Corporate Tax Rates for Foreign Companies in India 2026

Introduction: The Tax Rate Gap Foreign Companies Must Understand

This article is part of our Complete Tax Guide for Foreign Companies in India. Here we dive deep into the corporate tax rate structure that applies specifically to foreign companies, including the 2024 rate reduction, surcharge tiers, and strategies to optimise your effective tax burden.

India taxes foreign companies at a higher rate than domestic ones. This is not a minor difference. A domestic company incorporated under the Companies Act, 2013 can opt for a concessional rate of 22% under Section 115BAA, resulting in an effective tax rate of 25.17%. A foreign company, whether operating through a branch office or earning income through a permanent establishment, faces a base rate of 35% with an effective rate ranging from 36.40% to 38.22% depending on income level.

This 11-13 percentage point gap is the single largest structural disadvantage a foreign company faces in India. It directly affects entity structure decisions, profit repatriation strategies, and the long-term viability of operating through a branch office versus a wholly owned subsidiary. Understanding every component of this tax burden, and the legal mechanisms to reduce it, is essential for any foreign company operating in or earning income from India.

The Base Rate: 35% (Reduced from 40% in 2024)

The Finance Act, 2024, announced on August 16, 2024, reduced the base corporate tax rate for foreign companies from 40% to 35%, effective retroactively from April 1, 2024 (applicable from Assessment Year 2025-26 onwards). This 5-percentage-point reduction was the first meaningful cut in foreign company tax rates in over two decades and brought India more in line with competing investment destinations in the Asia-Pacific region.

What Counts as a Foreign Company?

Under Section 2(23A) of the Income Tax Act, 1961, a foreign company is any company that is not a domestic company, meaning it is not incorporated in India and has not been declared a domestic company for tax purposes. This includes:

• Branch offices of foreign companies operating in India
• Foreign companies earning income from India through royalties, fees for technical services, interest, or dividends without a physical presence
• Foreign companies with a permanent establishment in India under an applicable DTAA

Critically, a subsidiary incorporated in India, even if 100% owned by a foreign parent, is a domestic company for tax purposes. It pays tax at 22% under Section 115BAA (or 25% or 30% under other provisions), not the 35% foreign company rate. This distinction is one of the most important reasons many foreign companies choose to incorporate a subsidiary rather than operate through a branch.

Surcharge and Health & Education Cess

The base rate of 35% is only the starting point. Two additional levies apply on top:

Surcharge

Surcharge is levied on the income tax amount (not on taxable income) at the following rates for foreign companies:

Note that the surcharge rates for foreign companies (2% and 5%) are significantly lower than for domestic companies (7%, 12%). This partially offsets the higher base rate for high-income foreign companies.

Health and Education Cess

A cess of 4% is levied on the total of income tax plus surcharge. This applies uniformly to all companies, domestic and foreign, regardless of income level.

Marginal Relief

When a company's income marginally exceeds the surcharge threshold (INR 1 crore or INR 10 crore), marginal relief ensures that the additional tax payable (including surcharge) does not exceed the additional income beyond the threshold. For example, if a foreign company earns INR 1,00,50,000, the total tax including surcharge cannot exceed the tax on INR 1,00,00,000 plus INR 50,000. This prevents a situation where earning one rupee more results in paying lakhs more in surcharge.

Effective Tax Rates: The Numbers That Matter

Combining the base rate, surcharge, and cess, the effective corporate tax rates for foreign companies in India for FY 2026-27 (AY 2027-28) are:

Comparison with Domestic Company Rates

To understand the competitive disadvantage, compare these with rates available to domestic companies:

A foreign company with income above INR 10 crore pays an effective rate of 38.22%, compared to 25.17% for a domestic company under the concessional regime. That is a 13.05 percentage point gap on every rupee of profit. On a profit of INR 10 crore, the difference is approximately INR 1.3 crore (about USD 156,000) in additional tax every year.

Special Tax Rates: Royalties and Technical Fees

Foreign companies earning certain types of income from India face different rates:

Royalties and Fees for Technical Services (FTS)

Under the Income Tax Act, royalties and fees for technical services paid to a foreign company are subject to withholding tax at 10% under Section 195 (as per current domestic law rates). However, the applicable DTAA may specify a different rate. For example:

• India-US DTAA: 15% on royalties, 15% on FTS
• India-UK DTAA: 10% on royalties, 10% on FTS
• India-Germany DTAA: 10% on royalties, 10% on FTS
• India-Singapore DTAA: 10% on royalties, 10% on FTS
• India-Japan DTAA: 10% on royalties, 10% on FTS

The foreign company can opt for the lower of the domestic rate or the DTAA rate. To claim DTAA benefits, the company must provide a Tax Residency Certificate (TRC) from its home country and file Form 10F with the Indian tax authorities.

Interest Income

Interest paid to a foreign company is subject to withholding tax at rates specified in the applicable DTAA, typically ranging from 10% to 15%. Interest on ECBs received by foreign companies is taxed at 5% under Section 194LC in many cases.

Dividend Income

Since the abolition of the Dividend Distribution Tax (DDT) in April 2020, dividends paid to foreign companies are subject to withholding tax. The domestic rate is 20%, but most DTAAs reduce this to 10-15%. India's DTAA with Mauritius, Singapore, and the Netherlands provide for 5-10% withholding on dividends in certain conditions.

