Legality of Foreign Bank Accounts for Indian Companies
Legality of Foreign Bank Accounts for Indian Companies
Indian companies may open bank accounts abroad for business purposes such as international trade, investments, or holding foreign currency. Below is a concise guide on legality, compliance, and tax implications.
1. Legality & Regulatory Approval
Companies registered in India can open bank accounts overseas for legitimate business reasons. Depending on the account type and purpose, approval from the Reserve Bank of India (RBI) may be required.
- Current Account: For routine business transactions.
- Foreign Currency Account: For receiving and paying in foreign currency.
2. Tax Implications in India
Indian tax rules treat companies differently from individuals — in particular:
- Global Income Taxation: Indian companies are taxed on their worldwide income. Income earned in foreign accounts is taxable in India whether repatriated or not.
- Transfer Pricing & Documentation: If the foreign account relates to a related party (e.g., subsidiary/affiliate), transfer pricing rules and documentation requirements apply.
- Tax Reporting: Income from foreign bank accounts must be disclosed in the company’s Income Tax Return (ITR); disclosure under Schedule FA (Foreign Assets) is mandatory.
3. Tax Implications in the Foreign Country
- Corporate Tax on Local Income: Interest or business income earned in the foreign account may be taxed in that country; many countries also apply withholding tax on interest or payments.
- Double Taxation Avoidance Agreement (DTAA): India has DTAAs with many jurisdictions. Taxes paid abroad can often be credited against Indian tax to avoid double taxation (subject to DTAA terms and documentation).
4. Practical Example
Income Type — Country of Taxation — Notes
- Payment from US client — USA — May attract withholding tax (e.g., 10%).
- Same income in India — India — Taxed at normal corporate rate (foreign tax credit under DTAA may apply).
- Interest on USD account — USA / India — USA: may withhold tax; India: report as income and claim credit if allowed.
5. Key Compliance Points
- RBI Approval: Required for most foreign accounts (check specific RBI/AD bank guidance for exemptions and reporting routes).
- FEMA Reporting: Annual returns and necessary disclosures if foreign assets/accounts exist.
- Income Tax Reporting: Include all foreign income in ITR and claim DTAA/foreign tax credits with supporting documentation.
- Bank Requirements Abroad: Foreign banks often require local documentation and proof of business activity for corporate accounts.
Summary
Yes — Indian companies can open foreign bank accounts, but they must comply with RBI/FEMA rules, report foreign assets, and include foreign income in Indian tax returns. Taxes paid abroad are usually creditable under DTAA to prevent double taxation, provided proper documentation and compliance are maintained.
