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Dividend distribution tax: It's better off being foreign branch office
March, 02nd 2007

Rise in dividend distribution tax

The increase in dividend distribution tax could technically put Indian companies at a disadvantage with respect to foreign companies which have branch office operations in India, said tax experts.

A branch operation pays higher corporate tax than an Indian corporate or a foreign subsidiary in India. It pays 41.82 per cent as corporate tax against 33.6 per cent paid by the latter categories. But with dividend distribution tax up from 12.5 per cent to 15 per cent, the total tax outgo for Indian entities would exceed 41.82 per cent, they said.

This is assuming that the entire profits are actually distributed as dividend. "But technically, all profits belong to shareholders," said Mr Naresh Makhijani, Partner, KPMG.

Technically speaking those companies which might set up captive KPOs and BPOs in India might be better off having branches rather than set up an entity in India, he said.

"Yes, those who happen to have branch offices may be better off in this respect in certain cases," said Mr Akil Hirani, Managing Partner of international law firm Majmudar & Company. "But I don't think that increase of DDT can be the sole driver determining whether you have a branch office or not. Branch offices do end up limiting companies in many ways due to regulations. Sometimes there is no choice under the regulations but to be a company. There are so many restrictions. Everything else being right, you might be better off being a branch office."

Overseas companies have many other modes of payment, other than dividend, from their operations here to their corporate centres. These could be structured royalty, technical services and so on, he said.

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