India Entry & Business Startup Consultings

Permanent Establishment

Permanent Establishment

With the advent of globalization and technological advancement, the world has shrunk to a global village wherein no destination is inaccessible. Consequently, the business houses around the world have become global in their operations and have been expanding their businesses beyond the boundaries of their countries into new markets in order to achieve growth. 

Over the years, two type of cross border transactions have emerged namely:

  1. Doing business with a country which involves foreign enterprises engaged in the business transactions with the residents of a country, without setting up any business presence in that country, and 
  2. Doing business in a country in which foreign enterprises establishes undertakes business activities by establishing its formal presence in it. The activities of such a company may be conducted by its employees or an agent, or from a fixed base through which it operates in a country. The main question in these type of transaction is which country has a right to tax the profits of the foreign enterprise and how the profits will be attributed between the resident country and the source country. This is where the international tax concepts of permanent establishment and profit attribution come into play. They lay down the principles and factors to be considered for the constitution of a permanent establishment, and the consequent profit attribution methods and the taxation mechanisms it should use to avoid double taxation. The concept of permanent establishment is recognized by most countries and has been incorporated by them in their domestic tax provisions and international tax treaties. 

Principally, a company incorporated in India is a resident in India and accordingly global income of an Indian Company is taxable in India. However, when a foreign enterprise extends its presence in India for carrying out its business activities in India, such presence beyond a permissible time period gives rise to the permanent establishment in India. There can be various types of permanent establishment, namely,

  1. Fixed Place Permanent Establishment 
  2. Construction Permanent Establishment
  3. Service Permanent Establishment
  4. Dependent Agent Permanent Establishment

Once the Permanent Establishment of a foreign enterprise is established, the income of the foreign enterprise which is attributable to the business operations in India shall be taxable in India. 

Our key services include the following:

  • Analyzing the business activities of the foreign company in India based on the nature of services and period of contract;
  • Obtaining permanent account number (PAN) and tax deduction account number (TAN) of permanent establishment from the Indian Tax Authorities;
  • Providing complete support to permanent establishment from maintaining books of accounts in India to finalization of such books accounts, and thereafter preparing the financial statement viz balance sheet and profit and loss account of such permanent establishment.
  • Assisting permanent establishment for timely compliance under the Income-tax Act, 1961;
  • Assisting permanent establishment in filing its return of income. 
  • Representation before the tax authorities in case the return of income is selected for audit/scrutiny. 
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