Why these positions come first
A foreign group’s India tax cost depends less on the headline corporate rate than on four positions: whether the holding company can use its treaty, whether the group has a permanent establishment (PE) in India, what withholding applies to money flowing out, and how inter-company services are priced. Rulings in 2025-26 and the 2026 statutes moved each of them.
Treaty access and permanent establishment
Hyatt: control can create a PE (Supreme Court, July 2025)
The Supreme Court held that control over Indian hotels’ operations under a strategic oversight agreement created a fixed-place PE under Article 5(1) of the India–UAE treaty. A foreign company that directs Indian operations through agreements, secondees or oversight rights, even without premises of its own, should test its PE exposure. Income attributable to a PE is taxed at the foreign company rate; see corporate tax.
Tiger Global: substance over form (Supreme Court, January 2026)
GAAR denied Mauritius treaty relief on shares bought before 2017 and sold later. A tax residency certificate does not bar scrutiny of tax avoidance. GAAR and the treaty override, in force from 1 April 2017, applied to shares bought before that date but sold after it; the structure was treated as an impermissible avoidance arrangement.
Principal purpose test
CBDT Circular 1/2025 of 21 January 2025 states that the treaty principal purpose test applies prospectively. Shares acquired before April 2017 and grandfathered under the Mauritius, Singapore and Cyprus treaties are outside it. Tiger Global shows that grandfathering under a treaty does not by itself shut out GAAR.
| Position | What the sources state |
|---|---|
| Treaty relief on share sales | Open to challenge under GAAR; a residency certificate is not conclusive (Tiger Global) |
| PE through control | Strategic oversight of Indian operations created a fixed-place PE (Hyatt) |
| Principal purpose test | Prospective; pre-April 2017 grandfathered shares under the Mauritius, Singapore and Cyprus treaties are outside it (Circular 1/2025) |
Taxable presence without an office
- Significant economic presence (SEP). A non-resident can be taxable without an office in India where payments from India exceed ₹2 crore a year, or where it interacts with 300,000 or more users in India.
- Equalisation levy abolished. The 2% levy on e-commerce supplies ended in August 2024 and the 6% levy on online advertising from 1 April 2025. SEP and the normal income-tax rules now apply instead.
Withholding on cross-border flows
Domestic-law rates for tax year 2026-27, before surcharge and cess. The applicable treaty may reduce them where its conditions are met.
| Payment to a non-resident | Domestic rate |
|---|---|
| Dividends to a non-resident parent | 20%, plus surcharge and cess |
| Royalties and fees for technical services paid to a foreign company | 20%, plus surcharge and cess |
| Long-term capital gains on Indian shares, listed or unlisted | 12.5% (listed: on gains above ₹1.25 lakh), plus surcharge and cess |
| Short-term gains on listed shares | 20%, plus surcharge and cess |
| Short-term gains on unlisted shares | At the rate for other income, 35% for a foreign company |
Buy-backs are taxed as capital gains from 1 April 2026, with an additional promoter tax of 30% for a foreign parent on Companies Act buy-backs (before surcharge and cess). Full detail is on withholding and capital gains.
Offshore funds managed from India
The Taxation and Other Laws (Amendment) Act 2026 (assent 17 August 2026, deemed in force from 1 April 2026) eased the safe harbour for offshore funds whose managers sit in India. It dropped the 25-member, 10% single-investor and ₹100 crore corpus tests, and Indian residents may now hold up to 5% of the fund. The same Act exempts foreign institutional investors’ interest and gains on government securities, subject to prescribed reporting.
Transfer pricing across the border
- IT-services safe harbour. A 15.5% operating margin on cost for software, ITeS, KPO and contract R&D, for taxpayers within the ₹2,000 crore threshold (raised from ₹300 crore). Approval is automated and the option can cover five years.
- Data-centre services. A 15% cost-plus safe harbour for related-party data-centre services was announced in Budget 2026-27; confirm that it has been notified.
- Advance pricing agreements. Unilateral APAs for IT services are to be fast-tracked, aiming to conclude within two years, extendable by six months. Associated enterprises may file modified returns after an APA.
- Penalty becomes a fee. The Finance Act 2026 replaced the penalty for not furnishing the transfer-pricing accountant’s report (s.172) with a fee; the report is still required.
See transfer pricing and PE risk for how to choose between the safe harbour and an APA.
What to check next
- Map the holding chain and test each intermediate company for substance, not only for a residency certificate.
- Review oversight, management and secondment agreements with Indian operations for the control that created a PE in Hyatt.
- Establish the acquisition date of each Indian holding and whether pre-April 2017 grandfathering applies.
- Test any India-facing business without an entity against the ₹2 crore and 300,000-user SEP thresholds.
- Confirm the treaty rate and conditions for each dividend, royalty and fee stream before the first payment.