. One wrong move, and the house of cards could come crashing down, triggering an avalanche of tax audits, hefty penalties, and, worst of all, reputational damage that would shake investor confidence.

But as this strategy unfolds, the Indian tax authorities stand like sentinels, scrutinizing every transaction that crosses international borders. At the center of it all lies a suite of tax concepts—DTAA, Transfer Pricing rules, Permanent Establishment, FTS taxation, General Anti-Avoidance Rules (GAAR), and more—that form the arena in which this battle will be fought.

As TheraGenix executives in New York sip their morning coffee, their Indian colleagues in Gujarat are waking up to a different reality. Over the past two years, the company’s cost structure has ballooned. The Russia-Ukraine conflict has disrupted the supply of rare metals essential for pacemakers, while the Israel-Iran skirmishes have cut off crucial sensors used in dialysis machines. Add to this the turbulence of rising labor unrest at the Indian subsidiary’s plant, and you have the perfect cocktail for corporate drama. The question is no longer how to increase margins but how to safely remit profits from India while staying on the right side of an increasingly vigilant tax authority. 

Act 2: The Double Taxation Avoidance Agreement (DTAA) and TRC

Taxation doesn’t happen in a vacuum. TheraGenix’s international structure hinges on exploiting Double Taxation Avoidance Agreements (DTAA). The Indian entity relies on its DTAA with Switzerland to lower withholding tax rates on dividends, while the Irish subsidiary benefits from a reduced rate on royalties through the India-Ireland DTAA. When TheraGenix sends dividends from its Indian subsidiary to its Swiss holding company, these payments are shielded by the India-Switzerland Double Taxation Avoidance Agreement (DTAA). This agreement ensures that the same income isn’t taxed twice in both India and Switzerland. But using the DTAA isn’t as simple as pointing to the treaty. Indian tax authorities require that the Swiss entity provide a Tax Residency Certificate (TRC), proving it is indeed a tax resident of Switzerland and not a post office box with a Swiss address.

With a 15% withholding tax on dividends, this is the best-case scenario for TheraGenix’s financial team. But lurking in the shadows is the question of "substance." Does the Swiss entity really operate in Switzerland? Or is it merely a conduit for avoiding taxes on dividends and royalties? The Indian authorities, wielding substance-over-form principles, could deny treaty benefits if they determine that the Swiss entity lacks real economic activity.

Act 3: The "Make-Available" Clause on Fees for Technical Services (FTS)

TheraGenix is not just a manufacturer; it’s a purveyor of specialized technical services critical for the Indian subsidiary’s operations. The American HQ sends engineers, auditors, and IT specialists to India to ensure compliance with global standards. Payments made by the Indian subsidiary to the American parent company for these services fall under the category of Fees for Technical Services (FTS), which are subject to withholding tax in India.

Here’s the catch—India’s DTAA with the United States contains a "Make-Available" clause. According to this clause, if the technical services provided by the American entity merely troubleshoot problems without transferring long-term knowledge or skills to the Indian subsidiary, the FTS may be exempt from Indian taxation. TheraGenix’s tax team in New York argues that its services don’t "make available" any expertise that the Indian subsidiary could use independently. But the Indian tax authorities are notoriously skeptical. The line between troubleshooting and skill transfer is fine, and one adverse ruling could add millions to TheraGenix’s tax bill.

Case Law Update:
In the recent ABB FZ LLC v. DCIT (2023) case, the Supreme Court ruled that for the "make-available" clause to apply, the foreign entity must provide not just technical services, but also enable the recipient to use this knowledge on its own in the future. This ruling further complicates TheraGenix’s defense, as it must now prove that none of the technical services provided "equip" the Indian subsidiary with independent operational knowledge.

Act 4: The Royalty Dance and Transfer Pricing Risks

In addition to the technical services, royalties play a central role in TheraGenix’s India strategy. The Indian subsidiary pays royalties to the Irish entity for the right to use proprietary software and technology, with royalties carefully priced to ensure that TheraGenix doesn’t fall foul of India’s Transfer Pricing regulations. Transfer Pricing rules require that any transaction between related entities—like the Indian subsidiary and the Irish entity—be conducted at arm’s length, i.e., on terms that would apply if the two companies were unrelated.

