legal & tax partner germany...© rödl & partner 04.02.2016 7 tax calculation india -germany...

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Legal & Tax Partner Germany

Income Tax Cross-Border / Germany - IndiaIntroduction

Rödl & Partner | 04.02.2016

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Rödl & Partner Worldwide

3.900 colleagues – 102 offices – 46 countries

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of China� Poland� Romania� Russian

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Rödl & Partner in Germany

� Nuremberg *

� Ansbach � Bamberg� Bayreuth � Berlin*

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� * Designated India Desk

Nuremberg

Berlin

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Rödl & Partner in India

DelhiMumbaiPune ChennaiBangalore

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01

02

Fundamentals

Transfer Pricing

Income Tax Cross-Border

03 Tax Deducted at Source

04 Permanent Establishments

05 Expat Taxation

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01

02

Fundamentals

Transfer Pricing



05 Expat Taxation


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Tax Calculation India - Germany

� The income of an Indian company is subject to Income Tax at a rate of 30 % plus Surcharge and Education Cess. Further, any dividend paid out by the company to its shareholders (foreign or Indian) is subject to Income Tax at a rate of 15 % plus Surcharge and Education Cess. The total tax burden in India is thus approx. 45 %.

If the dividend is received by a German GmbH it is tax exempt to a great part (95%). Payouts from the GmbH to its shareholders (natural persons) would usually be subject to German withholding tax (25% Abgeltungssteuer + 5.5% Solidaritaetszuschlag).

� An Indian Limited Liability Partnership (similar to a German KG) is subject to Income Tax at a rate of 30 % plus Surcharge and Education Cess. However, no dividend taxation applies.

In certain cases, the profit share may be tax exempt in Germany in the hands of the ultimate taxpayer (natural person). Using a LLP in India may thus be tax efficient. However, LLPs are subject to certain non-tax-related restricitions (e.g. with regard to loans from abroad) and they are not very common in practice.

� Income of a foreign company having a so called „Permanent Establishment“ in India is subject to Income Tax at a rate of 40 % plus Surcharge and Education Cess. The income subjected to tax in India may be tax exempt in Germany.

� Gains from the sale of assets may be subject to tax in India at the above normal rate of 30% or 40% as the case may be (short term capital gains) or at a special rate of 10% or 20% (long term capital gains).

Income Tax Cross-BorderFundamentals

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Foreign Company Indian Company

Corporate Tax 40%* 30%*

Dividend Distribution Tax (“DDT”) on dividends declared - 15%*

Long-term capital gains tax (LTCGT)

( > 1 year for shares)10%* 20%*

Listed shares Exempt Exempt

Long-term capital gains tax (LTCGT)

( > 3 yr for other than shares)20%* 20%*

Short-term capital gains tax (STCGT) 40%* 30%*

Listed securities: Transaction done through recognised stock

exchange and subject to securities transaction tax15%* 15%*

* Plus applicable Surcharge and Education Cess


� Tabular Overview

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� Details: Taxation of an Indian Company (FY 15-16)

Basis of Taxation

Tax Rate

Worldwide Business Income

1. Tax Rate for Indian Company 30 %

2a. Surcharge on (1)* 7 %

2b. Surcharge on (1)** 12 %

3. Education Cess on (1) and (2) 3 %

4. Total Income Tax ** 34,61%

* If the taxable income exceeds INR 10 Mio. ** If the taxable income exceeds INR 100 Mio.


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� Details: Taxation of Dividend Declared by an Indian Company (FY 15-16)


DDT - Calculation Scheme as per Sect. 115-O ITA

Dividend Paid 100

Grossing up (i.e. „increased by“) 17.65

Grossed-up Amount 117.65

Dividend Distribution Tax („DDT“) 15% 17.65

Surcharge* 12% 2.12

Education Cess 3% 0.59

Total DDT 20.36

Effective rate of DDT on dividend paid out 20.36%

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� Details: Taxation of an Indian Limited Liability Partnership (FY 15-16)

Basis of Taxation

Tax Rate

Worldwide Business Income

1. Tax Rate for LLP 30 %

2. Surcharge on (1)* 12 %


4. Total Income Tax * 34,61%

* If the taxable income exceeds INR 10 Mio.


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� Sample Income Tax Calculation (current income)

Company LLP

Profit before Tax 100,00 100,00

Income Tax India 34,61 34,61

Dividend Declared / Profit Share* 65,39 65,39

Dividend Distribution Tax 11,06 -

Total Dividend Payout 54,33 65,39

§ 8b KStG (KSt / GewSt) 0,81

Net Dividend Germany 53,52 65,39

Withholding Tax („Abgeltungssteuer“) 14,12

Net income in the hands of the ultimate shareholder / natural Person*

39,40 65,39

* Note, simplified, under the Companies Act, a certain percentage of the profit has to be allotted to the capital reserve.

