income tax

Published on 8 May 2025

India's New FOCE Regulations: Strengthening Foreign Ownership Compliance by 2025

Introduction

India is enforcing more stringent foreign ownership regulations and anti-avoidance regimes by 2025 in response to rising complexity of international tax avoidance schemes. Although legislative formal Controlled Foreign Corporation (CFC) has not yet come into place, loopholes are being addressed by the government through the introduction of new categories such as Foreign Owned and Controlled Entities (FOCE), enhancing digital compliance procedures, and implementing rigorous disclosure regulations.

Status of CFC Rules in India (2025)

Failure to Enact Formal CFC Legislation

Presently, India's Income Tax Act, 1961, and proposed Income Tax Bill, 2025, lack explicit provisions about CFCs. Previous drafts under the Direct Tax Code (DTC) have not gained adoption.

Independent of Existing Rules

Anti-avoidance measures are implemented primarily through:

  • The General Anti-Avoidance Rule (GAAR)
  • The Place of Effective Management (POEM)
  • Mandatory foreign asset reporting under Schedule FA

Penalties under the Black Money Act

Failure to report foreign income or assets can lead to fines and imprisonment under the Black Money (Undisclosed Foreign Income and Assets) Act, 2015.

FOCE: The New Foreign Ownership Framework

Definition of FOCE

FOCE comprises Indian companies or funds owned by residents of foreign countries, including indirect foreign investment owners.

Implications of FOCE Regulations

  • Transfers of shares, restrictions or indirect change of ownership involving FOCEs must comply with Foreign Direct Investment (FDI) rules, including sectoral limits and fair market value assessments.
  • Internal transfers within group enterprises can necessitate FDI compliance requirements.
  • The regulations seek to prevent foreign investors from circumventing FDI regulations by using complex structures or indirect arrangements.

Disclosure and Compliance in 2025

Schedule FA in Income Tax Return (ITR)

Direct and indirect foreign assets are required to be disclosed by Indian residents in their ITR through Schedule FA. The guidelines have been updated for Assessment Year (AY) 2025–26 to mandate specific details.

Return of Foreign Investment Abroad (FLA)

Those having a 10% or more stake in a foreign organization are required to file an FLA return annually by July 15.

Penalties for Failure to Comply

Failure to disclose foreign assets or income can result in penalties three times the value hidden, besides potential prosecution and a seven-year jail term at maximum under the Black Money Act.

Sectoral Impact and Case Studies

Affected Sectors

Implementation of FOCE rules will have a major impact on sectors such as e-commerce and pharma, where ownership structure could be intricate in light of layered holdings or intense turnover.

Example: UAE Company Scenario

For instance, if an Indian resident has a UAE company and retains its profits abroad, current law taxes only income that is repatriated. However, penalties can be imposed by GAAR or the Black Money Act for failure to report or misuse of artificial structures.

Best Practices for Compliance

  • Full Disclosure: Disclose all foreign income and assets accurately in the ITR (Schedule FA).
  • Sectoral Norm Conformity: Restructuring or transfer of FOCEs will be under sectoral caps and reporting.
  • Maintain Significant Presence: Maintain foreign companies with genuine operations, resident directors, and regular board meetings outside India so as not to jeopardize POEM or GAAR concerns.
  • Hire Experts: In complex ownership structures, hire experts to minimize the risk of unintentional violations.

FAQs: Controlled Foreign Corporation and FOCE Rules in India

Q1: What is a Controlled Foreign Corporation (CFC)?

A CFC is a foreign company owned or controlled by Indian residents, typically utilized to defer or evade tax on foreign income.

Q2: Do CFC rules exist in India in 2025?

As of 2025, India has no official CFC regulations. Anti-avoidance techniques are addressed under GAAR, POEM, and rule-based disclosure requirements.

Q3: What are FOCE rules?

FOCE rules address Indian entities under foreign control as foreign-owned, regulated under FDI policy—also where indirect ownership or internal transfers are involved.

Q4: What happens if foreign assets are not reported?

Failure to disclose may draw severe sanctions under the Black Money Act in terms of fines and even imprisonment. India by 2025 will enhance its anti-avoidance and foreign ownership legislation with FOCE designations, aggressive digital compliance, and extensive disclosure requirements. While formal CFC legislation has yet to be created, the focus is on increasing transparency, substance guarantee, and compliance in corporate structures.