Taxation of Wholly Owned Subsidiary in India

A wholly owned subsidiary incorporated in India is generally taxed as an Indian company and is a separate taxable entity from its foreign parent. Its Indian profits are subject to corporate income tax, while transactions with the overseas parent may also involve transfer pricing, withholding tax, GST and other cross-border tax considerations.

For foreign investors, understanding the tax position before starting operations is important because the choice of corporate tax regime, nature of inter-company payments, transfer pricing policy and profit-repatriation method can materially affect the overall tax cost of the Indian business.

This guide explains the principal tax considerations for a foreign-owned Indian subsidiary under the tax framework applicable from Tax Year 2026-27. Foreign investors considering the broader incorporation structure may also read our guide on Wholly Owned Subsidiary in India.

How Is a Wholly Owned Subsidiary Taxed in India?

The Indian Subsidiary Is a Separate Taxpayer

A wholly owned subsidiary incorporated in India has a separate legal and tax identity from its foreign parent. The income earned by the Indian company is therefore generally computed and taxed in India in the hands of the subsidiary.

Foreign Ownership Does Not Make the WOS a Foreign Company

The fact that 100% of the shares are held by an overseas parent does not by itself make the Indian subsidiary a foreign company for Indian corporate income-tax purposes. An Indian incorporated company is generally treated as a domestic company for the purpose of applicable corporate tax rates.

Several Taxes May Apply to the Same Business Structure

Corporate income tax is only one part of the tax framework. Depending on the nature of operations, an Indian WOS may also need to consider withholding tax, transfer pricing, GST, payroll taxes, advance tax and taxes connected with cross-border payments.

Corporate Income Tax Rates for an Indian WOS

22% Concessional Corporate Tax Regime

From Tax Year 2026-27, Section 200 of the Income-tax Act, 2025 provides an eligible domestic company with an option to pay income tax at 22%, subject to the prescribed conditions and restrictions.

A 10% surcharge applies to tax under this regime and Health and Education Cess is levied at 4% on the tax plus surcharge. The resulting effective tax rate is approximately 25.168%, before considering income taxable at any special rate.

Normal Corporate Tax Rates

For Tax Year 2026-27, a domestic company continuing under the normal regime is generally taxable at 25% where its turnover or gross receipts for Tax Year 2024-25 do not exceed ₹400 crore, and at 30% in other cases. Applicable surcharge and 4% Health and Education Cess are additional.

Special Manufacturing Regime Should Not Be Assumed

Certain qualifying manufacturing companies may be covered by the special corporate tax framework applicable to eligible companies. However, a newly incorporated foreign-owned subsidiary should not assume that a 15% manufacturing rate is automatically available. Eligibility conditions and relevant commencement requirements must be examined before relying on a special manufacturing regime.

Foreign investors may refer to the official Section 200 of the Income-tax Act, 2025 and the Income Tax Department for current provisions.

Should a WOS Choose the 22% Concessional Tax Regime?

The 22% Rate Comes With Conditions

The concessional corporate tax regime is not simply a lower tax rate applied to the normal taxable income. The company must compute its total income without claiming specified deductions and incentives and without certain set-offs attributable to those deductions.

Effective Rate Is Approximately 25.168%

For ordinary income taxable at the 22% rate, the combination of 22% tax, 10% surcharge and 4% cess results in an effective rate of approximately 25.168%.

Compare Both Regimes Before Exercising the Option

A foreign-owned company should compare the projected taxable income, available deductions, brought-forward losses, depreciation position and future business plans before selecting the tax regime. A lower headline rate does not necessarily produce the lowest tax in every factual situation.

This decision should ideally be considered together with the company’s initial funding, accounting and tax setup. Foreign investors estimating their initial India budget can also review Cost of Setting Up a Wholly Owned Subsidiary in India.

Minimum Alternate Tax for an Indian Subsidiary

MAT Applies Mainly to Companies in the Normal Regime

Minimum Alternate Tax is intended to ensure that certain companies reporting book profits do not pay very low or nil income tax because of specified deductions or adjustments under the normal provisions.

MAT Rate for Tax Year 2026-27

Following the corporate tax reforms applicable from Tax Year 2026-27, MAT under Section 206 of the Income-tax Act, 2025 is generally computed at 14% of book profit, plus applicable surcharge and cess, where MAT exceeds the normal income-tax liability.