**Income from an LLP may be tax exempt in Germany in certain cases.


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01

02

Fundamentals

Transfer Pricing



05 Expat Taxation


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Transfer Pricing

� Transactions between related parties (e.g. a German company and its Indian subsidiary or Permanent Establishment) are under close review by the Indian (and German) tax authorities. The Indian tax authorities tend to assume that the parties may want to shift profit from India being a high-tax country to Germany.

� Any income arising from transactions between related parties is required to be computed as per the arm’s length price, i.e. the “fair” price which would have been agreed upon by unrelated parties in a comparable situation.

� Compliance requirements include maintenance of a comprehensive transfer pricing documentation and the annual furnishing of an accountant’s report (so called “Form 3CEB”).

� Non-compliance with the above requirements leads to heavy penalties.

� Transfer Pricing audits are very common in India. It is thus crucial to structure related party transactions correctly and to maintain a proper Transfer Pricing Documentation. It should especially be taken care of that Form 3CEB matches with the audited accounts and that it is backed up by a full documentation which may have to be submitted to the tax authorities at a later stage.

Income Tax Cross-BorderTransfer Pricing

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Key Triggers for Aggressive TP Audits

• Consistent losses / low margins attributable to inter-company transactions

• High royalty / technical fee payouts, cost recharges, management fees, cost allocations.

• Net losses incurred by routine distributors

• Low mark-ups for services

• Significant advertisement and marketing spends by manufacturing / distribution companies.

• Application of ratios such as “return on capital employed” / “berry ratio” / cash profit instead of net margins

Contributors to aggressive Audits

• Mounting fiscal demand on Government

• Need to preserve tax base

• Constant competitive pressure to restructure business operations efficiently

• Unprecedented sharing of information between revenue authorities

Substantial increase in transfer pricing audits and disputes across the Globe,India is no exception….

Income Tax Cross-BorderTransfer Pricing

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01

02

Fundamentals

Transfer Pricing



05 Expat Taxation


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Cross Border Payments – Tax Withholding in India

� Payments made by Indian enterprises to foreign persons are subject to tax deducted at source („TDS“) as per national Indian tax law.

� The tax is calculated on the gross amount paid / charged. The amount will be deduced by the payor and deposited with the Indian tax department.

� The payee needs to obtain a tax registration in India in order to comply with Indian tax requirements which includes filing a tax return in India (Permanent Account Number / PAN).

� The tax withholding rate is capped by the Double Taxation Avoidance Agreement („DTAA“) IND-GER at 10 % in most cases. Concessional rates exist for interest payments. As per national Indian law the tax rate is increased to 20 % (plus Surcharge and Cess) in case the payee does not have a PAN.

� It is crucial for the payee to obtain a certificate from the payor confirming that the correct amount of tax has been deposited against the PAN of the payee (so called Form 16A).

Income Tax Cross-BorderTax Deducted at Source

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(1) Fees for Technical Services and (2) Royalties

10% As per national Indian law / DTAA IND-GER

20% plus Surcharge and Cess As per national Indian law if the payee has no tax registration in India (PAN)

10%20%

• Overview TDS

(3) Interest

10% As per national Indian law / DTAA IND-GER

5% plus Surcharge and Cess Current concessional rate as per national Indian law in case of approved loans from abroad („External Commercial Borrowings“)

20% plus Surcharge and Cess As per national Indian law if the payee has no tax registration in India (PAN)

5%


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Cross Border Payments – Tax Credit in Germany

� Tax deducted and deposited by the Indian payor can usually be credited against German Income Tax (Einkommensteuer / Koerperschaftsteuer)

� However, the tax credit is capped as per German law ("Anrechnungshoechstbetrag"). Is is calculated as follows:

��

��× �� = ��. ��("Anrechnungshoechstbetrag")

� Example:

• Payment from India = EUR 100• TDS deducted therefrom at 10% = EUR 10• Income from India (profit) = EUR 20• Total Income (profit) = EUR 200• Total German Corporate Income Tax = 15% of EUR 200 = EUR 30

� Tax credit amount (Anrechnungshoechstbetrag) = EUR 20 / EUR 200 x EUR 30 = EUR 3

� EUR 7 out of 10 thus remain tax costs in the hands of the German taxpayer.


21© Rödl & Partner 04.02.2016

Cross Border Long-term Presence - Permanent Establishments

� German enterprises having own employees or agents in India may be subject to Income Tax in India with the profit attributable to such presence in India (Permanent Establishment / „PE“). Such profit would usually be exempt from German Income Tax in order to avoid double taxation. Typical cases are:

• Performing services towards Indian customers through employees in India for a substantial period of time if these employees are working from a fixed place (e.g. office space or hotel room).

• Engaging agents in India who negotiate contracts with Indian customers if those agents are not commercially and legally independent of the German enterprise (irrespective of whether the agents have a power to sign contracts).

