Litigation-Proof Cross-Border Tax & FDI Structuring Strategies: A Practical India Entry Playbook For Mid-Sized Groups

EXECUTIVE SUMMARY

This playbook offers a practical framework for mid-sized global groups entering India, covering capital structuring, treaty outcomes, PE defence, cross-border payments, GST treatment, and TP governance. It broadly covers following topics:-

1. Direct investment is usually superior for Mid-sized Groups and they don't need Singapore/ Netherland Holding Structures.
2. Several Treaties remain highly advantageous without adopting circuitous route of Parent Jurisdiction Co- Netherland/ Singapore HoldCo- India Inc
3. Choice of right instrument e.g. equity, CCDs, CCPS is relevant not only for tax structuring but also for transaction structuring, anti-dilution rights and other contractual and statutory rights.
4. What Foreign Parent Co. can do to avoid unplanned PE risk in India.
5. How tax treatment of Cross-border payments can be aligned with desired outcome with correct description, evidence, "make available" tests etc.
6. Structuring and documentation from perspective of GST.
7. Key transfer pricing issues, and why TP must match the PE and GST fact pattern to avoid unnecessary litigation.

R & D Law Chambers is a research-driven dispute resolution and advisory practice serving clients across India and internationally. We operate at the intersection of arbitration, commercial litigation, regulatory disputes, and cross- border tax and transactional issues, helping businesses and legal teams navigate high-value matters involving India. To know more about our services, you may click our services.

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Topics/Questions You Can Jump To

1. Holding Structure and India Entry Pathways
   1 Why Direct Investment Works
   1.2 Dividend Withholding Tax: Reduce 20% to 10-15%
   1.3 Capital Gains: Several Key Treaties Still Give Full Protection
   1.4 Interest, Royalty, Fees for Technical Services
   1.5 Indirect Transfer Rules under section 9 of Indian Income Tax Act: Low Risk for Mid-Sized Groups
2. Choosing Between Equity, CCDs & CCPS — Practical Playbook for Mid-Sized Companies
3. Managing Permanent Establishment (PE) Risk — Insights for Mid-Sized Companies
   1 What Actually Triggers PE for Mid-Sized Groups
   3.2 Practical Contracting Models That Avoid PE
   3.3 Commissionaire & Marketing Support Models (Correctly Implemented)
   3.4 What to Document to Defend a No-PE Position
   3.5 The Efficient Mid-Sized Model
4. Cross-Border Fees, Royalty & GST — Keeping Mid-Size Groups Out of Trouble
   1 Management Fees & Group Services — Avoiding the 20% Trap
   4.2 How to Design Inter-Company Agreements That Survive Scrutiny
   4.3 GST on Import of Services — Why It Is a Structuring Issue, Not Just Compliance
   4.4 Transfer Pricing — Five DO's and Five DON'Ts for Mid-Size Companies

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INTRODUCTION

Mid-sized companies enter India very differently from global conglomerates. Their focus is usually actual business operations — a JV, a subsidiary, a distributor, a contract manufacturer — not regional holding platforms. They invest directly from their home jurisdiction, rely on parent-country treaties, and need structures that are clean, defensible, and cost-efficient.

Unlike large groups (we have separately published article for inbound investment structuring for large groups), mid-size investors typically:

• cannot justify a Singapore/NL HoldCo,
• must manage PE risk with lean teams,
• combine equity with CCD/CCPS or shareholder loans,
• require simple treaty-aligned WHT outcomes,
• and must stay FEMA-compliant without complex multi-layer entities.

This article provides a practical, usable playbook for mid-sized companies covering aspects of direct investment structures, treaty optimisation, CCD/CCPS design, PE-safe models, and cross-border fee/royalty structuring

FRAMEWORK

1. Holding Structure and India Entry Pathways

Mid-sized foreign companies usually enter India for business — not to build regional tax platforms or multi-layer Singapore/NL holding structures. Their India entry is focused and capital outlay is moderate. In these cases, a clean direct investment from the parent company often works better than adding more jurisdictions. And if planned correctly, the outcomes are surprisingly efficient.