Section 200 Companies Are Outside MAT

Domestic companies that opt for the alternative corporate tax regime under Section 200 are not subject to MAT. This is an important factor while comparing the normal and concessional corporate tax regimes.

Official guidance on MAT is available from the Income Tax Department’s MAT and AMT guidance.

Taxation of Dividends Paid to the Foreign Parent

Dividend Is Not Deductible to the Indian Subsidiary

A dividend is a distribution of profits to shareholders and is not a deductible business expense while computing the taxable income of the Indian subsidiary.

Dividend Is Taxable in the Hands of the Foreign Shareholder

Dividend received by the foreign parent may be taxable in India under the domestic tax law, subject to the provisions of the applicable Double Taxation Avoidance Agreement between India and the country of residence of the foreign shareholder.

Withholding Tax Must Be Examined Before Payment

The Indian subsidiary must determine the applicable withholding tax before remitting a dividend to the overseas parent. The domestic law rate, treaty rate, beneficial ownership conditions and supporting documentation such as the Tax Residency Certificate should be reviewed before applying a treaty benefit.

The current Indian withholding framework is contained in Section 393 of the Income-tax Act, 2025.

Payments by the Indian WOS to Its Foreign Parent

Management and Support Service Fees

An Indian subsidiary may pay its foreign parent or another group entity for genuine management, technical, administrative, IT or other support services. The tax treatment depends on the nature of the service, contractual terms, evidence of services received, transfer pricing and the applicable tax treaty.

Royalty and Fees for Technical Services

Royalty and fees for technical services paid to a foreign group company may be taxable in India and may attract withholding tax. The domestic law and the applicable DTAA should both be reviewed because the treaty may contain a different definition or tax rate.

Reimbursements Are Not Automatically Tax-Free

Calling a payment a reimbursement does not automatically mean that no tax or withholding obligation applies. The underlying nature of the expense, whether a service element or markup exists, the contractual arrangement and the tax treaty should be examined.

Cross-border payment documentation should be aligned with the company’s FEMA position. See our guide on FDI and FEMA Compliance in India for Foreign Companies.

Transfer Pricing for Transactions With the Foreign Parent

Inter-Company Transactions Must Be at Arm’s Length

Transactions between an Indian WOS and its foreign parent or other associated enterprises are generally subject to Indian transfer pricing rules. The pricing should be consistent with the arm’s length principle.

Common Transactions Covered by Transfer Pricing

Transfer pricing may apply to transactions including provision of services, purchase or sale of goods, software development, management fees, royalties, cost allocations, loans, guarantees and other transactions having an impact on profits, income, losses or assets.

Documentation and Accountant Reporting May Be Required

The company should maintain contemporaneous support for the pricing methodology, agreements, invoices, cost bases, allocation keys and benchmarking. Where applicable, the prescribed transfer pricing report from an accountant must also be furnished within the statutory timeline.

Current transfer pricing provisions under the Income-tax Act, 2025 can be reviewed through the official Transfer Pricing Officer provisions.

Tax Treatment of Interest and Cross-Border Funding

Equity and Debt Funding Have Different Tax Consequences

Foreign parents commonly fund Indian subsidiaries through equity and, where permitted, debt. Dividend on equity is not deductible to the Indian subsidiary, whereas interest on genuine business borrowing may be deductible subject to applicable tax conditions and limitations.

Interest Paid Overseas May Attract Withholding Tax

Interest paid by an Indian subsidiary to a foreign lender or associated enterprise may be taxable in India and subject to withholding tax. The applicable domestic rate, treaty provisions, nature of borrowing and foreign exchange regulations should be reviewed before remittance.

Interest Deduction Can Be Restricted

Indian tax law contains restrictions that can limit the deduction of interest in specified cross-border related-party financing situations. Accordingly, the debt-equity structure should be evaluated before funds are advanced to the Indian company.

GST Implications for a Foreign-Owned Indian Subsidiary

The WOS Is a Separate GST Person

An Indian subsidiary is a separate legal entity from its foreign parent and must independently examine whether GST registration is required based on its activities, turnover and applicable registration provisions.

