Tax Implications of

Expatriates working in India

Forum for Expatriate Management

January 31, 2012

Mahesh Kumar

Topics for discussion

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1. Framework of analysis / planning

2. Determining tax residence

3. Taxation of expatriate’s income

4. Estate planning

5. Tax risks for foreign employer

6. Salary splits

7. Impact of Direct Taxes Code, 2010

8. Case studies

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Strategy

LawTax

The Framework

Determining tax residence

Residence under domestic law

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NotOrdinarily Resident

NotOrdinarily Resident

NO

YES

182 days in the relevant FY

60 days in the relevant FY* + 365 days in the

4 preceding years

Non-resident for 9 out of 10

preceding years

In India for < 729 days in 7

preceding years

YES

Ordinarily Resident

NO NO

NO

YES

Non-Resident

YES

* 182 days for citizens/PIOs

Dual residence tie-breaker

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Permanent home

Centre of vital interests

Habitual abode

Nationality

Mutual agreement procedure

Taxation of expatriate’s income

Scope of taxation

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Accrual of income (Domestic law)

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• Salaries earned in India

­ Services rendered in India

­ Income during rest / leave period succeeded by services rendered and forming part

of services contract

­ Employer’s location not relevant

• Fees for technical, managerial or consultancy services

­ Services are utilized in a business or profession in India

­ Non-resident need not have a place of business / business connection in India

­ Non-resident need not render services in India

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Accrual of income (Treaty law)

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• Dependent personal services

­ India does not have a right to tax income if:

o Employee is in India for a period lesser than 183 days

o Remuneration is paid by or on behalf of an employer who is a resident of the home

country

o Remuneration is not borne by a PE or fixed base which the employer has in India

• Independent personal services

­ Professional services include: independent scientific, literary, artistic, educational or

teaching activities as well as the independent activities of physicians, surgeons, lawyers,

engineers, architects, dentists and accountants

­ India may tax income only if:

o Non-resident has a fixed based in India

o Non-resident stays in India for a period exceeding day threshold (Eg: 90/183 days)© Nishith Desai Associates

Specific exemptions

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• Salary received by foreign employee if:

­ Foreign enterprise not is not engaged in any trade or business in India

­ Stay in India does not exceed 90 days

­ Employer does not claim deduction

• Salary for services rendered in connection with employment on a foreign ship where total stay

in India is lesser than 90 days

• Other select exemptions. Eg:

­ leave encashment

­ gratuity

­ house rent allowance

­ voluntary retirement compensation

­ per diem allowances

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• Tax slabs (FY 2011 - 2012)

• Dividend income exempt in the hands of shareholder. Company subject to DDT

• Capital gains

­ Long-term: 20% (NRI: 10%)

­ Short term: 30%

­ Sale of shares on floor of stock exchange: Exempt

Tax rates

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Double taxation relief

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• Foreign tax credit under home country’s domestic tax law

• Double taxation relief under applicable tax treaty

• Tax equalization arrangements

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Withholding Tax

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• Tax withholding by person making payment of salary income on the basis of employees

estimated income for the FY

• Is a non-resident employer required to withhold tax ?

­ Impact of Supreme Court’s decision in the Vodafone case (dated Jan 20, 2012) ?

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Estate planning

Estate Planning

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• Developing tax efficient structures taking into account:

­ Residency and tax credit issues

­ Deemed disposal taxes

­ Estate duty

­ Gift taxes

­ Wealth tax

­ Controlled foreign corporation regulations

­ Tax filings and other compliances

­ Regulatory considerations

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Tax exposure for foreign employer

Scope of Taxation

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• Domestic law

­ Foreign enterprise liable to tax on income arising from a business connection in India

• Treaty law

­ Foreign enterprise liable to tax in India on income arising through a permanent

establishment situated in India

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Permanent Establishment

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• Fixed place of business through which the business of the foreign enterprise is carried on

• Includes place of management

• Presence of employees in India may give rise to a service PE

• For example, under the US tax treaty, service PE is constituted if services are provided through

employees or other personnel if:

­ activities in India continue for a period exceeding 90 days; or

­ services are performed for a related enterprise

• Attribution of profits to PE

­ No further attribution if there is arm’s length compensation (Morgan Stanley case, 292 ITR

416)

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Cross-border salary splits

Salary split arrangements

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• Setting up of subsidiary in India

• Secondment / dual employment

• Employee leasing

• Consultancy services

• Objectives of salary splits:

­ Mitigate PE risks

­ Manage tax residence

­ Taking advantage of different tax regimes

­ Non-tax / regulatory compliances

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Direct Taxes Code, 2010

• Revised Tax slabs

• RNOR concept done away with. Exemption for offshore income retained

• NRIs subject to a 60 day residence threshold (not 182 days)

• Removal of exemptions: house rent allowance, tax on non-monetary perquisites, per diem

allowances

• Short stay exemption retained

• Wide service PE exposure under domestic law (with potential treaty override)

Salient proposals

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Case studies

Case Study 1

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• Expat was born in Canada and is a

Canadian citizen

• He spend around 120 days in Canada

where his family home is situated

• Around 245 days are spent in India

from where he conducted his business

• While in India, he stayed with his

Indian girlfriend. He also kept his car

at her house and this address figures

in his Indian driver’s license

• He is considered to be a resident

under the tax laws of both Canada

and India

• Based on the tie-breaker test, what is

the expat’s country of residence?

India

Canada

Case Study 2

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• Dutch company provides technical

services to its Indian clients through

various project offices

• It sends its employees to India who

work from these project offices

• Employees receive remuneration from

the head office (outside India)

• Dutch company taxed on a

presumptive basis in India

• Is the salary income received by the

employees taxable in India ?

Dutch Company

A B C

Indian Project Offices

Case Study 3

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US Affiliate

US Parent Company

Indian Subsidiary

• Indian subsidiary provides back-office

services to its US parent

• US affiliate seconds 3 employees to

the Indian subsidiary: 1 managing

director + 2 supervisors

• US affiliate pays all salaries, bonus,

etc and is reimbursed by the Indian

subsidiary

• Employees act exclusively under the

direction, control and supervision of

the Indian subsidiary, but remain on

the rolls of the US affiliate

• Are salary payments by US affiliate

taxable in India ?

• Are reimbursements made to the US

affiliate taxable in India ?

Case Study 4

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US Company

Indian Company

• US company supplies personnel to

Indian company on a hire-out basis

• Personnel work under the supervision

of the Indian company, but are still

employed by the US company

• Fees paid by Indian company to US

company captures personnel’s salary

entitlement

• Does the US company have a PE in

India ?

• Are the fees payable by the Indian

company to the US company taxable

in India ?

Case Study 5

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Dutch Company

Indian Company

Indian JV Company

• Dutch JV partner seconds 4

expatriates to the Indian JV company

• Expats were fully engaged in

providing services to the JV company

• JV company directly paid salaries to

the expats and withheld appropriate

tax

• Expats remained on the rolls of the

Dutch company and received

additional salary outside India

• Is the home salary taxable in India ?

• If so, should tax be withheld on such

salary and by who ?

Thank You

mahesh@nishithdesai.com