Permanent establishment risk and absurd tax back payments through bogus self-employment.
Many companies in India employ a local employee to take care of marketing and sales activities. This person is either employed by the European parent company or is paid directly through a type of “consultancy contract”. As a rule, this is someone who acts full-time directly on behalf of the European company and is often even subject to the authority of an employee at the head office.
An extremely risky model!
This model is problematic for two reasons:
- On the one hand, in this constellation the employee is clearly a “dependent representative”, which is in any case one according to the DBA Representative establishment justified.
- On the other hand, the Indian tax authorities recognize a kind of “Bogus self-employment“or a hidden (Indian) employment relationship, which carries corresponding liability risks.
With this sales model, the Indian tax authorities miss out on income tax (advance) payments, so-called TDS - Tax Deducted at Source, to a considerable extent. It is technically not possible for a foreign company to pay this tax (in India). In addition, in practice it is more than questionable whether the Indian employee will pay the income tax due at the end of the year and in an adequate amount.
Due to the high number of “perpetrators” and probably also out of a certain national pride, the Indian Income Tax Department is now reacting very sensitively to this crime, so that sooner or later you will (almost) inevitably end up in front of an Indian court.
In practice, the Indian authorities try to demand compensation and penalties directly from the foreign parent company and to push these to as astronomical heights as possible. All profits that the company has generated directly or indirectly (!) in India should then be taxed, for which almost crazy arguments are often put forward.
We therefore strongly recommend once again: Be careful of these constellations in order to avoid such procedures!
Red alert!
Due to ever-increasing networking - including electronic ones - the risk of detection has increased significantly compared to before. The Indian authorities now react very consistently when they notice that Indian salespeople are traveling around the country with business cards from European companies. An anonymous tip from a competitor or a dissatisfied customer is enough to set the whole machine in motion...
Talk to us about whether you too are affected by the risks described here. If so, we will help you identify suitable alternatives. Also speak to us if you have already been contacted by the Indian authorities and now need to prepare for the relevant actions.
WB finance & compliance® – Pragmatic support for all questions on the subject of permanent establishments.
