By Manu Rao | Updated March 2026
In Indian tax law, every company falls into one of two categories: domestic company or foreign company. This classification is not about who owns the shares — it is about where the company is incorporated. An Indian Private Limited Company owned 100% by a Japanese parent is a domestic company. A Japanese corporation earning income in India through a branch office is a foreign company. The distinction carries an 18-percentage-point difference in corporate tax rates.
Quick Comparison Table
| Criterion | Domestic Company | Foreign Company |
|---|---|---|
| Definition | A company incorporated in India under the Companies Act; OR a foreign-incorporated company whose place of effective management (POEM) is in India (Section 2(22A) IT Act) | A company that is NOT a domestic company — incorporated outside India with POEM outside India (Section 2(23A) IT Act) |
| Tax Rate | 22% under Section 115BAA (or 25%/30% standard rate) | 40% flat rate |
| Surcharge | 10% (if income > INR 1 Cr) or 12% (if income > INR 10 Cr) under 115BAA: flat 10% | 2% (if income > INR 1 Cr) or 5% (if income > INR 10 Cr) |
| Effective Rate | ~25.17% (under 115BAA) or ~26-34.9% (standard) | ~41.6-43.7% (depending on surcharge bracket) |
| MAT/AMT | MAT at 15% under Section 115JB (not applicable under 115BAA) | MAT at 15% under Section 115JB applies to foreign companies with India PE |
| Dividend Distribution | No DDT since FY 2020-21 — dividends taxed in shareholder hands | Not applicable — foreign companies do not distribute dividends through India operations |
| Branch Profit Tax | Not applicable | No separate branch profit tax in India (unlike US/UK), but 40% corporate rate covers it |
| Treaty Benefits | Applicable on outbound payments (withholding on dividends paid to non-resident shareholders) | Applicable on India-source income (royalties, FTS, capital gains, business income) |
| Filing Requirements | Full ITR filing (ITR-6) with ROC annual return | ITR-6 for foreign companies earning India income |
| Transfer Pricing | Applicable on international transactions with associated enterprises (Sections 92-92F) | Applicable on transactions with head office or related parties |
Why the Classification Matters
A 100% foreign-owned Private Limited Company incorporated in India pays 22% tax under Section 115BAA. The same parent company operating in India through a branch office pays 40%. Same business. Same revenue. Same profits. An 18-percentage-point gap.
This is the single biggest reason why long-term foreign investors incorporate Indian subsidiaries instead of operating through branch offices. The subsidiary (domestic company) gets the lower rate because it is incorporated in India — even though every share is owned by a foreign entity.
The Numbers
On INR 10 crore of taxable profit:
- Domestic company (115BAA): Tax = INR 2.52 crore (effective ~25.17%)
- Foreign company (branch): Tax = INR 4.16 crore (effective ~41.6%)
- Difference: INR 1.64 crore per year
Over a 5-year period, that is INR 8.2 crore saved — just from the choice of structure.
Place of Effective Management (POEM)
The Finance Act 2015 introduced the POEM concept to the definition of domestic company. Under Section 6(3) of the Income Tax Act, a company incorporated outside India is treated as resident in India (and therefore a domestic company) if its place of effective management is in India during that financial year.
POEM is defined as the place where key management and commercial decisions necessary for the conduct of the business as a whole are, in substance, made. The CBDT issued guidelines (Circular 6/2017) for determining POEM, which look at:
- Where the board of directors meets and makes decisions
- Where senior management performs their functions
- Where strategic decisions are taken (as opposed to routine operational decisions)
When POEM Applies in Practice
A foreign company that holds its board meetings in India, has its CEO based in India, and makes all strategic decisions from India could be deemed to have its POEM in India. This would make it a domestic company for tax purposes — subject to 22-30% rates instead of 40%, but also subject to worldwide income taxation.
For foreign investors, POEM is usually a risk to avoid rather than a benefit to seek. If a foreign parent company is inadvertently deemed to have POEM in India, its global income becomes taxable in India. This can happen if too many board meetings are held in India or if Indian-based executives make all the strategic calls.
The CBDT guidelines exclude companies with turnover up to INR 50 crore from POEM scrutiny. For larger companies, maintaining proper corporate governance records showing that key decisions are made at the parent level (outside India) is important.
Tax Filing Differences
Domestic Company
Files ITR-6 with the Income Tax Department. Separately files annual return (MGT-7A) and financial statements (AOC-4) with the ROC. Tax audit under Section 44AB is mandatory. Transfer pricing report (Form 3CEB) required if there are international transactions or specified domestic transactions.
Foreign Company
Also files ITR-6 for India-source income. Must maintain books of accounts for India operations (Section 44AA). Tax audit under Section 44AB applies. Transfer pricing documentation required for transactions with the head office or associated enterprises. The branch office also files Annual Activity Certificates and RBI returns.
The foreign company's India filing is focused on Indian-source income only. Global income is not reported in India (unless POEM applies).
Withholding Tax on Outbound Payments
When a domestic company (Indian subsidiary) pays dividends, royalties, or fees for technical services to its foreign parent, it must deduct tax at source under Section 195 of the Income Tax Act.
- Dividends: 20% domestic rate, reduced to 10-15% under most DTAAs
- Royalties: 20% domestic rate (10% under old agreements), reduced by applicable DTAA
- Fees for Technical Services (FTS): 20% domestic rate, reduced by applicable DTAA
A foreign company (branch) does not make these outbound payments in the same way — profits are remitted to the head office, and the 40% rate already accounts for the profit extraction. There is no additional withholding layer on branch profit remittance in India (unlike the US, which has a Branch Profits Tax under IRC Section 884).
DTAA Application
Treaty benefits work differently for each classification:
Domestic company: The DTAA is relevant when the company makes payments to non-residents (determining withholding rates) and when the foreign shareholder claims credit for Indian taxes in their home country.
Foreign company: The DTAA determines whether India can tax the foreign company's income at all, and at what rate. The PE article (usually Article 5) determines whether India has taxing rights on business profits. The royalty, FTS, and capital gains articles cap India's taxing rates.
Practical Implications for Structure Choice
- If you plan long-term India operations → incorporate a subsidiary (domestic company) → pay 22-25% instead of 40%
- If you have short-term project work in India → branch office (foreign company) may be acceptable → simpler setup but higher tax rate
- If you are an NRI → your Indian company is domestic regardless → same low rates apply
- If your foreign parent has significant India-based management → watch POEM rules → keep strategic decisions at the parent level
Which Classification Applies to You?
You do not choose your classification — it follows from how and where you set up.
You are a domestic company if:
- You incorporate a company in India (Private Limited, Public Limited, OPC, Section 8)
- You are a foreign company whose POEM is determined to be in India
You are a foreign company if:
- You are incorporated outside India and operate in India through a branch office, liaison office, or project office
- Your POEM is outside India
The tax rate alone makes the case for incorporating an Indian subsidiary rather than operating as a foreign company. For long-term operations, the 18-point tax gap is too large to justify the branch office structure on any other grounds.
Need help structuring your India presence for tax efficiency? Contact Beacon Filing — we help foreign companies choose the right structure and handle the full incorporation process.