Finding the best country or the best organization to invest your money is one of the most important financial decisions you’ll ever make.
Well this article is mainly to make you understand the taxation of foreign investment. But let us know what foreign investment actually is before directly switching onto the aspects of taxation.
What is FDI?
It refers to the amount of money invested by a foreign person or company to establish a business in another country.
The country to which the investor belongs is called as home country and the country wherein the foreign direct investment is done is called as host country. If any German company invests in India, then in this case Germany becomes the home country whereas India becomes the host country.
One of the ways for Foreign Direct Investment is the wholly owned subsidiary.In this case the foreign company acquires all shares along with 100% control rights of the company in the host country. But this is possible only in government approved sectors.
The other way is the joint venture.When the foreign company and the company in the host country together start a new business then it forms a joint venture.
One more way is the Subsidiary of Foreign Country. Here the foreign company acquires 51% to 99% shares of the company in the host country.
If FDI is done through government route then, the foreign investors have to take permission from central government as well as the ministry of external affairs. However the FDI through automatic route does not require any permission.
How foreign investment is taxed in India?
Indian taxation is very complex and it is beyond the scope of this article to review the entire tax structure. Only some of the important elements of the policy which directly impinge upon the private foreign investor in India have been mentioned and analyzed here. The elements of Indian taxation policy which directly affect foreign investors in India are:
1) Personal taxation — the income tax
2) Taxation of company profits (corporate taxation)
3) Taxation of inter corporate investment
4) Taxation of patent royal lies.
Even though major foreign investment comes from organisations that are based overseas, personal taxes influence foreign investment due to the fact that some foreign personnel always accompany investment from abroad.
Under the normal tax provisions, the dividends, interest income and rental income from house property outside India would be taxable in India. India has an extensive arrangement referred to as Double Tax Avoidance Agreements (DTAAs) with approximately 80 countries that intend to avoid double taxation so that certain relief may be available. The foreign tax credit paid in the source country shall be available as a deduction against the Indian income tax liability of the Individual, subject to certain specified conditions.
The taxability of the capital gains is based on the type of asset i.e long term capital asset or short term capital asset. An asset is classified into either long term capital asset or short term capital asset based on the period of holding the foreign asset. If the period of holding in case of shares of a foreign company is over 12 months, and for other foreign securities and immovable property, the period of holding is over 36 months, and then they are termed as long term capital asset.
Under section 80C and 80 CCF of the IT Act, an individual investor can get an aid of tax deduction up to Rs. 1,00,000 and Rs.20,000 respectively when investments are made in certain specified tax saving instruments. In case of foreign investments, there are no specific tax benefits available under section 80C / 80CCF of the IT Act.
On the other hand, in case of a purchase of a house property outside India, the benefits of principal loan deduction u/s 80C and Interest on house property loan under section 24(b) in case of loans taken from specified financial institutions shall be available subject to certain conditions.
For an Individual having foreign investment, the capital gains exemption available for reinvestment of capital gains u/s 54EC (investment in NHAI / REC bonds upto Rs. 50 lacs)/ section 54F (investment of sales shall also be available on the sale of foreign long term capital assets) & sales proceeds u/s 54 (Purchase of a Residential house property), subject to certain conditions.
How foreign investment is taxed in U.S?
If you’re investing overseas, the IRS(Internal Revenue Service) is onto you, and, in most cases, so is the host country. The amount of tax that needs to be paid – and to what entity – varies dramatically from one country to another.If a foreign country has taxed you, and then the U.S. surely provides you some relief in the form of either a credit or a deduction. Which to take depends on your situation.
If the U.S tax is less than your foreign tax, then you can take the U.S. tax amount as the maximum credit. If the U.S. tax is higher than the foreign tax, you can claim the entire foreign amount as your credit and pay the remaining balance to the IRS. Either way, you’ll need to fill out IRS form 1116, Foreign Tax Credit.
So, in general, foreign investments are taxed both by the foreign country and by the host country. But as per your earnings and tax accountability, you might need to pay only once.
These different aspects about taxation of foreign investment will certainly help you to better understand it’s importance!