This is where TheraGenix’s CFO, Maria Sanchez, walks a tightrope. Too low a royalty payment, and the Indian tax authorities could accuse TheraGenix of underreporting income in India to avoid paying higher taxes. Too high, and the Irish entity could face scrutiny from Irish tax authorities for inflating its profits to escape taxes. With margins squeezed across the board due to geopolitical instability in Ukraine and rising inflation, TheraGenix can’t afford a mistake. Yet, in this dance of royalties, one misstep could trigger a tax audit that would cost more than just money—it would cost valuable time and could lead to a domino effect across the company’s global operations.

Recent Case Law Impact:
In the Vodafone India Services Private Limited v. UOI (2022) case, the Bombay High Court ruled that excessive royalty payments between related entities could trigger Transfer Pricing adjustments, even if these payments were covered by a DTAA. This precedent serves as a cautionary tale for TheraGenix, reminding the company that mere reliance on treaties is not enough; it must ensure compliance with arm’s length principles.

Act 5: Permanent Establishment (PE) and Significant Economic Presence (SEP)

One of the most pressing concerns for TheraGenix is the risk of being caught in the web of Permanent Establishment (PE) rules. Under Indian law, a foreign company can be taxed on its income in India if it is deemed to have a PE in the country. PE can be triggered if TheraGenix’s expatriate employees are too involved in day-to-day decision-making at the Indian subsidiary. This is particularly relevant given the American HQ’s direct involvement in high-level business decisions for the Indian operations.

But there’s a newer, more insidious threat on the horizon: the concept of Significant Economic Presence (SEP). India’s SEP rule expands the definition of PE to include companies that engage in significant digital or commercial activities in India without having a physical presence. Although TheraGenix’s physical operations are robust, its reliance on digital technology and remote services from Switzerland and the U.S. may expose it to additional tax liabilities under SEP rules.

Recent Case Law Update:
In Google India Private Limited v. ADIT (2021), the Delhi High Court held that significant economic presence through digital transactions could indeed trigger a PE under Indian law, even in the absence of a physical office. This precedent poses a fresh threat to TheraGenix’s carefully planned operations.

Act 6: The General Anti-Avoidance Rule (GAAR) and the Indian Taxman's Sword

If the Indian tax authorities feel that TheraGenix’s entire corporate structure is designed to minimize taxes rather than conduct genuine business, they could invoke the General Anti-Avoidance Rule (GAAR). GAAR is India’s weapon of choice to strike down any transaction or structure primarily aimed at avoiding taxes. Under GAAR, the entire web of DTAAs, TRCs, and royalty payments could be disregarded if the authorities find that TheraGenix is engaging in "impermissible avoidance."

TheraGenix’s legal team in Mumbai, led by the seasoned advocate Nandini Patel, must demonstrate that every entity in its corporate structure has "substance"—real employees, real offices, and real operations. But the line between legitimate tax planning and impermissible tax avoidance is thin, and GAAR’s subjective nature makes it a dangerous tool. One wrong interpretation, and TheraGenix could be liable for millions in back taxes and penalties, undoing years of meticulous planning.

Act 7: The long arm of FEMA compliance and Defence Documentation

Amid all this, the firm must ensure smooth repatriation of profits, efficient remittance of dividends, and compliance with Indian regulations under FEMA, all while safeguarding against direct and indirect tax liabilities in multiple jurisdictions. To remit profits from India to the U.S., TheraGenix must ensure compliance with the Foreign Exchange Management Act (FEMA) and navigate the latest changes in Indian tax law, including the abolition of the Dividend Distribution Tax (DDT). Under this new regime, dividends are now taxed in the hands of shareholders, requiring the Indian subsidiary to deduct withholding tax (WHT) before transferring funds abroad. Complicating matters further is India’s patchwork of DTAAs. Under domestic law, TheraGenix’s Indian subsidiary is required to withhold 20% tax on dividends paid to foreign shareholders. However, under the India-Switzerland DTAA, this rate can be reduced to 10%, provided the Swiss entity furnishes the appropriate Tax Residency Certificate (TRC) and other documentation. As a result, TheraGenix has developed an intricate strategy to ensure that its Swiss subsidiary benefits from lower taxation, preserving valuable profits for future reinvestment. But DTAAs are not always a panacea. In a landmark ruling known as the Nestle Case (2023), the Indian Supreme Court restricted the Most Favored Nation (MFN) clause to countries that were members of the OECD at the time of signing the treaty protocol. TheraGenix, which routes part of its royalty income through a Cayman Islands entity, must now carefully evaluate whether it can claim lower withholding rates or face the full brunt of Indian taxation. With no DTAA between India and the Cayman Islands, the company may be exposed to 20% WHT unless an alternative route can be found. As the CFO of TheraGenix quipped in a recent board meeting, “We’re no longer just managing a supply chain; we’re navigating a tax minefield.”