GST Applies to Taxable Supplies Made in India

The subsidiary may need to charge GST on taxable goods or services supplied in India at the applicable rate and comply with invoicing, return filing, reconciliation and input tax credit requirements.

Import of Services From the Foreign Parent May Trigger RCM

Where the Indian subsidiary receives taxable services from its overseas parent or another foreign group entity, GST may be payable under the reverse charge mechanism, subject to the nature and place of supply of the service and other applicable conditions.

Accounting systems should be configured to identify such cross-border transactions correctly. Foreign-owned companies can explore our Accounting and Bookkeeping Services in India.

TDS, Payroll and Other Routine Tax Compliance

TDS May Apply to Domestic Payments

The Indian subsidiary may be required to deduct tax from specified payments such as salaries, professional fees, contractor payments, rent, interest and other payments covered by the applicable withholding provisions.

Payments to Non-Residents Require Separate Review

Cross-border payments should not be processed using the same approach as ordinary domestic vendor payments. The chargeability of income in India, applicable withholding rate, treaty position and prescribed remittance documentation should be examined.

Payroll Taxes Begin Once Employees Are Hired

Where the subsidiary employs staff in India, it must establish payroll processes for salary withholding and other applicable employment-related statutory compliances.

Advance Tax and Annual Income-Tax Return

Advance Tax Is Paid During the Tax Year

A company with an advance-tax liability is generally required to estimate its annual taxable income and discharge advance tax in instalments during the year rather than waiting until the annual return is filed.

Standard Advance-Tax Instalments

The normal instalment schedule requires cumulative payment of 15% by 15 June, 45% by 15 September, 75% by 15 December and 100% by 15 March, subject to the applicable provisions.

Corporate Return Filing Is Mandatory

Under Section 263 of the Income-tax Act, 2025, a company is required to furnish its income-tax return irrespective of whether it has taxable profit or a loss. For Tax Year 2026-27, the general due date for a company is 31 October of the succeeding financial year, while cases requiring the prescribed transfer pricing report have a 30 November due date.

Foreign investors can review Section 263 of the Income-tax Act, 2025 for the current return-filing framework.

Repatriation of Profits to the Foreign Parent

Dividend Is the Most Direct Profit Distribution Method

After payment of applicable Indian corporate tax and satisfaction of company-law requirements, profits may generally be distributed to the foreign shareholder by way of dividend. The withholding tax and applicable treaty position should be checked at the time of distribution.

Service Fees and Royalties Must Reflect Genuine Transactions

Payments such as management fees, technical service fees or royalties should not be used merely as substitutes for dividend. They should be supported by genuine commercial arrangements, actual services or rights, arm’s length pricing and appropriate tax and FEMA documentation.

Tax and FEMA Should Be Reviewed Together

A payment may be acceptable for income-tax purposes but still require separate foreign exchange documentation or regulatory compliance. Profit-repatriation planning should therefore integrate income tax, transfer pricing, withholding tax and FEMA requirements.

Can the Indian WOS Create a Permanent Establishment for the Foreign Parent?

A Subsidiary Does Not Automatically Create a PE

The existence of an Indian subsidiary does not by itself mean that the foreign parent has a permanent establishment in India. The subsidiary and the foreign parent are separate legal entities.

Actual Activities Can Create PE Exposure

Permanent establishment exposure may nevertheless arise depending on the facts, including the use of premises by the foreign parent, activities of employees, contract negotiation or conclusion, dependent-agent arrangements and the provisions of the applicable DTAA.

Inter-Company Arrangements Should Reflect Actual Conduct

Written agreements alone are not sufficient if the actual operating model is different. The responsibilities of the Indian team and overseas personnel should be clearly documented and followed in practice.

Tax Planning Checklist for a Foreign-Owned Subsidiary

Choose the Corporate Tax Regime Early

Before the first annual tax filing, management should compare the Section 200 concessional regime with the normal corporate tax regime and consider the impact of available deductions, losses, depreciation and MAT.

Document Inter-Company Transactions From Day One

Inter-company agreements, service descriptions, invoices, allocation workings and evidence of benefits should be maintained contemporaneously rather than reconstructed only at the time of audit or assessment.

Integrate Accounting, Tax and FEMA Compliance

Cross-border transactions should be reviewed simultaneously from accounting, income-tax, transfer pricing, GST, withholding tax and FEMA perspectives. This reduces the risk of inconsistent treatment across different filings.

