NRI business setup
Taxation of an Indian Company Owned by an NRI
An Indian company and its NRI owner are not the same taxpayer. Understanding company-level tax and the tax on money paid to the overseas shareholder is essential when deciding how profits should be earned, retained or taken out.
Quick Summary
Separate the company's tax from the NRI owner's personal tax.
An Indian company is a separate taxpayer. Its profits are first considered under the corporate-tax rules. A second tax question arises when the NRI shareholder personally receives a dividend, salary or remuneration, interest, or proceeds from selling shares.
Because the owner lives overseas, the same receipt may also have tax consequences in the country of residence. The applicable DTAA and foreign-tax-credit rules can therefore be as important as the Indian rate.
The key distinction
There can be two separate levels of taxation
Owning all or most of an Indian company does not make the company's business income your personal income. The company earns its income and pays tax as a separate entity.
The shareholder's tax position is considered separately when income or value moves from the company to the shareholder.
How is the Indian company taxed?
A domestic company is taxed in India on its taxable income. One option available to an eligible domestic company is the concessional regime under Section 115BAA, with a 22% base income-tax rate, subject to its conditions and applicable surcharge and cess.
The lowest headline rate is not automatically the best choice. The company should compare the regime with deductions, incentives and other tax attributes it may have to surrender.
| Stage | Tax question |
|---|---|
| Company earns business profit | Which corporate-tax regime applies? |
| Company pays dividend | What Indian tax and withholding apply to the NRI? |
| Company pays remuneration or interest | What is the character and withholding treatment? |
| NRI sells shares | What capital-gains, treaty and FEMA rules apply? |
Dividend paid to an NRI shareholder
A dividend paid by an Indian company to a non-resident shareholder is generally taxable in India and withholding can apply. The final treatment should not be determined from the domestic rate alone.
If India has a tax treaty with the shareholder's country of residence, the DTAA may provide a lower applicable rate, subject to treaty eligibility, documentation and other conditions.
Salary, director remuneration and interest are different from dividends
An NRI owner may receive money from the company in more than one capacity. Where the facts support it, this could include salary or director remuneration for services, or interest on qualifying funding.
These are not interchangeable labels for withdrawing profits. Each payment has its own company-law, tax, withholding and potentially FEMA considerations.
For the funding side, see How Can an NRI Invest Money Into an Indian Company?
What about tax in the NRI's country of residence?
Indian tax is only one side of the analysis. The shareholder's country of tax residence may also require dividends, remuneration, interest or capital gains to be reported there.
The applicable DTAA and that country's domestic law determine whether double-tax relief or a foreign tax credit may be available for Indian tax paid.
Before taking money out
Tax planning checklist for an NRI-owned company
- Confirm the company's applicable corporate-tax regime
- Separate company income from shareholder income
- Identify whether the payment is dividend, remuneration, interest or another receipt
- Check Indian withholding before payment
- Review the applicable DTAA and treaty documentation
- Check tax and reporting in the NRI's country of residence
- Consider foreign-tax-credit availability overseas
- Review FEMA implications alongside tax treatment
- Plan the eventual share sale and repatriation before exit
Watch the explainer
Taxation of an Indian Company Owned by an NRI
This CBTD video explains company tax, dividends, other payments to an NRI owner and cross-border DTAA considerations.
FAQs
Common tax questions for NRI-owned Indian companies
Is an Indian company owned by an NRI taxed separately from the NRI?
Yes. The Indian company is a separate taxpayer. The NRI shareholder is separately taxed on income personally received or arising to them, subject to the applicable rules.
Can an NRI-owned domestic company opt for Section 115BAA?
An eligible domestic company may opt for Section 115BAA subject to its conditions. The choice should be reviewed against deductions and incentives the company would give up.
What is the tax rate under Section 115BAA?
The base income-tax rate is 22%, subject to the regime's conditions, with applicable surcharge and health and education cess.
Are dividends paid by an Indian company to an NRI taxable?
Generally yes. Dividend income received by a non-resident can be taxable in India and withholding can apply. An applicable DTAA may provide relief subject to eligibility and documentation.
Can an NRI claim a lower treaty rate on Indian dividends?
Potentially. The DTAA, treaty conditions, tax residency documentation and Indian-law requirements should be checked before applying a treaty rate.
Is salary paid to an NRI taxed like a dividend?
No. Salary or remuneration and dividends are different types of income and can have different source, tax and withholding rules.
Can an NRI lend money to their Indian company and receive interest?
Debt funding can have separate FEMA, company-law and tax implications. Interest has its own Indian tax and withholding treatment.
What happens when an NRI sells shares of the Indian company?
A share sale can create Indian capital-gains and withholding considerations, along with FEMA pricing, transfer and repatriation issues. Treaty provisions may also require review.
Does paying tax in India mean no tax is due overseas?
Not necessarily. The country of tax residence may also require the income to be reported. Its domestic law and the DTAA determine foreign-tax-credit or other relief.
Should tax planning be done before taking money out of the company?
Yes. Dividend, remuneration, interest and share-sale proceeds can have different tax and FEMA consequences.
Running an Indian company from abroad?
Review company tax and shareholder tax together.
CBTD can help coordinate Indian tax, FEMA and ongoing compliance with a Chartered Accountant.
Disclaimer: This guide is general information, not legal, tax, FEMA, company-law, accounting or professional advice. Overseas tax treatment depends on the law of the relevant country.