This article explains some relevant aspects regarding the foundation of a German operational facility in India in the context of the agreement on the avoidance of double taxation between India and Germany, that is, The Double Taxation Avoidance Agreement, or DTAA for short.
This article is for informational purposes only. Consultinghouse does not provide tax advice, but is committed to supporting clients in sourcing a tax advisor and / or lawyer where needed, to support extended business requirements.
In principle, different kinds of operational facilities can be set up under the DTAA and can be divided up under the following headings:
The articles of the German Indian agreement to the avoidance of the double taxation (DTAA) cover cases in which a German enterprise establishes a stationary, permanent establishment (PE) in India, as well as when an Indian company establishes a business in Germany.
One can assume that such German enterprises ordinarily establish a stationary PE in India which meets the following criteria:
The OECD guidelines provide that the existence of a stationary business seat would generally be viewed as a permanent one for at least 6 months. However, one cannot take this as a rule of thumb, since it could be viewed differently depending on the line of business and its actual condition. Article 5 (2) contains an exemplary listing of stationary PEs for example: as the seat of the business operation, a branch office, offices, storage places, as well as operational facilities for construction, installation, assembly or supervision.
The following businesses can form a PE according to the DTAA, if they last more than six months:
In the event that the period of six months is exceeded, the PE applies as being founded from the beginning of the project. Conversely, those projects which don't last longer than six months normally aren't regarded as PEs under this definition.
|Particulars||German Limited (GmbH)||Subsidiary Company||Branch or Permanent Establishment|
|Earning before tax||2'000'000||2'000'000||2'000'000|
|(-) Income corporate Taxes @ 15%||300'000||300'000||300'000|
|Surplus tax 5.5 % of Corp. Tax||16'000||16'000||16'000|
|Profit after tax||1'689'500||1'689'500||1'689'500|
|Trade tax 3,5%*400%||280'000||280'000||280'000|
|Profit after tax||1'403'500||1'403'500||1'403'500|
|Tax Withheld on Dividend 26,375%||370'173||370'173||-|
|Dividend Equivalent Amount||-||-||-|
|Branch level tax||-||-||-|
|Tax Liability @ 33.99%||477'050||477'050||679'800|
|(-) Foreign Tax Credit as per DTAA||-||-||300'000|
|Balance tax payable in India||477'050||477'050||379'800|
|Total tax outflow||1'443'723||1'443'723||1'276'300|
Article 5 (3) of the DTAA stipulates that an enterprise which offers services or facilities, or provides plant and machinery in connection with the search for, or the promotion or mining of mineral oil in India is regarded as a PE in India.
Article 5 (5) of the DTAA is commonly known as a Dependent Agent PE. According to this article a person proceeding in India can form a PE for a German company provided that this person:
Article 5 (6), however, describes exceptions in which an independent agent in the practice of his ordinary business activity doesn?t need a PE for the German enterprise if the business relations between this agent and the enterprise are completely independent.
Article 5 (4) of the DTAA describes an essential exception, if company representations only deal with preparing or supporting activities. This one doesn?t lead to the foundation of a PE. This paragraph considers activities and installations which for this purpose
To be considered as exception under the DTAA, it has to be guaranteed, though, that the Indian business presence deals exclusively with the aforementioned activities.