And the drama doesn't end there. Amid rising labor costs and political instability, the management in the U.S. has decided to restructure its Indian operations. A proposal has emerged to shift key manufacturing functions from Gujarat to a new facility in Tamil Nadu, under a newly-formed subsidiary held by the Swiss company. This maneuver, while ostensibly designed to tap into Tamil Nadu's advanced infrastructure, is as much about avoiding the escalating wage demands of the Gujarat workforce, who have threatened to strike. In New York, TheraGenix’s top brass sees the Tamil Nadu expansion as an opportunity to streamline operations, increase profitability, and escape the labor unrest that has plagued its Gujarat plant. But any such restructuring comes with a cascade of tax implications.

Firstly, by setting up a new subsidiary under the Swiss holding company, TheraGenix is potentially laying itself open to further Permanent Establishment (PE) risks. If the Indian tax authorities perceive the Swiss company as effectively controlling the Indian subsidiary’s day-to-day operations, they could deem the subsidiary a PE, triggering global tax exposure for the entire Swiss entity. This risk has been exacerbated by the increasing presence of expatriates from Switzerland and the U.S., who are sent to oversee critical operations in India.

Adding to this complexity, TheraGenix must also be cautious of the Fee for Technical Services (FTS) provisions under India’s tax treaties. The Indian subsidiary frequently receives technical assistance from its American parent, and the tax implications hinge on whether the FTS arrangement transfers “technical knowledge” that would trigger the make-available clause—a provision that has long vexed multinational corporations. Under this clause, if the technical knowledge transferred allows the Indian entity to independently apply that knowledge in the future, the payments would attract a higher tax rate.

Finally, TheraGenix must ensure compliance with India’s Foreign Exchange Management Act (FEMA). With cross-border transactions involving foreign subsidiaries, FEMA requires meticulous documentation of funds transferred between India and other countries. Any slip-up in compliance could result in severe penalties, not just from tax authorities, but from regulatory bodies as well.

TheraGenix’s CFO, Maria Sanchez, prepares Defence Documentation—a compilation of transfer pricing reports, contracts, TRCs, and business justifications—to defend against potential inquiries. This documentation is not merely a formality. It’s a shield against the Indian taxman’s probing eyes and serves as a first line of defense in any litigation.

Act 8: The Art of Profit Repatriation and Dividend Remittance: The Complex Path Home

TheraGenix's Indian subsidiary must adhere to a detailed and multi-step process to repatriate profits via dividend payments to its ultimate parent in the United States. This process is essential not only to ensure the flow of funds but also to navigate the intricate tax framework laid out by the Foreign Exchange Management Act (FEMA), the Income Tax Act, and bilateral tax treaties. On average, MNCs typically repatriate between 20% to 40% of their profits as dividends to the parent company. 

