Cross Border Structuring, Repatriation and Foreign Tax Credit
Putting money into a foreign subsidiary, bringing profit home, getting profit out to a foreign parent, and claiming credit for tax already paid abroad are four separate rulebooks that have to agree with each other. Three of the four have been rewritten since 2022, and one of them changed twice in eighteen months.
- The overseas investment rules were replaced in 2022, and round tripping is no longer prohibited
- Form 67 became Form 44, and Rule 128 now means something completely different
- The concessional rate on dividends from a foreign subsidiary has been gone since AY 2023-24
- Buy-back taxation reversed again with effect from 1 April 2026
Four numbers that constrain the structure
The 2022 overseas investment framework, and what it changed
Two Acts are live at once. The Income-tax Act 1961 governs FY 2025-26, the year being filed now. The Income-tax Act 2025 governs tax year 2026-27 onward. Section, rule and form numbers differ between them, so every citation below names the year and the Act. The exchange control rules are a separate body of law from the Income-tax Act and were not affected by the recodification.
Outbound investment is governed by the Overseas Investment Rules and Regulations of 2022 and the Reserve Bank's directions and master direction under them. They replaced the earlier regime entirely. Anything citing the 2015-16 master direction or the older notification is describing law that was superseded in August 2022.
Is it overseas direct investment or overseas portfolio investment?
Any acquisition of unlisted equity capital of a foreign entity is direct investment, whatever its size. For a listed foreign entity, ten per cent or more of paid up equity is direct investment, and below ten per cent it is still direct investment if there is control. Everything else in foreign securities is portfolio investment. The common shorthand that unlisted means direct and listed means portfolio is wrong in both directions.
Once direct, always direct
A later dilution below ten per cent without losing control does not convert a direct holding into a portfolio one. This matters because the reporting, the performance reporting and the disinvestment rules differ between the two.
The limits
Total financial commitment in all foreign entities together must not exceed 400 per cent of net worth on the last audited balance sheet. Separately, financial commitment above USD 1 billion in a financial year needs prior Reserve Bank approval even inside that limit. And the old device of borrowing the net worth of a holding or subsidiary company was discontinued in 2022.
Round tripping
No longer prohibited. The restriction is now structural: an Indian resident may not make a financial commitment in a foreign entity that has invested or invests into India where the result is a structure with more than two layers of subsidiaries. Banking companies, non banking financial companies, insurance companies and government companies are exempt from the layering restriction.
This is the single most wrong item in published Indian outbound content
Most guides still say round tripping is prohibited or needs prior Reserve Bank approval, which was the position before August 2022. Since then a round tripped structure is permissible under the automatic route provided the two layer cap is respected. Counting the layers correctly, and applying the exemptions, is where the real advisory work now sits.
| Filing | What it is | When |
|---|---|---|
| Form FC | The single consolidated report of financial commitment, filed through the designated authorised dealer bank. It replaced the four part Form ODI | Before the initial investment, to obtain the unique identification number. No remittance is facilitated until that number exists |
| Form OPI | Reporting for portfolio investment, including employee share schemes reported by the employer | As prescribed for the transaction |
| Annual Performance Report | Annual reporting on each foreign entity, certified by the statutory auditor of the Indian entity, or by a chartered accountant where no statutory audit applies | By 31 December each year. Where the foreign entity's accounting year ends on 31 December, by 31 December of the following year |
The performance report is not required where the Indian entity holds less than ten per cent of equity capital without control and has no other financial commitment, where the foreign entity is in liquidation from the date the process starts, or for broken periods at disinvestment. Where several Indian investors hold the same foreign entity, the one with the highest stake files. Late filings are cured by a late submission fee rather than by compounding.
