The concept of Permanent Establishment (PE) has acquired tremendous importance in recent times as it determines taxability of a foreign company in India. Usually, foreign companies get tax concession under Double Taxation Avoidance Treaties and they pay taxes in their home countries. But if they have PEs in India, they should pay taxes for the income they have created in India. Thus PE makes a foreign companies’ Indian income taxable in India.
What is a Permanent Establishment?
A Permanent Establishment in India is a fixed place of business, wholly or partly carried out by a foreign enterprise operating in India.
Such fixed place of business can be a branch office, a place of management, a factory, a warehouse, a workshop etc. However the definition of permanent establishment differs in each tax treaty.
Tax treatment of PEs
The significance PE lies in the fact that “business profits” of a foreign enterprise can be taxed in India only if it has a PE in India and the profits are attributable to the PE. Even the amount for “royalty” or “fee for technical services” received by foreign enterprises will be taxed in India as business profits if they are attributable to a PE in the country.
Most of the DTAAs India has signed empowers the country to tax foreign enterprises if they have a PE in India. But the identification of PE itself is a controversial area and whenever the tax department gives tax notices to foreign companies that have PE in India, they goes to courts to reject PE presence.
Thus identification of PE itself often is settled after court proceedings.
The Income Tax Act contains a provision called business connection to tax the foreign enterprises.
In the recent Minimum Alternative Tax (MAT) controversy, government clarified that FPIs need not pay MAT if they don’t have a permanent establishment in India. This means that the FPIs who have a permanent establishment in India should pay MAT.