1.1 Why Direct Investment Works

Direct entry makes sense where India is one of only a few global operations and the immediate goal is a joint venture, subsidiary, or distribution arm and when repatriation needs are equally straightforward — dividends, buyback, interest, or group service fees. For such investors, adding a HoldCo usually adds compliance without adding value. As I often tell clients: "If a single lift can get you to the floor you want, you don't need to change elevators halfway."

1.2 Dividend Withholding Tax: Reduce 20% to 10-15%

Most mid-sized companies can reduce the default 20% WHT(s.195 of Income Tax Act, 1961) simply by relying on their home-country treaty:

• 15% WHT: UK, Spain and Belgium
• 10% WHT : Germany, France, Sweden, Switzerland, Japan

In many cases, this alone removes the need for a Singapore or NL intermediary. The important part is documenting beneficial ownership and the commercial purpose from day one — something far easier in a direct structure.

1.3 Capital Gains: Several Key Treaties Still Give Full Protection

India has amended only a few historic treaties; others continue to offer extremely favourable capital-gains outcomes. The practical position is as follows:

• France & Spain:
• India can tax gains only where the investor's participation is ≥10% at the time of sale. If the investor's holding is <10%, India has no taxing right.
• (If a 20% stake is sold in tranches, the first sale above 10% is taxable; the remaining sale once the holding falls below 10% is treaty-protected.)
• Switzerland:
• One of the most favourable treaties. India can tax only land-rich shares.
• All other direct and indirect transfers are taxable exclusively in Switzerland, subject to Switzerland actually taxing the gain. In practice, this often fully protects an exit.
• Belgium & Germany:
• These treaties give India full source-based rights on direct transfers of Indian-company shares. However, indirect transfers (offshore sale of a foreign parent holding Indian assets) remain outside India's taxing rights, because the treaties allocate taxing power only for shares of a company resident in a Contracting State.

For many mid-sized investors, this means a correctly structured direct investment — especially from Switzerland, France, or Spain — can still deliver clean exit outcomes, low litigation risk, and no India tax on offshore reorganisations, subject of course to BO/PPT and basic governance discipline.

1.4 Interest, Royalty, Fees for Technical Services

Most treaties cap withholding at 10%, allowing efficient inbound financing and group support arrangements:

• shareholder loans / CCDs (for deductible interest),
• management/technical service fees,
• IP/brand licensing.

If structured sensibly, this avoids the 20% domestic WHT trap and gives predictable pricing for inter-company transactions.

1.5 Indirect Transfer Rules under section 9 of Indian Income Tax Act: Low Risk for Mid-Sized Groups

India's indirect transfer provisions apply only where a foreign parent derives >50% of its value from Indian assets or where offshore reorganisations are India-centric. Mid-sized groups almost never meet these thresholds.

Very importantly:

Where a treaty denies India taxing rights, Section 9 cannot override it.
Vodafone's litigation journey — despite all its drama — ultimately reaffirmed this principle.

This is why direct investment remains both legally robust and administratively clean for mid-sized groups.

2. Choosing Between Equity, CCDs & CCPS — Practical Playbook for Mid-Sized Companies

Inbound financing for mid-sized companies is rarely about inventing new instruments — it's about using simple ones intelligently.

Different instruments help achieve different objectives and have to withstand different tests e.g. interest on CCDs has to be within limits of 30% EBITDA. (s.94B of Income Tax Act, 1961)

Equity is clean but tax-heavy; dividends face a 20% domestic rate unless treaty relief applies, and repatriation depends on actual profits. CCDs behave like debt for tax and like equity for FEMA — allowing interest deduction in India, predictable annual payouts at treaty WHT, and smoother financing without valuation heartburn. CCPS are the middle ground; it does not allow any room for deduction, but are excellent for structuring preferences, liquidation rights, and valuation protection. What is important to attain desired objectives is properly documented commercial logic and structuring from inception that is aligned with such objectives.