Cash repatriation has long been a strategic lever for multinationals looking to return profits to the United States. However, this seemingly straightforward maneuver can carry significant tax implications. Take, for instance, a US company whose subsidiary in China decides to distribute its earnings to the parent company. Such distributions may be subject to withholding tax in China, while simultaneously being taxed as dividend income in the US—a double whammy that could erode the intended benefits of repatriation. Before opting for a particular method of repatriation, companies must assess the tax costs associated with each approach and explore alternatives to mitigate these expenses. Prior to the Tax Cuts and Jobs Act (TCJA) of 2017, US firms often deferred taxation on their foreign subsidiaries’ earnings by refraining from paying dividends, allowing profits to accumulate offshore. While some provisions, such as Subpart F income, still imposed taxation on foreign earnings, they were narrowly defined and often navigated through clever financial engineering. The enactment of the TCJA marked a significant shift in this landscape, introducing a one-time repatriation tax on profits stashed away in foreign corporations. This legislation had profound repercussions for many multinationals, compelling them to rethink their cash management strategies. Additionally, the TCJA ushered in the global intangible low-taxed income (GILTI) regime, which mandates that companies pay tax on their foreign earnings in the year they are realized, regardless of whether any actual distributions occur. Under this framework, such income is classified as previously taxed income, fundamentally altering the calculus for multinationals weighing the benefits of repatriation. There are significant differences between how the United States taxes individuals and corporations that own foreign corporations. Individuals may make an election under Internal Revenue Code (IRC) Section 962, which allows the individual to be treated as a corporation with respect to certain income from foreign corporations. While there are tax benefits to this election, there are significant impacts on a taxpayer’s previously taxed income and the tax effects of future cash repatriations. Individual taxpayers should consider the tax impact on future cash repatriation before making a Section 962 election.

In the intricate web of international taxation, the distinction between how foreign and domestic entities file returns in India offers a revealing glimpse into the underlying principles of tax compliance. Foreign companies operating in India, often bound by the provisions of Double Taxation Avoidance Agreements (DTAAs), are subject to withholding taxes on gross payments. These entities typically file what are known as gross returns. These returns, in essence, capture their total earnings from Indian sources without factoring in any expenses. The rationale behind this approach is straightforward: foreign firms can claim a refund if the taxes withheld exceed their actual liability, or alternatively, remit any additional tax due if withholding has fallen short.

By contrast, Indian entities navigate a different path. Filing net returns, they report income after deducting permissible expenses under the Income Tax Act. This net figure then forms the basis for calculating tax liabilities. The logic is clear — domestic entities are taxed on actual profits, while foreign companies contend with taxes on gross inflows, reflecting the broader uncertainty around non-resident taxation. This bifurcated approach underscores India's intricate tax landscape, where residency status sharply influences the manner in which companies engage with the tax authorities.

Key Restrictions and Procedures for Dividend Remittance

Avoiding PE Exposure

• Limited Delegation: Expatriates must avoid making critical business decisions in India, to prevent being classified as a "fixed place PE."

• Technical Services under FTS: American employees sent under Fee for Technical Services (FTS) agreements must ensure that their stay is limited to training and advisory roles, without engaging in managerial duties. This could help avoid triggering the "make-available" clause under the India-U.S. DTAA, which exempts certain technical services from taxation if no technology or knowledge is transferred that enables the Indian entity to independently perform such functions.

Procedures for Remittance: Steps and Compliance

Before dividends are remitted, TheraGenix must follow a set of compliance measures:

• Board Resolution: The Indian subsidiary's board must approve the dividend declaration and ensure profits are sufficient to justify the payment.

• Tax Deduction at Source (TDS): The company must withhold tax before remitting dividends. For example, if the Swiss parent provides the necessary documents (TRC, Form 10F, etc.), TheraGenix can apply the lower 10% rate under the DTAA. Otherwise, the default 20% rate applies.

• Form 15CA and 15CB: Form 15CA is filed online with the Indian tax authorities, detailing the amount of remittance and the applicable tax rate. Form 15CB, issued by a Chartered Accountant, certifies the accuracy of tax deductions and the correctness of treaty claims. These forms must be submitted to the authorized bank handling the foreign exchange transaction.

• Submission to Bank: All documentation, including the TRC and CA-certified forms, must be submitted to the authorized dealer bank for processing the foreign exchange remittance.

• Annual Reporting: TheraGenix is also required to file an Annual Return on Foreign Liabilities and Assets (FLA) with the RBI, detailing all dividend remittances and ensuring proper disclosure of foreign investments in India.

FEMA Compliance: The Legal Framework

Remitting dividends from India to foreign shareholders is permitted under the automatic route (no prior RBI approval required), provided profits are from regular operations. However, dividends from sources like capital gains require special permission. TheraGenix must ensure its dividends are repatriated in freely convertible foreign currency—usually USD or EUR—and that this flow is reported to the RBI.

