PROFITS FROM FOREIGN ENTITY

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DHRUV

student

109 Points Posted on 18 December 2024

3 indian residents own stake in a company incrporated in Dubai free trade zone as FZCO. During the year such company has earned profits. Now in the books of individual such profits needs to recorded so that "investment in FZCO" balance matches with the capital a/c in such company. Please note that no profits has actually been repatriated to India. Just a journal entry is passed to match balance.

Will indian residents needs to pay tax in india on such profits earned by company, but not recived?

Replies (3)

Quick Summary

This discussion explores whether Indian residents need to pay tax in India on profits earned by a Dubai Free Trade Zone company (FZCO) where they hold a stake. The profits have been recorded in the books to match investment balances but have not been physically sent back to India. The consensus is that as the profits have not been repatriated or received in India, they are considered notional income and therefore not subject to Indian income tax under current laws, specifically Section 5 of the Income-tax Act, 1961.

Rama chary Rachakonda

Master in Accounts & high court Advocate

7021 Points Posted on 18 December 2024

As Indian residents, the shareholders are subject to tax in India on their global income, including income earned from foreign sources.

However, in this scenario: - The profits have not been repatriated to India. - The journal entry is passed only to match the balance in the investment account.

The key concept here is: - _Accrual of income_: Income is deemed to accrue or arise in India only when it is received in India or is deemed to be received in India. -

_Notional income_: In this case, the profits are notional, as they have not been repatriated to India. As per the Indian tax laws: - Section 5 of the Income-tax Act, 1961, states that income accrues or arises in India only when it is received in India. - Section 9 of the Income-tax Act, 1961, deals with income deemed to accrue or arise in India, but it does not apply in this scenario. Based on these provisions: - The Indian residents are not liable to pay tax in India on the profits earned by the FZCO company, as the income has not been repatriated to India. However: - It is

DHRUV

student

109 Points Posted on 23 December 2024

not able to see your reply in full. can you please re-edit it

Aashok Kumar Sharma

Finance/Compliance Consultant

75663 Points Posted on 08 November 2026

Indian residents owning a Dubai FZCO:
• The FZCO's profits are its own (taxed in the UAE, with 0% or 9% corporate tax). Indian shareholders are taxed in India only on dividends received (at slab rates; the UAE doesn't withhold). FTC is available for any UAE tax on dividends.
• POEM risk: if the FZCO is effectively managed from India (key decisions taken by Indian-resident shareholders in India), it may be an Indian tax resident (Sec 6(3)), taxed in India on global income.
• FEMA: the investment is an ODI by resident individuals (OI Rules 2022: individuals can make ODI in operating companies, not in step-down structures; reporting through the AD bank, APR annually).
• Report the shareholding in Schedule FA (each resident).