For a profitable foreign-owned Indian subsidiary, a dividend is the most straightforward way to return cash to the parent. The process is well established, but it touches company law, FEMA and income tax at the same time, and small errors, such as paying out of the wrong profits or applying a treaty rate without documents, can be costly. This checklist sets out the steps.
1. Confirm distributable profits
Under the Companies Act, 2013, a dividend can be declared only out of profits for the year or accumulated profits of earlier years, after providing for depreciation and setting off previous losses as required. Interim dividends can be declared by the board during the year; final dividends are recommended by the board and approved by shareholders at the AGM. Check whether any part of the profits must be transferred to reserves under the company's policy.
2. Board and shareholder approvals
- Board meeting: approve the interim dividend or recommend the final dividend, and fix the record date.
- General meeting: approve the final dividend.
- Separate bank account: deposit the dividend amount in a separate bank account within five days of declaration.
- Payment: pay within 30 days of declaration.
3. Withholding tax
Dividends are taxable in the hands of the shareholder. The Indian company must withhold tax at the rate under domestic law or the lower rate under the applicable tax treaty. To apply the treaty rate, obtain from the parent:
- a valid tax residency certificate;
- the prescribed declaration with additional particulars;
- a declaration of beneficial ownership and, where relevant, satisfaction of any limitation of benefits or principal purpose test conditions;
- PAN, or the alternative details permitted under the law.
Many treaties provide a lower rate for company shareholders holding a minimum percentage of shares.
4. Remittance
The dividend is remitted through the AD bank. The prescribed online information on the remittance and, where required, a Chartered Accountant's certificate must be filed before payment. The tax withheld is deposited by the due date and reported in the quarterly withholding return.
5. Records and reporting
- update the register and dividend records;
- reflect the dividend in the financial statements and annual return;
- include it in the FLA return for the year, as it affects foreign liabilities;
- issue a withholding certificate to the parent for its foreign tax credit claim.
Dividend versus other routes
Dividends are not deductible for the Indian company, unlike royalties, service fees or interest, which are deductible subject to transfer pricing and other limits. Since October 2024, buybacks are taxed like dividends in the shareholder's hands, which has reduced their relative appeal. The right mix depends on the treaty, the parent's home-country tax and the subsidiary's profit position.
Conclusion
Paying a dividend to a foreign parent is routine when the profits, approvals, withholding documents and remittance formalities are lined up in the right order. A one-page checklist, followed every time, avoids the most common errors.
The author, N. Sudheer, M.Com., FCS, LL.B., is a Partner at A2 Consultants, Hyderabad, advising foreign companies on FEMA, international tax and corporate law in India. Views are personal.
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