Priyanka Tiwari
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The Indian Income Tax Department has issued notices to at least a dozen multinational companies (MNCs) operating in the country. The notices demand additional tax on fees paid for corporate guarantees provided by their foreign parent companies. If the tax department’s assessment is upheld in court, these fees will be taxed at 35% plus a surcharge, instead of the current 10% or lower under the interest income category.
Who is Affected?
According to sources, these tax notices have been sent to MNCs from the US, UK, and Netherlands. The companies primarily operate in the manufacturing, chemicals, and services sectors. The tax demands pertain to payments made between FY19 and FY23 for guarantees issued by parent companies on loans taken by their Indian subsidiaries. The demand letters have been sent to the foreign parent entities, as they earned fees for providing these guarantees.
Tax Authorities’ Argument
Indian subsidiaries typically pay their foreign parent companies 1-2% of outstanding debt as a fee for corporate guarantees. These parent companies have been considering such payments as interest income, arguing that they should be taxed at a lower rate under India’s Double Taxation Avoidance Agreements (DTAAs). However, the Indian tax authorities argue that these payments do not qualify as interest income since they are fixed guarantee fees, not variable interest-linked payments. Instead, they classify them as ‘income from other sources,’ which is taxed at a higher rate of 35% plus applicable surcharges.
If this assessment is upheld, the foreign parent companies will be required to pay additional tax on fees received for corporate guarantees provided to their Indian subsidiaries.
Legal Precedent: Johnson Matthey Case
The tax scrutiny on corporate guarantee fees follows a recent Delhi High Court ruling in May 2024 involving UK-based sustainable technology company Johnson Matthey. The court upheld the tax department’s classification of guarantee fees as ‘income from other sources.’ This verdict is now being cited as a precedent for similar cases.
“Based on the Johnson Matthey ruling, guarantee fees received by foreign companies will be taxed at a 35% rate plus surcharge,” said Amit Singhania, founder of Areete Law Offices.
Industry Concerns and Global Impact
Tax experts warn that these notices have unsettled international companies. Corporate guarantees are a common practice in MNC financing structures, and this new taxation approach could increase costs for foreign investors.
“These tax notices have raised concerns among global corporations. Inter-group guarantees are a standard financial practice, and they do not provide undue advantages to parent companies. The fees are paid at arm’s length, and taxing them at 35% in India could make foreign investment structures more expensive,” explained a senior tax consultant.
Indirect Tax Scrutiny on Corporate Guarantees
Corporate guarantees have also come under scrutiny on the indirect tax front. Indian GST authorities have issued notices to conglomerates for applying Goods and Services Tax (GST) on similar transactions.
Awaiting Official Statement
As of now, the Income Tax Department has not issued an official statement regarding these tax notices. The ongoing scrutiny signals increased regulatory oversight of MNC tax practices in India. Foreign companies operating in India will need to review their tax strategies to ensure compliance with evolving tax regulations.
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