Concept of permanent establishment (PE)

In this contemporary world, initiation of globalization has lubricated great technological advancement. All this has facilitated easy access as well as real-time communication among various countries notwithstanding the physical distance. Currently, the world is a ‘global hub’ where no destination is secluded. Subsequently, corporates 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 their quest to achieve growth and economies of scale.
Over time, two type of cross border transactions have emerged

• Conducting business activities with a country – Residents of a country transacting business with foreign companies without setting up the business presence in the other country.
• Conducting business in a country – Business activities are undertaken in the foreign country by establishing a formal presence in it.

This difference in establishment of companies leads to varied tax implications. This is where Article 5 (1) of the double tax avoidance agreement (DTAA) provides that for the purpose of this tax concept of PE comes in action. Any fixed place of conducting business through which the business operations of an enterprise are carried on by foreign companies, wholly or partly is termed as permanent establishment.

This concept determines the right of a country to tax the profits of a company that is the resident of another country. They lay down the principles and factors to be considered for the constitution of a PE, and the consequent profit attribution methods and the taxation mechanisms it should use to avoid double taxation. The PE concept is recognized by most countries and has been incorporated by them in their domestic tax provisions and international tax treaties.

Inclusions in PE
Exclusions from PE
Place of management
A fixed place for the purpose of advertising
Branch
For preparatory and auxiliary activities
Office
For purchase of goods and merchandise
Workshop
Independent agents
Sales outlet
Purchasing or information gathering exercise
Warehouse
Mine, quarry, oil or gas well or any other place of extraction of natural resources

Mandatory requirements for PEs in India:

• Maintenance of books of accounts and other documents in accordance with the provisions
• Auditing of accounts by an accountant and a duly signed and verified audit report obtained in the prescribed format before the due date of filing the return of income
• Taxation of profits attributable to a PE in India at the rate of 40% (plus applicable surcharge and cess) on a net basis, subject to domestic tax provisions
• Mandatory permanent account number (PAN) , tax deduction and collection account number (TAN) and indirect tax registrations
• Filing of return of income in India
• Deduction of expenses incurred, such as salary cost of employees, from income attributable to a PE, subject to its compliance with withholding tax provisions under domestic tax provisions
• Mandatory compliance with withholding tax requirements – withholding tax on payments made, filing of withholding tax returns, issue of tax withholding certificates, etc.
• Payment of indirect tax and compliance with its related rules
• Mandatory personal taxation of employees of foreign companies in India

The concept of permanent establishment is one of the most important concepts in international taxation. The existence of a PE or otherwise, would in most cases determine the exposure to domestic tax liability in the country of source. It is, therefore, imperative to understand the concept fully before embarking on the structuring of activities in another jurisdiction. Attribution of profits to a Permanent Establishment has also been one of the major issues both for taxpayer as well as tax advisers.

(Trademark registration)

If you are looking to establish your PE in India, our team of professionals can assist you in complying with all the mandatory requirements and compliances as prescribed by law. We can provide assistance in registration under indirect taxation, acquisition of PAN and TAN, auditing services, payroll processing services, etc.

Our team can also assist you in various other services including bookkeeping, auditing, internal audit, trademark registration, tax audit, payroll compliances, management audit, STPI registration, statutory audit, income tax, tax planning, setting up of virtual office, direct taxes, service tax, delhi value added tax, sales tax, company formation, business consultation, company registration / incorporation in India, corporate compliance, foreign branch / liaison office registration. For detailed discussion or assistance in compliance related issues, kindly click here

Angel tax relief to startups

Angel funds refers to a money pool created by high net worth individuals or companies, generally called as angel investors, for investing in business startups. Various startups founder claimed that they received notice under section 56(2) (vii) (b) of Income Tax Act (“Act”) from Income Tax Department (“Department”) to pay taxes on angel funds raised by them. Entrepreneurs have raised their concern on such tax notices. However, India is likely to soon announce the concessions to shield startups from the angel taxes. The changes will be made to the conditions specified under section 56(2) (vii) (b) of the Act to remove any ambiguity and allow exemption for past as well as proposed investments that do not exceed INR 10 crores.

Meaning of angel tax
With an intention to promote entrepreneurship in India, government has loosened the condition for startups and investors to shield them from what has been called angel tax. Angel tax is a term referred to the income tax payable on capital raised by unlisted companies via issue of shares where the share price is seen in excess of the fair market values of the share sold. The excess realization is treated as income and taxed accordingly. This tax was introduced in the year 2012 Union Budget by the finance minister Pranab Mukherjee to seize and desist money laundering practices.

Allowances for angel investors
Suresh Prabhu, Commerce and Industry Minister of India has approved a notification concerning to this clause to make allowances for angel investors. A formal notification for such allowances will be issued by Department of Industry Policy and Promotion (DIPP). DIPP recognizes an entity as startup up to a period of 7 years from the date of incorporation, if its turnover for any of the financial year since incorporation has not exceeded INR 25 crores.

Tax exemption available
Tax exemption is the fiscal exclusion that reduces the taxable income. Under this, you can get a certain tax relief from tax, reduced tax rates or tax will be applicable on a certain portion. Tax exemptions are offered to promote certain economic activities. Startup, with a view to improve economy of any nation is considered as an economic activity which needs to be promoted and should be an eye catcher for new comers. According to the official sources, government of India has alleviated the procedure of seeking income tax exemption by startups on investments made from angel funds and prescribed a 45 days deadline for a decision on such applications.
To avail exemption according to new procedure, a startup will apply with all documents to the DIPP. Application received from the well-known or recognized startups shall be moved to Central Board of Direct Taxes (CBDT) with all necessary documents.

Earlier procedures were carried out by inter-ministerial board of certification. Now these procedures are carried out by CBDT. Within the period of 45 days from the receipt of application received from DIPP for startups tax exemption, CBDT has been mandated to approve the tax exemption for startups for the purpose of this clause or they can decline to grant such approvals.

Requisites for availing tax exemption

• A startup should be recognized by DIPP and its aggregate amount of paid up share capital as well as share premium after issuance of shares does not exceed INR 10 crores, according to a notification.
• The investor should have return income of INR 50 lakhs (earlier the return income limit was INR 25 lakhs) or more in the preceding financial year else, either its net worth or the invested amount of money should be more than INR 2 crores as on the last date of the preceding financial year.
• Startups will have to furnish account details and return of income for last three years. Likewise, investors would also have to hand their net worth details and return of income.

Current scenario
CBDT will soon be set for processing requests from startups and angel investors for exemption to speed up the process. DIPP will meet stakeholders to seek feedback in the first week of February 2019 to discuss all policy and implementation issues. New framework regarding the same will be announced on 16 February. Helping hand that is CBDT will set up cell to process exemptions applications. Latest notification issued by DIPP lays down a process for startups to obtain an exemption from angel tax.

Ambiguous about how to start with your own business? Are taxation and other regulatory compliances difficult to understand? We at AJSH, render services related to setting-up your presence in India, startup registrations, tax assessment, filing and other regulatory compliances.

Our team is also proficient in the areas of accounting and bookkeeping, auditing & assurance, internal audit, tax audit, management audit, statutory audit, income tax, tax planning, direct taxes, service tax, delhi value added tax, sales tax, company formation, business consultation, company registration / incorporation India, corporate compliance, foreign branch / liaison office registration. Get in touch with us for any assistance by clicking here.