Advisory on PE Risk Assessment and Business Structuring for a Foreign Company
Query from the Client
Recently, a US-based company, ABC Financial Services Inc. ("ABC USA"), approached us seeking international tax advisory on certain critical issues concerning its operations in India.
The client sought our opinion on the following matters:
• Whether its Liaison Office (LO) in India could be regarded as a Permanent Establishment (PE) in India and whether any profits could consequently become taxable in India.
• Whether it would be advisable to continue operating through the existing Liaison Office or establish a separate subsidiary company in India, considering its future business plans.
Given the potential tax and regulatory implications, the client required a detailed review of its existing structure and activities being undertaken in India.
Facts of the Case
ABC Financial Services Inc. ("ABC USA") is a company incorporated and tax resident in the United States of America.
The company is engaged in the business of providing currency exchange services for travellers and facilitating money transfers from the United States to India through a network of agents operating in both countries.
The agents primarily operate as tour operators and receive a fixed commission based on the value of transactions processed through the company’s platform.
To support its activities in India, ABC USA had established a Liaison Office (LO) after obtaining the necessary approvals from the Reserve Bank of India (RBI).
The Liaison Office was established solely to act as a communication channel between the head office in the United States and various stakeholders in India.
The Liaison Office maintained a Liaison Office In-charge along with supporting administrative staff necessary for carrying out permitted liaison activities.
The activities undertaken by the Liaison Office included:
• Distribution of brochures and informational material describing the services offered by ABC USA.
• Maintaining communication and coordination with government authorities in India.
• Gathering market intelligence and business information and reporting the same to the head office.
• Identifying potential business opportunities in the Indian market.
• Exploring legal, regulatory, and commercial feasibility for establishing subsidiaries, affiliates, partnerships, or other business structures in India.
Importantly, the Liaison Office was not authorised to undertake any commercial, trading, or industrial activities in India.
Further:
• The Liaison Office did not enter into contracts on behalf of ABC USA.
• It did not negotiate commercial arrangements.
• It was not entitled to receive any commission, fees, or remuneration.
• All operating expenses of the Liaison Office were fully funded by the head office in the United States.
Based on the above facts, the key issue was whether these activities could result in the creation of a Permanent Establishment in India under the provisions of the India–US Double Taxation Avoidance Agreement (DTAA).
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