A wide tax rate differential between foreign and Indian resident corporations in India may allure foreign businesses to operate in India either by setting a branch office, liaison office, wholly owned subsidiary corporation or a limited liability partnership. We have discussed the different forms of entities set up in India in our whitepaper titled Interaction of Indian and U.S. Tax Laws and an earlier blog [#insert link India Blog 13.Establishing an Indian base].
Drawing an acceptance to foreign investment in India with favorable policy measures, foreign investors are funding information technology start-ups in India. Mostly foreign parent entities licenses know-how to group entities that allows it to penetrate markets worldwide. The group entities are generally required to withhold tax on royalty payments to the parent entity. This may result in parent entity to submit tax returns in various jurisdictions of the group entities. For instance, the foreign parent entity is required to file tax return in India to claim refund of the tax withheld in India. This administrative process to claim refund may take time but a checklist item for foreign entities to comply and it serves as a proof for tax paid in India.