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February 2010

Foreign arms of Indian cos under tax net likely – Introduction of CFC Rules

By Raman Jokhakar
Tarunkumar G. Singhal
Chartered Accountants
Reading Time 2 mins
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Foreign arms of Indian cos under tax net likely – Introduction of CFC Rules


The forthcoming budget may contain provisions for taxing the
undistributed dividends of foreign corporations that are controlled or owned by
Indian companies. Controlled Foreign Corporations (CFCs) laws enable the
authorities to tax the income of a resident derived from a foreign corporation.
This is irrespective of whether the profit/dividend of the foreign entity is
transferred to India or not.

Countries adopt CFC laws mainly for checking the probable
loss of revenue arising from the transfer of profit of foreign corporations to
offshore havens, such as the Isle of Man and Cayman Islands.

CFC laws are in force in at least 25 countries with varying
rules and regulations. In the US, for instance, 50 per cent of the voting rights
or 50 per cent of the value of shares constitutes a CFC.

The Indian tax authorities think it is time India had a law
that will tax the profits of foreign corporations that are controlled by Indian
companies. Since cross-border acquisitions by Indian companies have been on the
rise in the recent past, the government may find it difficult to ignore the
demand of the tax authorities.

(Source: The Economic Times, dated 05.01.2010)

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