When you are expanding from India into the U.S. you need to consider your short and long trem investment objectives. Are you entering the U.S. market to expand market share and build long-term cash flow or are you expanding into the U.S. market to drive capital growth?

 

Entity Choice

An article in Harvard Business Review states that a business founder’s role and vision for steady growth of the business is thinking about its long term objectives. This drives the entity choice decision when entering a new country or market.

The common entity choices in the U.S. market are a limited liability company (LLC) or a C-corporation (C Corp).  An LLC is akin to a limited liability partnership and a C Corp is like a private limited company in India.  An entity is taxed on federal and state levels in the U.S.

India Corporate Residency vs U.S. Corporate Residency

The corporate residency rules in India and the U.S. are substantially different.  Global families and business founders should be conscious of these differences to ensure their personal and corporate compliances are met in both the countries.

In India, a corporate entity includes a company formed and registered under the Companies Act, 2013, company formed under corporate laws of another country, or an institution, association or body declared by general or special order of the Indian tax department i.e. Central Board of Direct Tax (CBDT).  A corporate entity is an Indian tax resident if it is formed and registered under the Companies Act, 2013, or its place of effective management (POEM) is in India at any time during the current tax year.  Broadly, POEM means the place where key management and commercial decisions necessary for the business as a whole, are in substance made.  It is important to note that foreign corporations are treated as foreign corporations to be taxed at higher tax rate (base corporate tax rate of 40%) in comparison to domestic Indian corporations (general base corporate tax rate of 30%).

In the U.S., a corporation incorporated in the U.S. is a U.S. tax resident.  Foreign businesses with any income effectively connected to the trade or business or Fixed, Determinable, Annual and Periodic (FDAP) is taxed in the U.S.

 

U.S. Corporate Tax Rate vs India Corporate Tax Rate

U.S. federal corporate tax rate:

For U.S. tax resident corporations
21% corporate tax rate
No Alternate minimum tax rate
For nonresident corporations
21% corporate tax rate
No Alternate minimum tax rate
In addition to the U.S. federal corporate tax rates, the corporations are taxable in the state(s) where the corporations have been registered and doing business.  The corporate state tax rate ranges from 3% in North Carolina to 12% in Iowa.

India corporate tax rate (as applicable for assessment year 2019-2020)

For Indian resident corporations
30% General base corporate tax rate
29% Base corporate tax rate for a corporation with turnover less than INR 50 million
25% Base corporate tax rate for a corporation with turnover less than INR 500 million
25% Base corporate tax rate for qualified manufacturing / research companies
18.5% Alternate minimum tax rate
The above base corporate tax rate is increased by:

  • surcharge (depending on the total income) on tax.  A surcharge of 7% where total income exceeds INR 10 million and 12% where total income exceeds INR 100 million; and
  • education cess (EC) of 2% and secondary and higher education cess (SHEC) of 1%, i.e. total of 3% of the sum of tax and surcharge.
For nonresident / foreign corporations
40% General base corporate tax rate
The above base corporate tax rate is increased by:

  • surcharge (depending on the total income) of base corporate tax rate.  A surcharge of 2% where total income exceeds INR 10 million and 5% where total income exceeds INR 100 million; and
  • EC of 2% and SHEC of 1%, i.e. total of 3% of the sum of base corporate tax and surcharge.

Withholding tax rates on dividends

U.S. India
Withholding tax rate on dividend is 30%. There is no withholding tax applicable on dividend distributions by Indian corporations.  However, a dividend distribution tax (DDT) applies at the net rate of 15% plus surcharge EC and SHEC.

Withholding tax rates on royalties

U.S. India
Withholding tax rate on royalties is 30%. Withholding tax rate on royalties is 10% plus surcharge EC and SHEC.

Withholding tax rate on interest

U.S. India
Withholding tax rate on interest is 30%.  However, zero percent applies for portfolio interest and bank deposits. Withholding tax rates on interest is 5% for interest on long-term loans/bonds, 10% for foreign currency convertible bonds and 20% for others.  The rates are increased by applicable surcharge, EC and SHEC

Withholding tax on branch profits

U.S. India
Withholding tax rate on branch profits is 30%. There is no withholding tax in relation to branch profits.

Moving from India to the U.S.

If you are planning to relocate from India to the U.S. or spend a substantial amount of time in the U.S., it is important to consider the impact of your travel on your residency status. A change in residence can directly impact which jurisdiction has taxing rights over your income and assets and how your financial affairs should be reported with tax authorities and financial institutions.

The U.S. taxes U.S. Persons, as defined in the Internal Revenue Code 1986 (the Code), on a worldwide basis and non-residents on U.S. sourced income only. You are considered a U.S. Person if you are a citizen or ‘resident of the United States’. You are considered a resident of the U.S. if you are a green card holder, meet the requirements of the ‘substantial presence test’ (SPT).

An individual is an Indian tax resident if he resides in India:

  • for 182 days or more during the current tax year; or
  • for 60 days or more in India during the current tax year and for 365 days or more during 4 tax years preceding the current tax year. The period of 60 days is replaced by 182 days where an Indian citizen or a person of Indian origin (i.e., a person who’s either parents or grand-parents were born in undivided India) comes on a visit to India, but not for a permanent stay.

An individual is a not ordinarily resident in India if he:

  • has been a non-resident in India for 9 out of 10 tax years preceding the current tax year; or
  • has been in India for 729 days or less during 7 years preceding the current tax year.

An individual is a non-resident Indian is he does not satisfy any of the above requirements during the tax year.

India follows residence-based taxation, i.e. the income is taxable in India based on the residence.  Taxation is not based on citizenship as is the case in the U.S.  An Indian resident is taxable on his worldwide income like a U.S. citizen or resident.  However, a non-resident Indian is only taxable for the income received, accrued or derived from India, unlike in the U.S. where even if the U.S. citizen even if residing outside the U.S., he will still be considered as a US resident and taxable on his worldwide income.

 

Investing from India to the U.S.

Structuring for passive investment in the U.S. requires an understanding of the U.S. and Indian tax residency rules, the circumstances in which income tax is levied in both countries, foreign tax credits and the application of withholding tax rules, the impact of U.S. Estate Tax and how entities are classified in either India or the U.S.

 

Selling a business that is operating in the India and the U.S.

Simplifying tax consideration in selling a business may be help the seller and acquirer to align their interests.

In our experience it will be the business objectives of the acquirer that will dictate the legal and economic structure of the deal.  It is important that you have visibility of the U.S. India compliance issues that can reduce a business’ value in a U.S. India deal:

  1. income tax information reporting;
  2. transfer pricing;
  3. withholding tax;
  4. sales tax filings;
  5. state income tax filings; and
  6. the characterization of employees as contractors.

 

 


OFFICES

DOWNLOADABLE DOCUMENTS

Newsletter

Newsletter Footer

  • This field is for validation purposes and should be left unchanged.