Foreign companies setting up in India

The five inbound structures, the 40%-vs-22% tax gap, and the POEM risk

A foreign company entering India chooses between five structures, and the tax differs sharply. A liaison office (representation only, no commercial activity) pays no Indian income tax if it stays within its limits. A branch office or project office is an extension of the foreign company, taxed as a foreign company at 40% (plus surcharge and cess, an effective ~42 to 43%). A wholly-owned subsidiary or joint-venture company is a separate Indian domestic company, taxed at the domestic rates (25/30%, or the concessional 22% under 115BAA), an effective gap of around 18 percentage points below the branch rate. So for any material India operation, an Indian subsidiary structurally wins. Throughout, watch the POEM rule: managing a foreign holding company's affairs from India can make it Indian-tax-resident on its global income.

Last reviewed: 29 May 2026

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The five structures and their tax

A liaison office is a communication and representation channel only, no contracts, no revenue, funded by inward remittances from the parent; it pays no Indian income tax if it stays within those limits (but over-stepping creates a permanent establishment and tax). A branch office can do specified activities (export/import, consultancy, technical services, R&D) and can bill locally, but it is an extension of the foreign company, taxed at the 40% foreign-company rate, with the parent fully liable. A project office is a branch-like presence for a specific project, taxed the same. A wholly-owned subsidiary (WOS) is a separate Indian resident company even if 100% foreign-owned, taxed as a domestic company, with full operational flexibility. A joint-venture company is the same but with mixed Indian and foreign equity.

Why a subsidiary usually wins

The structural point is the rate gap: a branch is taxed at 40% (effective ~42 to 43% with surcharge and cess) as a foreign company, while a wholly-owned subsidiary on the 22% concessional regime is at an effective ~25%, around 18 percentage points lower. A subsidiary also gives cleaner governance, local fundraising, ESOPs for Indian staff, and clearer profit repatriation (dividends and arm's-length service fees). So for anything beyond representation or a single time-bound project, incorporating an Indian subsidiary is usually both lower-taxed and more flexible than running a branch. A branch suits a specialised, time-bound or regulated presence (such as a foreign bank's branch); a liaison office suits a pre-revenue exploratory phase.

tipFor any real, scaling India operation, an Indian subsidiary at an effective ~25% beats a branch at ~42%, an 18-point gap, plus cleaner governance and repatriation. The branch and project office suit narrow, time-bound or regulated cases.

POEM, transfer pricing and the levies

Three overlays apply throughout. POEM (Place of Effective Management, Section 6(3)) can make a foreign company Indian-tax-resident on its worldwide income if its key management and commercial decisions are in substance made in India, a risk where a founder runs a foreign holding company from India (note the Rs 50 crore turnover carve-out below which POEM does not apply). Transfer pricing applies to all dealings between the Indian entity and its foreign group (arm's-length pricing, Form 3CEB). And the old equalisation levies on digital advertising and e-commerce have been withdrawn (the 2% e-commerce levy from 1 August 2024 and the 6% advertising levy from 1 April 2025), so those no longer add a layer. GAAR sits behind all of this as a backstop against artificial structures.

Companion guides

Source / notes

FEMA 1999 (FEMA 22(R): liaison/branch/project office approvals; AAC for LO)
Income-tax Act 1961 (foreign-company rate 40%; domestic-company rates incl. s.115BAA 22%) (re-enacted in the Income-tax Act 2025)
Income-tax Act 1961 s.6(3) (POEM) + Chapter X (transfer pricing) + ss.95-102 (GAAR)

Frequently asked questions

How is a foreign company's branch in India taxed?+

As a foreign company, at the 40% rate (plus surcharge and 4% cess, an effective ~42 to 43%), on the profits attributable to its Indian operations. A branch office or project office is an extension of the foreign parent, not a separate entity, so the parent is fully liable. This is much higher than the rate an Indian subsidiary pays, which is why a branch is usually used only for narrow or time-bound activity.

Should a foreign company use a branch or an Indian subsidiary?+

For any material, scaling operation, an Indian subsidiary, taxed as a domestic company at an effective ~25% under the 22% regime versus ~42% for a branch, is structurally better, around 18 percentage points lower, with cleaner governance, local fundraising and clearer repatriation. A branch or project office suits a specialised, time-bound or regulated presence; a liaison office suits a pre-revenue, representation-only phase.

What is POEM and why does it matter for a foreign company?+

Place of Effective Management (Section 6(3)): a foreign company is treated as Indian-tax-resident, taxed on its worldwide income, if its key management and commercial decisions are in substance made in India. It catches founder-led structures where a foreign holding company is actually run from India. Note that POEM does not apply to a company with turnover of Rs 50 crore or less, so it targets larger groups, not small ventures.

Does a liaison office pay Indian tax?+

Not if it stays within its limits, pure representation and communication, with no commercial activity, no contracts and no revenue, funded only by remittances from the parent. It must obtain RBI approval and file an Annual Activity Certificate. But if it over-steps into commercial activity, it can be re-characterised as a permanent establishment and taxed as a branch, so the activity restrictions must be respected carefully.