The form and the rule both changed, and one number was reused
Where an Indian resident pays tax abroad on income that is also taxable in India, credit is available, under the treaty where there is one and unilaterally where there is not. The credit is claimed through a prescribed statement, and the statement is where claims are most often lost.
| FY 2025-26, Income-tax Act 1961 | Tax year 2026-27 onward, Income-tax Act 2025 | |
|---|---|---|
| Relief under a treaty | Section 90 and section 90A | Section 159 |
| Relief where there is no treaty | Section 91 | Section 160 |
| The credit rule | Rule 128 of the Income-tax Rules 1962 | Rule 76 of the Income-tax Rules 2026 |
| The form | Form 67 | Form 44 |
| Outer date to file | The end of the assessment year, provided the return was filed within the time allowed. Where an updated return is filed, on or before the date that return is filed | Within twelve months from the end of the tax year in which the foreign income was offered to tax, provided the return was filed within the time allowed |
| New | Nothing equivalent | Form 45, intimation of settlement of a dispute about foreign tax for which credit was not claimed |
The rule number collision, which is a genuine trap
Under the old Rules, Rule 128 was foreign tax credit. Under the Income-tax Rules 2026, Rule 128 is the general anti-avoidance rule carve out, the successor to Rule 10U. Practically all published foreign tax credit content still says 'Rule 128 and Form 67'. For tax year 2026-27 that is wrong twice: the form is Form 44 under Rule 76, and a reader who follows the old citation lands on anti-avoidance.
The filing date was relaxed in 2022. Before that, the statement had to be filed by the return due date and a late filing was routinely treated as fatal. Since then the outer date for Form 67 has been the end of the assessment year, and a belated return can still support a claim.
On Form 67, the courts have since moved towards treating the date as procedural. The Madras High Court in Duraiswamy Kumaraswamy in October 2023 held the requirement directory. The Delhi High Court in Real Time Data Services in February 2026 treated a late filing as a technical breach that should not by itself defeat a valid credit. And in Nitin Khurana in March 2026 the Delhi Tribunal, following that decision, allowed a credit where Form 67 was filed nine days after the end of the assessment year. Earlier Tribunal decisions going the other way, such as Muralikrishna Vaddi, have to be read in that light.
None of that decides Form 44. Rule 76 sets its own twelve month limit, and the department's own guidance calls the filing mandatory. The first tax year under the new rule ends on 31 March 2027, so its first outer date is 31 March 2028 and, as at 19 September 2026, no court has ruled on a late Form 44. Do not plan on the Form 67 cases carrying across. File within the twelve months.
The concessional rate is gone, and nothing replaced it
For years, dividends received by an Indian company from a foreign company in which it held at least twenty six per cent were taxed at a concessional fifteen per cent. That provision was amended by the Finance Act 2022 so that it does not apply to any assessment year beginning on or after 1 April 2023. It has been dead since AY 2023-24.
Foreign dividends received by an Indian company are now taxable at the company's normal applicable rate, with credit for foreign tax under the rules above. The Income-tax Act 2025 did not reinstate a concessional rate: the Board's own mapping lists the old provision as redundant, meaning it was not carried into the new Act, and neither the Finance Act 2026 nor the amendment Act of August 2026 introduced one. We verified the absence of a successor provision rather than reading every rate schedule in the new Act.
This is the second most wrong item in published Indian outbound content. A large volume of material still presents the fifteen per cent rate as live, and it has been gone for three assessment years.
The cascading relief reaches foreign dividends too
Relief from tax cascading through a chain of companies is given by a deduction for inter corporate dividends, to the extent the recipient further distributes them to its own shareholders one month before the return due date. That provision was carried into the 2025 Act as section 148, and it expressly covers dividends a domestic company receives from a foreign company, not only from another Indian one. Two limits matter. Only a domestic company can claim it. And it is capped at the lower of the dividend received and the dividend the recipient distributes on in time, which under the 2025 Act means at least one month before the return due date. For a group planning a repatriation and an onward distribution in the same year, the timing of the second is what decides the first.
Five routes, and one of them reversed twice
An Indian subsidiary gets money to a foreign parent by dividend, by interest on a loan, by royalty or fees for technical services, by buying back its own shares, or by reducing capital. The first three are withholding rate questions. The last two are capital gains against deemed dividend questions, and that is where the law has been moving.