Below table gives comparison between different outcomes for different instruments.

Quick Comparison: Equity vs CCD vs CCPS

Parameter	Equity	CCDs	CCPS
Tax Deduction in India	❌ None	✅ Interest deductible	❌ None
WHT on Payouts	Dividend WHT 20% (10–15% treaty)	Interest WHT 20% (10% treaty typical)	Dividend WHT 20% (10–15% treaty)
Repatriation Flexibility	Low – dividends only when profits exist	High – annual interest payouts	Medium – dividends require profits
FDI Valuation Rules	Strict	Strict (issue + conversion)	Most flexible
Thin Cap Exposure (s.94B)	None	Yes, if AE debt/guarantee >30% EBITDA	None
Voting Rights	Full	None	Limited/structured
Investor Protections	Standard	Contractual	Strong (preferences, anti-dilution)
Best Use Case	Long-term FDI/JV	Tax-efficient financing	Valuation-sensitive rights structuring

What Most Mid-Sized Companies Actually Do:-

Almost every well-advised mid-sized entrant uses a blend, not a single instrument:

• Equity for control and regulatory clarity,
• CCDs for deductible financing and repatriation,
• CCPS where economic and exit rights need tailoring.

Such structuring is a simple way to achieve tax efficiency without over-engineering the structure or building a Singapore/NL HoldCo that the business cannot justify.

3. Managing Permanent Establishment (PE) Risk — Insights for Mid-Sized Companies

For mid-sized foreign companies entering India, PE is not an academic issue — it's the single most common way Indian tax authorities extend the tax net to the foreign parent. And very often, PE is triggered not by some dramatic business presence but by ordinary actions: a visiting employee, a sales-heavy contract, or a "helpful" Indian subsidiary doing more than it should.

Fortunately, PE risk is predictable, manageable, and — with the right documentation — fully avoidable.

3.1 What Actually Triggers PE for Mid-Sized Groups

In practice PE gets invoked in broadly the following ways:

Fixed Place PE

Occurs where the foreign entity has a place at its disposal in India.

• Using group/affiliate offices as if your own
• Employees repeatedly operating out of India
• Project sites, warehouses, or R&D facilities

In Formula One World Championship Ltd. v. CIT, the Supreme Court held that a "place" includes any facility—such as premises, machinery, or equipment—which need not be owned by the foreign enterprise but must be at its disposal. The race circuit was treated as a physical location through which FOWC's business was actually carried on.

In DIT v. Morgan Stanley & Co., the Court clarified that determining a PE requires a functional and factual analysis of the specific activities undertaken in India. A fixed-place PE exists only where the foreign enterprise has the right to use, and exercises control over, a location in India through which its own business is wholly or partly carried on. On the facts, the Court held that MSAS was merely providing back-office support, that MSCo did not have the premises at its disposal, and that MSCo's core business was not carried on from the MSAS facility.

Service PE

Common under many EU treaties.

• Employees/consultants in India for >30–90 days
• Technical/managerial services physically rendered in India
• Shadow employees reporting abroad but working from India

Courts have consistently emphasised (including in DIT vs. E-Funds IT Solutions) that Service PE is a fact-driven enquiry. The focus is not on labels used in agreements but on what actually happens on the ground — who performs services, from where, under whose control, and for how long. The threshold is crossed only where employees or personnel of the foreign enterprise render services in India in a manner that amounts to the enterprise itself carrying on its business here. Routine support, coordination, or back-office assistance, even if valuable, do not by themselves create a Service PE unless the foreign enterprise's own core functions are effectively being performed from India.

Agency PE (DAPE)

Triggered when an Indian subsidiary or partner "habitually concludes contracts" or binds the foreign parent.

