Choice of form of business organisation :

While embarking on any joint venture project in a foreign country, it is most essential to identify and pre-determine the form of business organisation which would be most appropriate to carry on the joint venture activities in the foreign country.

The income-tax law in India impose liability to tax based purely on the residential status of the taxpayer and the tests for ascertaining whether a particular taxpayer is resident or non -resident in India have to be determined by applying different criteria prescribed for different categories of taxpayers. It is for the assessee in India as well as the other party in the foreign country to identify and decide in advance the form of business organisation which would be advantageous from the tax angle.

The joint venture may be in the form of incorporating a new company or may be in the form of a partnership firm. A third form is the establishment of an association of persons or body of individuals such as a society or a trust. Though there is no restriction for an individual or HUF to carry on joint ventures outside India, it becomes practically rather difficult and uncertain in terms of accountability and permanency.

In the case of a company, the test of residence specified in section 6 of the Income-tax Act, 1961, requires that for the company to be regarded as resident in India, the company must be either an Indian company within the meaning of section 2(26) or a company whose POEM is in India during the relevant previous year. Although a non-resident company is subject to tax at higher rates of income-tax as compared to a resident company, the tax base for a nonresident company is confined to its Indian income and, therefore, its foreign income would not suffer tax in India. It is to take advantage of this scheme of income-tax law that one should consider the establishment of a foreign company in the country where the foreign project has to be carried out so that the income by way of profits or losses arising from or attributable to that foreign project is kept outside the purview of Indian tax laws. Care should be taken to ensure that the POEM of the company is not in India during that year.

On the other hand, if the foreign project in the form of a joint venture is established as a partnership firm, the test applicable for residence would be exactly opposite and materially different. This is because of the fact that in the case of a partnership firm, it is considered to be resident in India within the meaning of section 6 of the Income-tax Act, 1961, in every case where even a negligible portion of the control and management of the affairs of the firm is carried out from India. If it is desirable to have a taxable entity which would be in a position to claim set off of foreign losses against the Indian income or Indian losses against the foreign income, it would be advisable for the assessee to do so having regard to the facts and circumstances of the case and a reasonable estimation which one could make by proper financial analysis and project planning of the profits and losses of the taxpayers concerned in India and outside.

The other forms of organisations such as trusts, co-operative societies or societies of a general nature and other associations of persons or bodies of individuals could also be thought of to suit the convenience of the parties because even in the case of those associations, bodies or societies, the criteria for determining the residential status would be the same as the one followed in the case of the partnership firms.

But the advantage is that these kinds of entities would also keep the taxpayers free from the difficult circumstances or problems arising from the assessments of partnership firms and their partners to income-tax in India resulting in considerable uncertainties in this regard both for the firms and for the partners.

Depending upon the form of business organisation chosen, the assessee could also shift the place of control and management of the affairs of that organisation to India or outside, whether wholly or partly, to secure that the assessee in question is a resident or non-resident in India for the relevant depending upon what is beneficial from the income-tax angle.

Since each year is a separate and self contained period, it is permissible for the assessee to be resident in one year and to become non-resident in another and such a change can, however, be contemplated or brought about only if the form of organisation is properly thought out. The tax base and consequently the burden of tax, particularly in India would, therefore, be dependent upon the choice made in this regard not only at the beginning but also from year to year.