India Canada business structures decide where profits are taxed, how cash comes home and how many filings you take on, so the choice between selling directly, forming a subsidiary or opening a branch is a tax decision as much as a legal one. A Canadian importer buying from Ahmedabad, an Indian software firm serving Toronto customers, and a Calgary manufacturer opening a sales office in Pune face the same questions: does the activity create a permanent establishment, what is withheld on dividends, interest and fees, and which regulators need reports. This guide compares the main structures under the Canada-India tax treaty and each country's reporting rules.
How do India Canada business structures compare?
| Structure | Host-country tax | Return of profits | Key reporting |
|---|---|---|---|
| Direct sales or purchases, no entity | None if no PE; customs and indirect tax apply | Payment for goods | Withholding on royalties or technical fees if any |
| Subsidiary company in the host country | Taxed as a resident company | Dividends, with 15% or 25% treaty caps; interest 15%; royalties and fees 15% | Parent's foreign affiliate reporting; host company filings |
| Branch of the foreign company | Foreign company taxed on PE profits; Canada can add a branch tax up to the dividend rate; India may tax a Canadian company at a rate up to 15 percentage points above the domestic company rate | Head-office remittance | RBI approvals in India; branch filings |
| Liaison or project office in India | Limited activities, still subject to tax if a PE arises | Not intended for earning income | RBI annual activity certificate through the bank |
| Agent or distributor | Dependent agents who conclude contracts or secure orders can create a PE | Commission or sales margin | Agent's invoices; PE analysis |
Treaty Article 5 lists PE triggers: a place of management, branch, office, factory, workshop, store, warehouse for others, building site over 120 days, and services performed through personnel for more than 90 days in a 12-month period or for a related enterprise. Storage, display, delivery, purchasing and information-gathering are excluded when they are the only activity. Article 24 permits the additional branch tax and the higher Indian rate for a Canadian company.
What are the tax rates and withholding rules?
Canada's default Part XIII rate is 25% on amounts paid to non-residents, reduced by a treaty if you document eligibility. India applies its own withholding rules; the treaty caps (15% or 25% on dividends, 15% on interest, 15% or 10% on royalties and fees for included services) apply only with the paperwork. "Fees for included services" covers technical or consultancy services that make technical knowledge or skill available. See the India-Canada treaty guide, India TDS and TCS for businesses and repatriating profits. Finance Canada lists the India agreement as covered by the Multilateral Instrument, so confirm that no provision you rely on has been modified.
How to choose and set up a structure step by step
- Map the activities: who signs contracts, where goods are stored, where staff sit and how long they are there.
- Test for a PE under Article 5 on both sides.
- Pick the form. A Canadian subsidiary can be federal or provincial; see incorporating in Canada. An Indian entity may be a private limited company or LLP; see entity options in India. A branch or liaison office in India follows the RBI's FEMA rules, through approval or general-permission routes via an authorised dealer bank.
- Set intercompany pricing with a written policy; see India transfer pricing basics.
- Register: Canadian business number and GST/HST (see GST/HST registration); Indian PAN, TAN and GST, and the FDI reports described in FDI reporting.
- Apply the treaty at payment: residency certificates, declarations and correct withholding on each payment.
- Calendar the annual filings and review the structure each year.
Documents and information you need
- Incorporation or registration documents, shareholder and director details
- Intercompany agreements and a transfer pricing policy
- Residency certificates for each entity
- Business plan with dates, headcount and locations
- FEMA filings and bank approvals in India
- Contracts with agents, distributors and customers
Deadlines and penalties
Canada: a corporation files its T2 and Form T1135, if required, within six months after its fiscal year-end. Form T1134 for foreign affiliates is due 10 months after the year-end for tax years starting after 2020. The CRA says the transfer pricing penalty is 10% of certain adjustments, and contemporaneous documentation must be provided within three months of a written request. Bill C-15, which received Royal Assent on March 26, 2026, modernized Canada's transfer pricing rules under section 247, so review your policy. India: the RBI says entities with foreign direct or overseas investment file the FLA return by July 15, with a late submission fee, and a company with no outstanding investment at the end of March of the reporting year and the previous year need not file. Branch, liaison and project offices submit annual activity certificates.
Worked example
Pune Cloud Services, an Indian company, opens a wholly owned subsidiary in Toronto to serve Canadian clients. The subsidiary earns C$400,000 of taxable profit after Canadian tax and pays C$100,000 of dividends to the Indian parent. Because the parent owns at least 10% of the voting power and supplies a residency certificate, the Part XIII rate on the dividend is capped at 15%, which is C$15,000, instead of the 25% default of C$25,000. The parent reports the dividend in India and claims credit for the Canadian tax under the treaty. The subsidiary pays the parent a license fee for software, subject to a 15% cap and transfer pricing support. The Indian parent reports the investment to the RBI through its bank and files the annual FLA. The figures are hypothetical.
Mistakes to avoid
- Sending staff to the other country for more than 90 days without testing for a service PE.
- Paying royalties or technical fees without checking withholding.
- Forgetting the FLA filing in India or Form T1134 in Canada.
- Treating a liaison office as a way to earn revenue.
- Relying on the dividend cap without a residency certificate.
- Overlooking US rules: if any owner is a U.S. citizen or resident, see foreign business reporting for Forms 5471 and 8858.
How we can help
We are a U.S. CPA firm in the Aurora, Illinois area. For owners who are U.S. persons, we handle Forms 5471 and 8858, foreign tax credits and the U.S. effect of Canadian and Indian entities, and for U.S. businesses trading with both countries we handle the U.S. side of contracts, pricing and sales tax. We coordinate with your Canadian CPA and Indian Chartered Accountant on the filings under Canadian and Indian law; we do not file them. See business tax returns and planning, business formation and registrations and the cross-border hub.
Frequently asked questions
Is a subsidiary better than a branch?
It depends on liability, tax and reporting. A subsidiary separates risk and is a distinct taxpayer; a branch is simpler but exposes the head office.
Does the treaty exempt royalties?
No. It caps source-country tax. Domestic rules and the paperwork decide the actual rate.
Does a liaison office create tax?
It is limited to non-earning activities, but a PE can arise if it does more.
Who files the India-side forms?
Your Indian Chartered Accountant and bank. We coordinate but do not file them.
Do these rules apply to a U.S. company trading with Canada or India?
The treaties differ. See U.S. company entering Canada and U.S. company entering India.
Official sources
- Government of Canada: Canada-India Income Tax Agreement (treaty text)
- CRA: Rates for Part XIII tax
- CRA: Transfer pricing
- RBI: FAQs on liaison, branch and project offices of foreign entities in India
- RBI: FAQs on the annual return on foreign liabilities and assets (FLA)
- Finance Canada: Canada's tax treaties in force
This page summarizes public guidance in plain language. If anything here differs from the official source, the official source controls.
General information only. It is not tax, legal, accounting or immigration advice for your situation, and rules change; confirm the current rules with the official source or a licensed professional in the relevant country.