• Sales teams negotiating or signing on behalf of parent
• Local individuals securing orders that parent routinely approves
• Deal terms dictated from India

(E-Funds decision clarifies that a normal subsidiary does not amount to PE unless it binds parent)

Digital / Server PE

• Server located in India & at the disposal of the foreign entity
• Core business operations performed through Indian digital infrastructure
  

SEP (Significant Economic Presence)

Domestic law concept — not applicable where treaty exists.

3.2 Practical Contracting Models That Avoid PE

Most mid-sized firms unintentionally create PE through badly drafted contracts. These simple insights could reduce the risk:-

1. Only the foreign parent signs core contracts
   Indian entity should provide support services, not revenue-generating activity.
2. Subsidiary employees must not have and also must not appear to have signing or binding authority.
3. Keep Indian subsidiary strictly to marketing support, market intelligence, back office, or after-sales.
4. Avoid shadow employees
5. Do not use Indian offices as the foreign parent's office as 'disposal test' is fact driven and Indian Courts apply it.

3.3 Commissionaire & Marketing Support Models (Correctly Implemented)

A well-drafted commissionaire or marketing support arrangement can safely avoid PE if:

• Indian entity acts on principal-to-principal basis
• No contract is concluded in India
• No authority, actual or implied, is granted
• Transfer pricing remunerates Indian entity at arm's length

This keeps the revenue outside India while the Indian entity's functions remain low-risk.

3.4 What to Document to Defend a No-PE Position

PE challenges are won (or lost) on evidence. You strengthen your position enormously if you maintain:

• Board minutes clarifying roles of India vs foreign teams
• Email protocols restricting contract negotiation authority
• Employment contracts (no authority to bind foreign parent)
• Transfer-pricing documentation aligning functions & risks
• Contracts explicitly restricting Indian entity to auxiliary activities
• Proof that strategic decisions occur outside India
• A record of employee travel days (for service PE thresholds)

When documentation matches reality, PE disputes often collapse early.

3.5 The Efficient Mid-Sized Model

Mid-sized entrants don't need expensive structures — they need simple discipline:

Foreign Parent

↓

Indian Subsidiary (Support Services Only)

• no contract authority
• no binding quotes
• no strategic functions
• remunerated on a cost-plus or arm's-length basis

Foreign Parent earns revenue offshore → India taxes only the subsidiary, not the foreign company.

This is exactly the structure upheld in E-Funds and applied by most multinational mid-caps successfully.

4. Cross-Border Fees, Royalty & GST — Keeping Mid-Size Groups Out of Trouble

For mid-size companies, cross-border payments are where most inadvertent tax leakage happens, not in capital structuring. A simple management-fee arrangement or poorly drafted IP licence can trigger 20% WHT, GST under reverse charge, TP adjustments, or, worse, a PE argument.

Most disputes arise not because companies were non-compliant, but because their paperwork didn't reflect commercial reality.

4.1 Management Fees & Group Services — Avoiding the 20% Trap

Cross-border management fees and intra-group service charges are frequently mischaracterised. Under Indian domestic law, Fees for Technical Services (FTS) paid to a non-resident attract 20% withholding tax (plus surcharge and cess), unless the applicable tax treaty provides a lower rate — many modern treaties (e.g., Germany and France) cap such withholding at 10%.

Several disciplined practices help avoid accidental FTS characterisation and unnecessary litigation:

• Describe the services accurately. Where a treaty taxes only "managerial, technical, or consultancy" services, a clear description of routine, administrative, coordination, or back-office support helps avoid falling within the technical definition.
• Ensure services are actually rendered. Indian courts and tribunals increasingly look for evidence that services were provided and that the Indian entity derived a benefit. Emails, time-sheets, project logs, and deliverables materially strengthen the position.
• Apply the 'make available' test where relevant. Many treaties — such as those with the US, UK, and Canada — tax technical services only if they "make available" technical knowledge, skill, or know-how. Where no such transfer occurs, the payment generally falls outside FTS under those treaties.
• Routine support may fall outside FTS. Functions such as accounting assistance, back-office support, and administrative coordination may not satisfy the treaty definition of FTS when properly documented and when no managerial/technical content is involved.