| Route | Position | What constrains it |
|---|---|---|
| Dividend | 20 per cent Act rate for a foreign company, 10 per cent from an International Financial Services Centre unit, before surcharge and cess, subject to the treaty | Distributable profits, and the treaty rate needing a residence certificate |
| Interest | 20 per cent on foreign currency borrowing by an Indian concern, with concessional rates of 4, 5 and 9 per cent for specified bonds and infrastructure debt funds | Thin capitalisation, below, and the exchange control borrowing framework |
| Royalty and fees for technical services | 20 per cent Act rate since the Finance Act 2023, subject to the treaty | Transfer pricing. The rate you set is an arm's length question first and a withholding question second |
| Buy-back | Capital gains for the shareholder from 1 April 2026, after eighteen months of being taxed as a deemed dividend | A new additional income tax on promoters, below |
| Capital reduction | Split. The part attributable to accumulated profits is a deemed dividend under section 2(40)(d); the balance is consideration for the rights extinguished and is a capital gain or loss after deducting the cost of those rights. With no accumulated profits, the whole amount is on capital account | The accumulated profits figure, and the cost attributable to the rights extinguished, which has to be apportioned where the shares survive at a reduced value. The Supreme Court settled the split in Kartikeya Sarabhai in 1997 and G Narasimhan in 1999 |
Buy-back: the position changed twice in eighteen months, and most content describes the middle one
From 1 October 2024 the Finance (No. 2) Act 2024 treated buy-back proceeds as a deemed dividend in the shareholder's hands, deemed the consideration to be nil so the cost became a capital loss, and ended the company level buy-back tax. That was the law for FY 2025-26. The Finance Act 2026 reversed it with effect from 1 April 2026: the buy-back limb was omitted from the dividend definition, and buy-back is once again a capital gains event with cost relief, plus a new additional income tax charged on promoters. The structuring conclusion flips with it. Under the 2024 regime buy-back was usually unattractive for a foreign parent. Under the 2026 regime it is competitive again. Any guide that describes buy-back as a deemed dividend without naming a year is wrong for the current tax year.
The additional tax on promoters sits on top of the ordinary capital gains tax. It applies to a buy-back under section 68 of the Companies Act 2013 where the shareholder is a promoter, and only to the capital gains categories the section names.
| Gain named in section 69(2) | Promoter is a domestic company | Promoter is any other person |
|---|---|---|
| Short term, of the kind taxed at 20 per cent under section 196 | 2 per cent additional, 22 per cent in all | 10 per cent additional, 30 per cent in all |
| Long term, of the kind taxed at 12.5 per cent under section 197 or 198 | 9.5 per cent additional, 22 per cent in all | 17.5 per cent additional, 30 per cent in all |
The totals are before surcharge and cess. A foreign parent is a promoter other than a domestic company, so the 30 per cent column is the one that usually matters for repatriation.
Who is a promoter depends on the company. For a company listed in India, it is the meaning in regulation 2(k) of the SEBI buy-back regulations. For any other company, it is a promoter under section 2(69) of the Companies Act 2013, or anyone holding, directly or indirectly, more than 10 per cent of the shares. That second limb catches a foreign parent of an unlisted Indian subsidiary whether or not anyone calls it a promoter.
The 12 per cent surcharge, under section 3(6) of the Finance Act 2026, is charged on the additional tax only. On Rs 100 of long term gain in the hands of a domestic company promoter, the additional tax is Rs 9.50 and the surcharge on it is Rs 1.14. It is not a further twelve points on the gain, and it does not replace the surcharge that applies in the ordinary way to the capital gains tax itself. Cess is added on top.
Interest, avoidance and residence
Thin capitalisation
Where interest paid to a non resident associated enterprise exceeds Rs 1 crore in the year, the deduction is limited to the lower of the excess interest and 30 per cent of earnings before interest, tax, depreciation and amortisation. Disallowed interest carries forward for eight years. A debt from an unrelated lender counts where an associated enterprise gives an implicit or explicit guarantee or places a matching deposit. Banking, insurance and International Financial Services Centre finance companies are excluded, along with notified non banking financial companies. Section 94B under the 1961 Act, section 177 under the 2025 Act.
General anti-avoidance
An arrangement may be declared an impermissible avoidance arrangement, and the consequences include denying a tax benefit or a treaty benefit, disregarding steps and accommodating parties, recharacterising debt as equity, relocating residence or the situs of assets, and looking through corporate structures. It applies to any step in an arrangement as it applies to the whole. It does not apply where the aggregate tax benefit to all parties in the year does not exceed Rs 3 crore, and income from the transfer of investments made before 1 April 2017 is grandfathered. Sections 95 to 102 and Rule 10U under the old law; sections 178 to 184 and Rule 128 of the Income-tax Rules 2026 now. The threshold and the grandfathering date both survived unchanged.