Foreign companies planning their wider India structure can also review Setting Up Business in India and India Market Entry Consulting.

Common Tax Mistakes Made by Foreign-Owned Subsidiaries

Applying the 22% Rate Without Reviewing Conditions

The concessional rate should not be applied mechanically. The company should confirm eligibility and understand the deductions, losses and other tax attributes affected by the chosen regime.

Paying the Foreign Parent Without Withholding Review

Management fees, royalties, interest and other overseas payments should be reviewed before payment or credit. Failure to deduct the appropriate tax can create interest, disallowance and other compliance consequences.

Ignoring Transfer Pricing Until Year-End

Transfer pricing should form part of the commercial design of inter-company transactions. Waiting until the year-end to determine the markup or pricing methodology can lead to accounting adjustments and documentation weaknesses.

Treating Tax, GST and FEMA as Separate Workstreams

Cross-border transactions frequently affect more than one law. A structure that works under one regulation may still create issues under another, so integrated review is advisable.

Frequently Asked Questions

What is the corporate tax rate for a wholly owned subsidiary in India?

An eligible domestic company may opt for the 22% corporate tax regime under Section 200 of the Income-tax Act, 2025, subject to conditions. With 10% surcharge and 4% cess, the effective rate on ordinary income is approximately 25.168%. Companies under the normal regime may generally be taxable at 25% or 30%, plus applicable surcharge and cess.

Is a foreign-owned Indian subsidiary treated as a foreign company for tax?

No. An Indian incorporated wholly owned subsidiary is generally treated as an Indian or domestic company for corporate income-tax purposes even though its shares are held by a foreign parent.

Is MAT applicable to a WOS opting for the 22% tax regime?

No. A domestic company opting for the alternative corporate tax regime under Section 200 is outside the MAT provisions. Companies continuing under the normal regime should separately examine Section 206.

Is dividend paid to the foreign parent tax deductible?

No. Dividend is a distribution of profits and is not a deductible business expense of the Indian subsidiary. Withholding tax and the applicable DTAA should be reviewed when the dividend is paid to the foreign shareholder.

Are management fees paid to the foreign parent deductible?

They may be deductible where the services are genuine, incurred for business purposes, properly documented and priced at arm’s length, subject to applicable withholding and other tax provisions.

Does transfer pricing apply even if the foreign parent owns 100% of the Indian company?

Yes. In fact, transactions between a wholly owned Indian subsidiary and its foreign parent commonly fall within the associated-enterprise and international-transaction framework and should be reviewed under Indian transfer pricing rules.

Can the Indian subsidiary repatriate its profits abroad?

Yes. Profits may generally be repatriated through legally permitted methods such as dividend, subject to company law, tax withholding, applicable DTAA provisions and FEMA requirements. Other inter-company payments must be supported by genuine commercial arrangements.

Does the Indian subsidiary have to file an income-tax return even if it has a loss?

Yes. A company is generally required to file its income-tax return irrespective of whether it reports taxable profit or a loss.

Related Services

• Wholly Owned Subsidiary in India
• Cost of Setting Up a Wholly Owned Subsidiary in India
• Foreign Company Registration in India
• FDI and FEMA Compliance in India for Foreign Companies
• Income Tax Assessment and Litigation Services in India
• Accounting and Bookkeeping Services in India
• Setting Up Business in India
• India Market Entry Consulting

Prepared By: EzyBiz India Consulting LLP

Reviewed By:
Anil Agrawal, Chartered Accountant
Founder, EzyBiz India Consulting LLP
20+ Years of Experience in Tax, Regulatory and Business Advisory

Last Updated: 6 September 2026

Disclaimer:
This article is intended for general informational purposes only and does not constitute legal, tax, transfer pricing, GST, FEMA or investment advice. Tax rates, deductions, treaty benefits, withholding obligations and compliance requirements depend on the facts of each case and may change through legislation, rules, notifications, judicial decisions or treaty developments. The Income-tax Act, 2025 applies from 1 April 2026, while earlier periods may continue to be governed by the Income-tax Act, 1961 under the applicable transition provisions. Foreign investors should obtain professional advice based on their specific structure, jurisdiction, transactions and tax year before taking any decision.