PROFITS FROM FOREIGN ENTITY

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DHRUV

student

127 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 (2)

Rama chary Rachakonda

Master in Accounts & high court Advocate

9615 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