Query from the Client
Recently a client named ABC financial services Inc from US approached us to provide international tax advisory on the following matters:
👉 Whether Liaison office (LO) in India shall be treated as Permanent Establishment (PE) in India & whether its profits attributable are liable to tax in India.
👉 Further, client need advisory on whether they should move from LO to opening a subsidiary Company, a Private Limited Company in India.
Facts of the Case
ABC financial services Inc. (‘ABC USA’) is a foreign company incorporated & registered in USA & tax resident of USA.
It is engaged in the business of currency exchange facility for travellers & money transfer from USA to India by appointing agents in India & USA.
Agents are running the business of tour operators. They are being paid fixed commissions on the value of orders booked by users through their Company.
ABC USA has already established a Liaison office (LO) in India which acts as a communication channel between ABC USA & entities in India after obtaining due approvals from Reserve Bank of India.
Liaison office has LO in-charge & all supporting office as required for running activities of LO. Further, LO in India is performing following activities in India:
👉 Distribute brochures & literature describing activities performed by ABC Inc.
👉 Maintaining contact with government authorities in India
👉 Gather marketing data & pass on to ABC US
👉 Find business opportunities for ABC US in India
👉 Explore legal, commercial & regulatory feasibility of setting up subsidiaries, affiliates, partnerships etc.
Further, LO is not authorised to enter into commercial arrangements. LO does not have authority to engage in commercial, trading or industrial activity in India on behalf of ABC US.LO is not entitled to receive any commission, fees or remuneration.
All expenses of LO are borne by head office i.e. ABC USA.
Determination of status of Liaison office (LO) of BAC US as fixed place PE
As per the facts of the client, ABC USA is a foreign company incorporated in USA. ABC US has established a LO in India which is operating as per the regulations of RBI.
In order to determine, whether LO shall form a Permanent Establishment in India or not. It is important to check the criteria prescribed in Article 5(1) & 5(2) of India US DTAA.
As per Article 5(1), a PE exists if the following conditions are satisfied cumulatively:
👉 There is an ‘enterprise’
👉 Such enterprise is carrying on ‘business’
👉 There is a ‘place of business’
👉 Such place of business is at the ‘disposal’ of the enterprise
👉 The place of business is ‘fixed’ and
The business of the enterprise is carried on wholly or partially through this ‘fixed place of business’.
A PE does not exist unless all the aforesaid conditions are satisfied.
In this case, following conclusions can be drawn:
👉 ABC US satisfies the ingredients of an enterprise which is carrying on the business as it is clearly a given fact
👉 ABC US has setup a LO in India that means it has a fixed place of business in India, so it satisfies the test of place of business
👉 Further, LO has established itself at fixed location it satisfies the ‘Location Test’& it continues to be available at specific location in foreseable future so it satisfies the ‘permanence test’
👉 Further, LO has been established itself as a communication channel between head office & government authorities & partners. So it satisfies the condition of ‘place of disposal’.
Conclusion:
As per the facts of the case, LO of ABC US is engaged in liaison with government authorities, acts as a communication channel between head office & Indian business partners.
All these activities are not core business activities of ABC US’s tour operating business. Further, LO is not performing any contracts on behalf of head office & not negotiating on their behalf.
Therefore, Lo of ABC US does not satisfy the conditions prescribed in Article 5(1) of India US DTAA for a Fixed Pace PE. It does not create any Permanent Establishment in India & its profits are not attributable to Indian taxes
Advisory on whether they should move from LO to opening a subsidiary Company
If ABC US wants to operate full fledge activities of tour operator in India. ABC US is advised to open a separate subsidiary Company in India.
Currently LO is operating limiting activities as per RBI regulations & it is not engaging in any business activity. It depends on the activities of ABC US that it wants to engage in India.
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