By Naraway
In this article
The same profit earned in India can be taxed at two very different base rates. As a branch, it is taxed as a foreign company at 35%. As an Indian subsidiary that opts in, it is taxed at 22%. Both carry surcharge and cess on top. The 35% figure itself is recent: the Finance (No. 2) Act 2024 cut it from 40%.
| Structure | Taxed as | Base rate |
|---|---|---|
| Subsidiary (opting in) | Domestic company | 22% |
| Branch or project office | Foreign company | 35% |
| Liaison office | No taxable income permitted | Not applicable |
Sources: Income Tax Department; ThePrint; India Briefing. Rates exclude surcharge and health and education cess.
The Second Tax: Moving the Profit
Dividends
Paid from post-tax profit. India withholds 20% for non-resident shareholders, or the lower treaty rate for a beneficial owner meeting treaty conditions.
Royalties and fees
Deductible for the Indian company, taxed by withholding in India at domestic or treaty rates, and tested under transfer pricing.
Interest
On loans from the parent, subject to external commercial borrowing rules, withholding and interest limits.
Branch profits
A branch remits its post-tax profit to head office; there is no separate dividend.
Indian tribunals have held that the treaty rate applies to dividends where the treaty provides one, but the wording differs between treaties, and a shareholder claiming the lower rate must file an Indian return. The dividend distribution tax that companies once paid was abolished in 2020; tax now falls on the shareholder.
The 2026 Renumbering
From 1 April 2026, the Income-tax Act, 2025 replaced the 1961 Act. The rates above carry across; section numbers change. The higher withholding rate for payees without a PAN, for example, moved from section 206AA to section 397(2).
Part of Naraway's research series India Market Entry in 2026.
In short
An Indian subsidiary of a foreign company is taxed as a domestic company and can opt for a 22% base rate; a branch or project office is taxed as a foreign company at a 35% base rate, cut from 40% by the Finance (No. 2) Act 2024; surcharge and cess apply on top. Profits leave mainly as dividends, on which India withholds 20% for non-resident shareholders unless a tax treaty gives a lower rate, or as royalties, fees and interest that must meet transfer pricing rules. The Income-tax Act, 2025 replaced the 1961 Act from 1 April 2026.
- Subsidiary: 22% base rate if opted (domestic company).
- Branch or project office: 35% base rate (foreign company), down from 40%.
- Dividends to non-residents: 20% withholding, or the lower treaty rate for beneficial owners.
- Royalties, service fees and interest also move profit, subject to transfer pricing.
- The Income-tax Act, 2025 applies from 1 April 2026.
Sources
- Tax rates for foreign companies, Income Tax Department
- Withholding tax rates, Income Tax Department
- FM announces cut in corporate tax on foreign companies to 35%, ThePrint
- Tax ruling says dividend tax in India to be based on beneficial treaty rate, India Briefing
- India's corporate taxation framework, India Briefing
Frequently Asked Questions
What is the tax rate for a foreign company in India?
A 35% base rate for foreign companies and their branches, plus surcharge and cess. An Indian subsidiary of a foreign company is a domestic company and can opt for a 22% base rate.
How are dividends paid to a foreign parent taxed?
India withholds 20% on dividends to non-residents, or the lower rate in the applicable tax treaty if the parent is the beneficial owner and meets the treaty's conditions.
Can profits be repatriated from India?
Yes. Dividends, royalties, fees and interest can be remitted abroad after tax, subject to foreign exchange rules and, for payments to group companies, transfer pricing.
When was the foreign company tax rate cut?
The Finance (No. 2) Act 2024 cut the base rate for foreign companies from 40% to 35%.
Which tax law applies from 2026?
The Income-tax Act, 2025, from 1 April 2026, replacing the Income-tax Act, 1961.