Withholding Tax: The Challenge of DTAA Navigation

India’s previous Dividend Distribution Tax (DDT) has been replaced by taxation in the hands of shareholders. TheraGenix’s Indian subsidiary must now deduct withholding tax (WHT) before remitting dividends to its Swiss parent. This tax can be complex to manage, as it depends on the relevant Double Taxation Avoidance Agreement (DTAA):

• Domestic Law imposes a standard 20% WHT on dividends paid to non-residents. However, under the DTAA between India and Switzerland, the rate may drop to 10%, provided the Swiss company furnishes a valid Tax Residency Certificate (TRC). A lower rate under DTAA would help preserve profits for future reinvestment in India.

• For the Cayman Islands company to receive royalties, TheraGenix must assess whether it can claim DTAA benefits with India. Since the Cayman Islands has no tax treaty with India, it is subject to full taxation unless routed through a favourable jurisdiction.

The Nestle Case (2023) adds complexity here. The Indian Supreme Court ruled that the Most Favored Nation (MFN) clause only applies to countries that were OECD members at the time of signing the DTAA protocol. This means TheraGenix must carefully evaluate which of its holding companies can avail of lower tax rates, especially if some of these entities are based in countries that joined the OECD later, like Lithuania or Slovenia.

Failure to comply with these provisions can result in severe penalties, as Indian regulators have increased scrutiny on outbound remittances in recent years. The risk of non-compliance is especially high for TheraGenix, given its multi-layered corporate structure, involving jurisdictions with varying levels of regulatory transparency. Annual Foreign Liabilities and Assets (FLA) reports must be filed with the RBI to track capital flows, ensuring transparency in the eyes of both Indian and global regulators. 

Multiple Choice Questions

1. Under what conditions can TheraGenix claim benefits under the India-Switzerland DTAA?
   a) When the Swiss entity holds substantial business operations in Switzerland
   b) When the Swiss entity obtains a valid Tax Residency Certificate (TRC)
   c) When the Indian subsidiary pays royalties to the Swiss entity
   d) When the Swiss entity has no digital presence in India

2. What is a key factor that could trigger Permanent Establishment (PE) for TheraGenix in India?
   a) Regular dividends paid by the Indian subsidiary
   b) Expatriate employees being too involved in the Indian subsidiary’s decision-making
   c) Payments for Fees for Technical Services (FTS)
   d) Royalties being paid to the Cayman entity

3. What would likely invalidate the application of the "Make-Available" clause for FTS in TheraGenix’s case?
   a) If the technical services equip the Indian subsidiary with independent skills and knowledge
   b) If the technical services are short-term and troubleshooting in nature
   c) If the Indian subsidiary is only provided with operational assistance
   d) If the technical services result in transfer of physical equipment

4. What concept could cause TheraGenix’s digital activities to be taxed under Indian law, even without a physical presence?
   a) Transfer Pricing
   b) Tax Residency Certificate
   c) GAAR
   d) Significant Economic Presence (SEP)

5. In which case would GAAR most likely apply to TheraGenix’s tax strategy?
   a) If TheraGenix fails to submit Transfer Pricing documentation
   b) If the Indian subsidiary pays royalties to the Cayman Islands entity
   c) If the Indian tax authorities determine the company’s structure is primarily for tax avoidance
   d) If the Indian subsidiary engages in digital transactions without physical presence

6. What is the primary purpose of the "Make-Available" clause in a DTAA?
   a) To ensure that technical services are not subject to double taxation
   b) To determine if the technical services provided result in the transfer of skills or knowledge
   c) To limit the taxation of royalties paid for intellectual property
   d) To reduce withholding tax on dividends

7. How can TheraGenix reduce its withholding tax on dividends paid to its Swiss subsidiary?
   a) By invoking the Transfer Pricing regulations
   b) By using the "Make-Available" clause in the India-Switzerland DTAA
   c) By claiming benefits under the MFN clause of the DTAA
   d) By ensuring the Indian entity does not create a Permanent Establishment

8. Under what condition would GAAR likely apply to TheraGenix's structure?
   a) If the company fails to obtain a Tax Residency Certificate (TRC)
   b) If the Indian tax authorities determine that the company’s structure is primarily designed for tax avoidance
   c) If the royalties paid to the Cayman entity are not at arm’s length
   d) If the Indian subsidiary is deemed to have a Permanent Establishment