Place of effective management
A foreign company is resident in India if its place of effective management is in India, meaning the place where key management and commercial decisions necessary for the conduct of the business as a whole are in substance made. Residence brings worldwide income into Indian tax. Section 6(3) under the 1961 Act, section 6(10) under the 2025 Act. For an Indian group with foreign subsidiaries run from India, this is the largest single structuring risk and the one most often left unexamined.
The active business test, and two things about it worth knowing
A company is treated as having active business outside India where passive income is not more than half its total income and less than half its assets are in India and less than half its employees are situated in or resident in India and payroll on those employees is less than half of total payroll. All four, not any one. Passive income means income from dealings where both purchase and sale are with associated enterprises, plus royalty, dividend, capital gains, interest and rent. Where the test is met, the place of effective management is presumed outside India if the majority of board meetings are held outside India, unless the board is not in fact exercising its powers.
Smaller companies are outside the rule altogether. CBDT Circular 8/2017 of 23 February 2017 says the place of effective management provision does not apply to a company whose turnover or gross receipts are Rs 50 crore or less in a financial year, and Circular 25/2017 repeats it. The threshold is in the circular, not in section 6, so it is a concession the Board can withdraw rather than a rule of the Act. It carries into the 2025 Act through section 536(2)(j), which keeps circulars issued under the 1961 Act in force so far as they are consistent with the new one, and the residence test for a company has not changed. The Board's transition guidance says so. The guidelines in Circular 6/2017 and the clarifications in Circular 25/2017 continue on the same footing. Exactly Rs 50 crore is inside the carve out; a rupee more is not.
Capital gains for a non resident, and the indirect transfer rule
The rates and holding periods changed on 23 July 2024 and the change was substantial. The holding period is twelve months for listed securities and twenty four months for unlisted securities; the old thirty six month category is gone. Indexation was removed generally, with grandfathering only for resident individuals and Hindu undivided families on land and buildings acquired before that date.
| What is sold | Long term | Short term |
|---|---|---|
| Listed equity or equity oriented fund with securities transaction tax paid | 12.5 per cent above the annual exemption, up from 10 per cent | 20 per cent, up from 15 per cent |
| Unlisted shares, including shares of an Indian company held by a foreign parent | 12.5 per cent without indexation. For a non resident, without the foreign currency and indexation adjustments in the specified case | Normal applicable rates |
For a foreign parent selling unlisted Indian shares the headline moved from 20 per cent with indexation to 12.5 per cent without it. That is a reduction in many fact patterns and an increase where the asset was held a long time through a high inflation period. It has to be modelled, not assumed.
The indirect transfer rule, and the two conditions people forget
A share or interest in a foreign company is deemed situated in India where it derives its value substantially from assets located in India. Two conditions must both be met: the Indian assets exceed Rs 10 crore in value on the specified date, and they represent at least fifty per cent of the value of all the company's assets. Content that states the test as fifty per cent alone omits the floor. There is also a small shareholder exclusion: a transferor falls outside the charge if, throughout the twelve months before the transfer and counting its associated enterprises with it, it had no right of management or control and held no more than five per cent of the voting power, share capital or interest. Where the foreign company holds the Indian assets through another entity, the five per cent is tested in that entity too. The clause also carries a separate exemption for specified foreign portfolio investors. Both tests are now in section 9(10) of the 2025 Act, carried over without substantive change.. The Indian concern also has its own reporting obligation, with a penalty attached.
Reorganisation reliefs survive. A transfer of shares in an amalgamation of foreign companies, and the equivalent for a foreign company deriving value substantially from Indian shares, are outside the charge where at least twenty five per cent of the shareholders of the amalgamating company remain shareholders of the amalgamated company and the transfer is not chargeable in the country of incorporation. For a demerger the continuity figure is seventy five per cent. Where a transaction is in prospect, the valuation and deal questions sit with Valuation Services and Transaction Advisory Services.
Questions Indian groups ask about the outbound position
Can we set up a foreign holding company that invests back into India?
Yes, subject to the layering cap. Round tripping stopped being prohibited in August 2022. What is restricted is a structure with more than two layers of subsidiaries, with exemptions for certain regulated entities. Counting the layers correctly is the work, and the general anti-avoidance rule still applies to the arrangement as a whole.
