New Indian tax rules:

The most important concept that India has adopted from the BEPS project is “Significant Economic Presence” (SEP). In this article, we will explain the implications of this addition for Indian tax law.

Significant Economic Presence (SEP)

Significant Economic Presence means that tax is levied if a company has a significant presence in the market where it will pay the tax, even if it has no physical presence in the country. According to the current law, a foreign company in India constitutes a SEP if:

• it enters into a transaction involving goods, services or property with a legal entity in India, including the downloading of data or software, and the total payments resulting from such transaction(s) exceed Rs 20 million (Euro 220,000) in the preceding year.

or

• it is engaged in continuous solicitation of business or is in contact with at least 300,000 users.

The implications of Significant Economic Presence

The idea behind the SEP provision is to ensure that no one making profits in a country avoids tax there and that all players are taxed in the same way. While the OECD’s regulation focuses on the digital economy, the current implementation of SEP in India has a broad scope. It covers all transactions involving goods, services or property carried out by foreign companies incorporated in India, whether online or offline.

The SEP has been implemented in India in a very broad sense, which means that even foreign companies that do not have an entity in India are considered SEPs by virtue of their activities. For example, a single export of goods to India by a foreign company, which has no other business presence in India, can trigger the SEP provision if it exceeds Rs 20 million (Euro 220,000).

Indian law therefore looks at both the regularity with which you, as a foreign company, are active in India, and the income that is involved. Once the provision comes into effect, the foreign company must keep accounts, undergo audits, pay taxes and file tax returns in India.

Significant economic presence and the European tax treaties with India

Companies with activities in India that are established in countries with which India has a tax treaty will of course not be double taxed because they are classified as SEP. Indian laws also prescribe that for foreign companies, the most favourable provisions of either the Indian tax law or the tax treaty are decisive.

The tax treaties that India has concluded with Europe do not use the term SEP but the term Permanent Establishment, which has a more limited scope. As long as foreign companies can demonstrate that they do not have a ‘permanent establishment’ in India, they remain outside the scope of the SEP provisions. However, the company must be able to provide documentation for this, including a certificate of tax residence, a declaration that they do not have a ‘permanent establishment’ and form 10F.

However, the SEP provisions will always apply to companies originating from countries that do not have a tax treaty with India (all member states of the European Union have a tax treaty with India). For companies from these countries, it is important to constantly check whether the transactions trigger the SEP provisions.

Everything you need to know about the fiscal side of doing business in India

SEP and Permanent Establishment are not the only treacherous fiscal matters that European companies in India encounter. IndiaConnected has been active in India for ten years and helps hundreds of companies every year with their questions about the Indian tax system and other fiscal matters. To help companies on their way, we have therefore bundled all our knowledge and tips in a free guide for CFOs that do business in India.