Minimum Alternate Tax (MAT)

Even if a foreign company's taxable income is reduced to near zero through deductions and exemptions, it may still be liable to pay Minimum Alternate Tax (MAT) under Section 115JB at 15% of book profit.

When MAT Applies to Foreign Companies

MAT applies to a foreign company only if it has a place of business in India, meaning a branch office, project office, or other fixed place of business. A foreign company earning only passive income (royalties, dividends, interest) without a place of business in India is not subject to MAT.

Furthermore, a foreign company that is a resident of a country with which India has a DTAA and does not have a PE in India under that DTAA is exempt from MAT. This is an important planning point for foreign companies structuring their India operations.

MAT Credit

If a company pays MAT in a year where it exceeds the normal tax liability, the excess (MAT credit) can be carried forward for up to 15 years and set off against future tax liability. The MAT credit is computed as the difference between MAT paid and the normal tax payable.

DTAA Benefits: Reducing Your Effective Tax Rate

India has signed over 94 comprehensive Double Taxation Avoidance Agreements (DTAAs) with countries worldwide. These treaties can significantly reduce the effective tax burden on foreign companies through:

• Reduced withholding rates: Lower rates on royalties, technical fees, interest, and dividends compared to domestic law
• PE threshold protection: DTAAs define when a foreign company's presence in India constitutes a PE, protecting companies with limited activities from being taxed as if they have a full presence
• Tax credit mechanism: Taxes paid in India can typically be credited against tax liability in the home country, eliminating double taxation

Documents Required to Claim DTAA Benefits

To claim treaty benefits, the foreign company must provide:

1. Tax Residency Certificate (TRC): Issued by the tax authority of the home country, confirming tax residency
2. Form 10F: A self-declaration filed with the Indian tax authorities containing prescribed details about the foreign company
3. No PE Certificate: If claiming that no PE exists in India, a certificate or declaration to that effect
4. Form 15CA/15CB: Required for the Indian payer to remit payments, with Form 15CB being a CA certificate confirming the applicable DTAA rate

Advance Tax Payment Schedule

Foreign companies with a tax liability exceeding INR 10,000 in a financial year must pay advance tax in four quarterly instalments:

Failure to pay advance tax on time attracts interest under Section 234B (for shortfall from 90% of assessed tax) and Section 234C (for deferment of individual instalments). Interest is charged at 1% per month on the shortfall amount.

Transfer Pricing: The Hidden Tax Risk

For foreign companies operating in India, transfer pricing is often a bigger tax risk than the headline corporate rate. Every transaction between the Indian branch or subsidiary and the foreign parent or associated enterprises must be at arm's length price.

If the Indian tax authorities determine that transfer prices are not at arm's length, they will make an adjustment that increases the Indian entity's taxable income, resulting in additional tax, interest, and potentially penalties. The transfer pricing audit threshold is triggered for international transactions exceeding INR 1 crore in aggregate during a financial year.

Key compliance requirements include maintaining contemporaneous transfer pricing documentation (local file and master file), filing the transfer pricing audit report in Form 3CEB by November 30, and filing the Country-by-Country Report if the consolidated group revenue exceeds INR 5,500 crore.

Tax Planning Strategies for Foreign Companies

While the 35% rate is statutory and cannot be avoided, there are legitimate strategies to optimise the overall tax burden:

1. Incorporate a Subsidiary Instead of a Branch

The most impactful strategy is to operate through a domestic subsidiary rather than a branch office. The subsidiary pays tax at 22% (effective 25.17%) under Section 115BAA, saving 11-13 percentage points on every rupee of profit. See our detailed comparison for a full analysis.

2. Claim DTAA Treaty Benefits

Ensure all cross-border payments, whether royalties, technical fees, interest, or management fees, are structured to take advantage of the applicable DTAA. Maintain TRC and Form 10F documentation proactively, not reactively when a payment is being made.

3. Use the Tax Credit Mechanism

Taxes paid in India can be credited against home-country tax liability under most DTAAs. Coordinate with your home-country tax advisor to ensure Indian taxes are fully credited and not wasted.

4. Optimise Transfer Pricing

Set arm's length prices for all intercompany transactions at the planning stage, not after the fact. Consider an Advance Pricing Agreement (APA) with the CBDT for certainty on transfer pricing for 5-10 years. India's bilateral APA programme has resolved over 500 cases since inception.

5. Utilise Available Deductions

Foreign companies can claim deductions under various sections, including depreciation, research and development expenses (Section 35), and certain sector-specific incentives. However, these deductions are not available if the company opts for the concessional rate under Section 115BAA, which is only available to domestic companies.

Key Takeaways

• The corporate tax rate for foreign companies is 35% (reduced from 40% in Finance Act 2024), with an effective rate of 36.40% to 38.22% after surcharge and cess.
• Domestic subsidiaries pay an effective rate of 25.17% under Section 115BAA, creating an 11-13 percentage point advantage over foreign company taxation through a branch.
• DTAA treaties with over 94 countries can reduce withholding tax on royalties, technical fees, interest, and dividends. Always obtain a TRC and file Form 10F to claim benefits.
• MAT at 15% of book profit applies to foreign companies with a place of business in India, but not to those earning only passive income without a PE.
• Advance tax must be paid in four quarterly instalments starting June 15, with interest at 1% per month on shortfalls.
• Transfer pricing compliance is critical: all intercompany transactions must be at arm's length, and Form 3CEB must be filed by November 30.