Our foreign subsidiary is run by our Indian directors. Is that a problem?
It is the question to examine before it becomes a problem. If the key management and commercial decisions for the business as a whole are in substance made in India, the foreign company can be Indian resident, which brings its worldwide income into Indian tax. The active business test can move the analysis, but it has four conditions and all four must be met. A foreign company with turnover or gross receipts of Rs 50 crore or less in the year is outside the rule under CBDT Circular 8/2017.
We paid tax in three countries last year. Can we claim all of it?
Credit is available for tax on income that is also taxable in India, under the treaty where there is one and unilaterally where there is not, and it is capped by the Indian tax on that income. The mechanical point that matters most is filing the statement: it is Form 44 under the Income-tax Rules 2026, not Form 67, and the outer date is twelve months from the end of the tax year.
Is a dividend or a buy-back better for getting cash to our foreign parent?
It depends on the year, which is an unsatisfying answer and a true one. For FY 2025-26 buy-back proceeds were a deemed dividend with the cost stranded as a capital loss, which usually made a dividend better. From 1 April 2026 buy-back is a capital gains event with cost relief again, plus an additional tax where promoters are involved. A foreign parent holding more than 10 per cent of an unlisted Indian company is a promoter for this purpose, so it pays a combined 30 per cent before surcharge and cess on the gains the section names. The comparison has to be run on the current year's rules.
Do we have to file an Annual Performance Report for a dormant foreign subsidiary?
Generally yes, unless it is in liquidation from the date the process starts, or you hold under ten per cent without control and have no other financial commitment. Dormancy on its own is not an exemption, and the date is a fixed 31 December.
How much debt can we push into our Indian subsidiary?
As much as the exchange control borrowing rules allow, but the interest deduction is capped at 30 per cent of earnings before interest, tax, depreciation and amortisation once it exceeds Rs 1 crore, and a third party loan guaranteed by a group company counts as related party debt for that purpose. Disallowed interest carries forward for eight years, which softens it but does not remove it.
Where to go next
Where this connects
The rate you charge a foreign subsidiary, and the rate it charges you, is a transfer pricing question first, on transfer pricing compliance. Withholding on what you pay out, and the treaty paperwork behind the rate, is on cross border payments. And if the department challenges the structure, the machinery is on disputes.
Where to go next
International Taxation
Back to the main page: what we do, how an engagement runs, and how to reach us.
Transfer Pricing Compliance and Documentation
What you have to file and keep when you deal with a related party abroad: the accountant's report that has no threshold at all, the Local File, the Master File that catches far more Indian subsidiaries than people expect, country by country reporting, and the safe harbour that was rewritten this year.
Withholding Tax on Cross Border Payments and Treaty Relief
The payer's problem: deciding whether a payment abroad is chargeable to Indian tax at all, at what rate, what the treaty does to that rate, and what paperwork has to exist before the money leaves. Form 10F, Form 15CA and Form 15CB have all been renumbered.
Permanent Establishment and Taxable Presence in India
When a foreign enterprise becomes taxable in India without ever setting up a company: business connection, significant economic presence, the three kinds of permanent establishment, what the Multilateral Instrument did to your treaty, and how much profit India can attribute once a presence is found.
International Tax Disputes and How They Are Resolved
What happens when the department disagrees: the transfer pricing assessment cycle, the Dispute Resolution Panel and its thirty day window, the appeal ladder, mutual agreement procedure between two governments, advance pricing agreements as a way of avoiding the argument entirely, and where the global minimum tax stands for an Indian group.
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Position as at 19 September 2026. Reviewed every six months.
This page is general information, not professional advice. Cross-border tax in India is in the middle of the largest transition it has had in sixty years. The Income-tax Act 2025 replaced the Income-tax Act 1961 on 1 April 2026 and renumbered every section; the Income-tax Rules 2026 replaced the 1962 Rules on the same day and renumbered every rule and every form. The 1961 Act still governs the return being filed for FY 2025-26. That means almost every figure and citation has two correct answers depending on the year you are asking about, and a great deal of published material, including material updated this year, gives only one of them. Take professional advice before acting on anything on this page. We are happy to be that adviser, but we do not act on a web page, ours or anyone else's, without one.