• Performing assembly or assembly supervision services in India for a period of more than 6 months (counted from the begin to the end of the project).

� The tax rate applying on PE profit is 40% plus Surcharge and Cess. Payments by Indian customers attributable to the PE are subject to a higher tax withholding (40% instead of 10%) unless otherwise certified by the Indian tax authorities.

� The tax compliance for an enterprise having a PE in India is very cumbersome (separate PE accounts / tax audit / Transfer Pricing / tax withholding from payments to subcontractors and employees etc.). Most enterprises would thus want to avoid having a PE.

Income Tax Cross-BorderPermanent Establishments

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� Income Tax rate applying on foreign companies having a PE in India (FY 15-16)

Basis of Taxation

Tax Rate

Profit attributable to the PE

1. Tax Rate for foreign Company 40 %

2a. Surcharge on (1)* 2 %

2b. Surcharge on (1)** 5 %


4. Total Income Tax ** 43,26%

* If the taxable income exceeds INR 10 Mio. ** If the taxable income exceeds INR 100 Mio.


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� PE Scenario in Case of a Service Company

Service

Company

Customer

CustomerServices

Services

Services rendered for a substantial period of time (e.g. 10 months) by own employees in India may lead to a PE from Indian tax perspective. The German tax authorities may not follow this opinion and may not exempt the PE profit from German taxation. This would lead to a worst case double taxation scenario.


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Taxation of Employees sent to India

� Employees become subject to tax in India if they are based in India for a longer period of time or if they are working for anIndian enterprise or a Permanent Establishment of their foreign employer in India.

� In detail, German employees are subject to Indian Income Tax if:

• They stay in India for a period exceeding 183 days in the relevant Financial year (01.04 - 31.03.), or• If the remuneration is paid by or on behalf of an employer who is resident of India, or• If the remuneration is borne by a PE or a fixed base which the foreign employer has in India.

� The employer is under the obligation to deposit salary tax with the Indian tax authorities on a monthly basis and to report the salary tax payments accordingly. He further has to issue a certificate (“Form 16”) to the employee (similar to the German “Lohnsteuerbescheinigung”). This also applies to foreign employers.

� The employer has to obtain a Tax Deduction and Collection Account Number (TAN). The employee needs to obtain a Permanent Account Number (PAN) and has to file an annual tax return by 31 July.

Income Tax Cross-BorderExpats

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� Personal Income Tax Rates (Financial Year 2015-16):

• Income exceeding INR 10 Mio is subject to a Surcharge of 12% on the tax amount. The total tax is further subject to an Education Cess of 3%. Thus, the total tax rate for high income currently is 34,61%.

Income Rate

Upto INR 250.000 0%

INR 250.001 to INR 500.000 10%

INR 500,001 to INR 1,000,000 20%

Exceeding INR 1,000,000 30%

Income Tax Cross-BorderExpats

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„Jeder Einzelne zählt“ – bei den Castellers und bei uns.

Menschentürme symbolisieren in einzigartiger Weise die Unternehmenskultur von Rödl & Partner. Sie verkörpern unsere Philosophie von Zusammenhalt, Gleichgewicht, Mut und Mannschaftsgeist. Sie veranschaulichen das Wachstum aus eigener Kraft, das Rödl & Partner zu dem gemacht hat, was es heute ist. „Força, Equilibri, Valor i Seny“ (Kraft, Balance, Mut und Verstand) ist der katalanische Wahlspruch aller Castellers und beschreibt deren Grundwerte sehr pointiert. Das gefällt uns und entspricht unserer Mentalität. Deshalb ist Rödl & Partner eine Kooperation mit Repräsentanten dieser langen Tradition der Menschentürme, den Castellers de Barcelona, im Mai 2011 eingegangen. Der Verein aus Barcelona verkörpert neben vielen anderen dieses immaterielle Kulturerbe.

Your Contacts

Tillmann Ruppert

Rechtsanwalt

Associate Partner

Rödl & Partner

Äußere Sulzbacher Str. 100D-90491 NürnbergTel. +49 (911) 9193 -3125Fax +49 (911) 9193 [email protected]

Alle Angaben wurden sorgfältig recherchiert und zusammengestellt. Für die Richtigkeit und die Vollständigkeit des Inhalts sowie für zwischenzeitliche Änderungen der Rechtslage besteht aber keine Gewähr.

Gaurav Khanna

Head – Tax Advisory (Delhi Office)

Rödl & Partner Delhi

Unit No. 4, German Center, 12th Floor, Building 9B, DLF Cyber City, Phase III, Gurgaon - 122002Tel. +91 (124) 4837572Fax +91 (124) [email protected]

legal & tax partner germany...© rödl & partner 04.02.2016 7 tax calculation india -germany...

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