In practice, most disputes arise because the agreement is loosely drafted, not because the law is unclear.

A few simple drafting precautions significantly reduce risk:

• Where the arrangement involves access to software, tools, or other IP, clarify that the Indian entity receives only a limited, non-exclusive, non-transferable right of use for internal purposes.
• This prevents authorities from re-characterising the payment as royalty, which attracts its own withholding regime.
• For technology-linked services, evaluate upfront whether the treaty's "make available" test applies, and draft the service description consistently with the factual position.

Precision in describing the nature of services — and limiting what is not being provided — is usually the most effective safeguard.

4.2 How to Design Inter-Company Agreements That Survive Scrutiny

You don't need 50-page agreements; you need sensible, defensible ones:

• State the commercial rationale ("cost savings", "shared capability", "group standardisation").
• Specify service categories, hours, deliverables.
• Include a cost-plus or hourly basis that matches your TP policy.
• Make it explicit that the foreign entity does not conclude contracts in India and does not create PE.
• Mirror reality: if the parent is only providing remote oversight, don't call it "consulting" or "technical management".

A well-drafted 6-page agreement beats a boilerplate 40-page document every day of the week.

4.3 GST on Import of Services — Why It Is a Structuring Issue, Not Just Compliance

Cross-border services received by an Indian subsidiary are generally subject to GST under the Reverse Charge Mechanism (RCM) only when the arrangement qualifies as an "import of service." i.e., the place of supply is in India.

Under the IGST Act, an import of service arises when:

1. the supplier is outside India,
2. the recipient is in India, and
3. the place of supply is in India.

If the place of supply is outside India, the service is regarded as consumed outside India, and RCM should ordinarily not apply — consistent with GST's destination-based tax principle.

Where RCM does apply, GST (typically 18%) must be paid in cash by the Indian entity, with input tax credit available unless the entity makes exempt supplies. The challenge is rarely the tax itself — it is the cashflow and the risk of a routine internal arrangement being mischaracterised as a taxable supply.

This is why GST becomes a structuring consideration rather than a mere notification lookup. How an inter-company arrangement is designed determines whether GST applies at all:

• Secondment vs manpower supply:
• A secondee treated as an Indian employee is not a taxable supply; structured as manpower supply, the entire cost becomes RCM-liable.
• Reimbursements vs service fees:
• Pure pass-through reimbursements (with evidence) are not supplies; loosely drafted "reimbursements" are often recharacterised as consideration for services.
• Software and platform access:
• Limited, internal-use access is usually non-problematic; broad rights may be treated as an import of services and draw RCM.
• Support vs advisory services:
• Routine administrative support may fall outside FTS/service characterisation altogether; but careless drafting ("technical management", "consulting") can convert the same activity into a taxable import.

GST disputes in this space arise almost entirely from characterisation and documentation, not from any ambiguity in the statute.
Proper structuring ensures that only genuine imports of services attract RCM — and avoids unnecessary cashflow leakage or litigation.

4.4 Transfer Pricing — Five DO's and Five DON'Ts for Mid-Size Companies

DO

✓Keep simple TP policies tied to real services

✓Maintain evidence of services (emails, deliverables, time-sheets).

✓Benchmark fees once every 3 years unless circumstances change.

✓Use safe-harbour margins where applicable.

✓ Align TP documentation with PE-defence arguments.

DON'T

✗Don't charge fees if no services were rendered.

✗Don't leave agreements undated or unsigned.

✗Don't put "management services" for everything — be specific.

✗Don't charge India for global strategy work done for the whole group.

✗ Don't ignore GST classification; TP and GST must tell the same story.

About the Author

Ravish is a dual-qualified lawyer and solicitor licensed to practice in India and on the roll of the Solicitors Regulation Authority (England and Wales). He specialises in international arbitration and international taxation, Insolvency and Bankruptcy, and holds the Advanced Diploma in International Taxation (ADIT) from the Chartered Institute of Taxation (CIOT).

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