The Income Tax Act, 1961 sets different tax rules for companies based on whether they are domestic or foreign. This classification is not the same as residential status, which is decided under Section 6(3) based on where the company is managed or incorporated. Domestic or foreign status mainly affects tax rates and compliance requirements.
It is important to understand these terms and how they differ from related concepts in the Act, such as Indian Company, Company, and A Company in which the Public are Substantially Interested. All Indian companies are domestic companies. Some foreign companies can also be treated as domestic if they meet certain conditions related to dividend payments.
Distinction between Domestic and Indian Company
A Domestic Company is not the same as an Indian Company. An Indian Company is defined under Section 2(26) of the Income Tax Act, 1961. It refers to a company formed and registered under the Companies Act, 1956 or the Companies Act, 2013. It also includes certain other bodies corporate with a registered office in India.
A Domestic Company includes all Indian companies and also some foreign companies that meet specific conditions. This wider definition ensures that taxation reflects economic activity and dividend distribution within India.
Definition of Domestic Company u/s 2(22A)
Section 2(22A) of the Income Tax Act, 1961 defines a Domestic Company as:
- An Indian company, or
- Any other company that has made arrangements for declaring and paying dividends in India from income taxable under this Act.
These arrangements are explained in Rule 27 of the Income Tax Rules, 1962. They include:
- Keeping a register of members in India
- Paying dividends in Indian currency
- Ensuring the payment process happens within India
If a foreign company follows these rules, it is treated as a domestic company for tax purposes.
Definition of Foreign Company u/s 2(23A)
Section 2(23A) defines a Foreign Company as any company that is not a domestic company. If a company is not an Indian company and does not meet the dividend payment conditions, it is considered foreign. Foreign companies usually face different tax rules, including higher tax rates.
Tax Implications of the Classification
The classification affects how much tax a company pays:
- Domestic companies generally pay 25% or 30% tax on income, depending on turnover and special provisions. Surcharge and cess apply as per law.
- Foreign companies pay 40% tax on income, plus surcharge and cess.
This system encourages foreign companies to comply with Indian tax norms by making dividend arrangements in India. Always check the latest changes in the law, including updates from the Finance Act, 2025.
Different Definitions under Income Tax relating to Companies:
Section 2(18): Substantial Interest of Public in Company
Section 2(22A)/ 2(23A) Income Tax: Domestic/ Foreign Company – Meaning
In case of non-Indian companies to be domestic company, it is written that the dividend declared, if any, shall be payable only within India to all share holders. Please some one elaborate this point for me with examples. Thanks