The Income Tax Department has issued notices to at least a dozen multinational companies (MNCs) operating in India, demanding additional tax on fee paid for corporate guarantees provided by foreign parent entities, Moneycontrol has learnt from people familiar with the development.
If the tax department’s assessment is eventually upheld in the court of law, the fees will be taxed at 35% plus surcharge, instead of the current 10% or lower under the interest income category.
According to people familiar with the matter, income tax notices have been sent to MNCs from the US, UK, and Netherlands, primarily operating in manufacturing, chemicals, and services sector. The tax demands pertain to payments made for guarantees issued by parent companies between FY19 and FY23 on loans taken by Indian subsidiaries. The demand letters have been sent to the foreign parent of the MNC since the parent provided a service to its Indian arm and earned a fee on it.
The Indian units of MNCs typically pay their foreign parents 1-2% of outstanding debt as a fee for such guarantees. The foreign parent companies have been considering this payment as interest and arguing that it should be taxed at a lower rate under India’s Double Taxation Avoidance Agreements (DTAAs).
However, tax authorities contend that the payments do not qualify as interest income because they are fixed guarantee fees rather than variable interest-linked payments. Instead, they are classifying them as ‘income from other sources’, which attracts a 35% tax rate plus applicable surcharges.
If the assessment of the tax department prevails, the foreign parent companies are liable to pay additional tax on the fee received in lieu of guarantees provided to Indian units.
“The tax department has taken a stance that such fees can be characterized as interest income only if they are tied to an actual loan interest payment. In these cases, the payments are fixed charges for corporate guarantees, which makes them taxable as income from other sources in India,” said a tax expert with direct knowledge of the matter.
Rising Scrutiny of MNCs
The latest tax scrutiny follows a Delhi High Court ruling in May 2024 involving UK-based sustainable technology company Johnson Matthey, where the court upheld the tax department’s classification of guarantee fee as income from other sources. The 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 as income from other sources, making them liable for a 35% tax rate plus surcharge,” an tax expert said.
Industry experts say the tax notices have unsettled international companies, as corporate guarantees are a standard practice in MNC financing structures. “These notices have raised concerns as intra-group guarantees are common in global corporations, 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,” said a senior tax consultant.
Corporate guarantees have also come under scrutiny on the indirect tax front, with GST authorities issuing notices to Indian conglomerates for Goods and Services Tax (GST) on similar transactions.
The tax department has yet to issue an official statement on the matter.
