Corporate - Branch income

Last reviewed - 09 February 2024

In general, branches and resident companies are taxed alike (i.e. taxation of corporate profits is postponed until profit distribution). As with companies, a PE's taxable base is a sum of taxable items consisting of profit distributions and deemed distributions. However, the PE's taxable base consists not only of taxable items incurred directly through the PE but also of any taxable items the non-resident allocates to the PE. Since technically branches and PEs cannot pay dividends, this fact makes it more difficult to determine what forms the taxable base for a PE or branch.

The PE's taxable base includes items in cash or otherwise that are extracted from the PE, including profit distributions and deemed distributions. These items include the following:
  • Any payments to the non-resident exceeding 10% of expenses not related to the PE's business.
  • The non-resident's direct revenue gained through and allocated to the PE.
The following expenses would be excluded from the PE's taxable base:
  • Cost of goods sold the PE pays to the non-resident for goods supplied for resale (as if they were acquired by an independent company from an intermediary but not the final reseller) are considered business expenses and excluded from the taxable base.
  • Up to 10% of non-business expenses incurred to cover the non-resident's general and operating expenses relating to the PE's operations supported by documentary evidence, other than the cost of goods acquired for resale mentioned above, are not considered items extracted from the PE.
  • The PE can deduct from its profits for CIT purposes any business expenses actually incurred by the non-resident, supported by documentary evidence and capable of being allocated to the PE.
Accordingly, the PE's taxable profit is significantly affected by keeping separate books and holding documentary evidence for the type of expenditure concerned (cost of goods sold, expenses related to the PE's business activity, or non-business expenses).