Advisory on Repatriation of profits generated by India Subsidiary Services
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Profit Repatriation In India
For foreign businesses operating in India, managing profits and repatriating funds can be difficult because of the many interconnected local and international laws and regulations that must be followed. These laws and regulations include the Companies Act, the Foreign Exchange Management Act, applicable income tax laws, Double Tax Avoidance Agreements, and transfer pricing guidelines.
There are various regulations that limit how much money can be remitted from India and for what purpose. Prior to investing in India, companies must know how to repatriate their profits from the country.
Methods to repatriate funds
While sending company funds from India is much simpler than remitting personal income, the procedures to remit money to the parent company depend upon the entity’s investment model.
Funds can be repatriated using the following methods:
1. Payment of dividend;
2. Upon closure or winding up of the entity;
3. Remittance upon buyback of shares;
4. Upon reduction of share capital;
5. Fees for technical services;
6. Consultancy service/business support services; and
7. Royalty.
Procedures and Regulations for Remitting Profits
The procedure to repatriate profit to the foreign investor/parent company depends upon an entity’s investment model. Foreign companies operate through either a liaison office, project office, branch office, or wholly owned subsidiary (WOS) – depending upon the nature of their activities.
Remitting from liaison offices
LOs is only meant to spread awareness of the company’s products and/or carry out market research. They are not allowed to undertake any business activities and thus cannot earn any income in India.
Remitting from project offices
Project offices are set up to execute specific projects in India. They can only undertake activities related to the execution of the specified project. These offices can remit surplus only upon completion of the project.
Remitting from branch offices
All investments and profits earned by branches of a foreign company are repatriable after taxes are paid.
There are two notable exceptions to this rule:
1. Certain sectors, such as defense, are subject to special conditions. For these sectors, there is a lock-in period where companies have to wait for permission to be granted by the Indian government; and
2. The second exception only applies when non-resident Indians (NRIs) choose to invest under non-repatriable schemes.
Branch offices of foreign companies must file the application for remittance of profits along with the following documents:
Certified copies of audited balance sheet and profit and loss account statement for the year to which the profit relates;
Certificate from auditors covering how the remittable amount was calculated;
Confirmation that the entire income of the branch office was accrued from sources in India;
Confirmation that the requirements of the Companies Act 1956 have all been met;
Certificate from auditors citing RBI’s approval number and date, to the effect that the branch office has carried on business in compliance with approval granted by the RBI;
Certificate from auditors that shows sufficient funds have been set aside to meet all Indian tax liabilities or that these liabilities have already been met; and
Declaration from the applicant that profits sought for remittance are purely earned in the normal course of business and do not include profits from any other source.
Companies must note that authorized dealers scrutinize the documents to ensure that the income is derived from RBI-approved activities and that the amount sought to be remitted calculations are correct.
An authorized dealer is essentially a bank specifically authorized by the RBI to deal in foreign exchange. Most large international banks are authorized dealers.
Remitting from Wholly Owned Subsidiaries
Wholly owned subsidiaries in India have independent legal status distinct from the parent foreign company.
Funds can be repatriated from a WOS via a dividend, buyback of shares, reduction of share capital, surplus funds on closure or winding up of the WOS, fees for technical services, consultancy service/business support services, and royalty.
1. Dividends
Dividends are freely repatriable without any restrictions if taxes are deducted at source from the dividend and the net amount remitted. Companies do not require permission from the RBI, but the remittance must be made through an authorized dealer.
Profits can be repatriated in the middle of the year with interim dividends. However, if using interim dividends, the company must have enough book profits to cover depreciation for the full year and enough money to pay taxes in India. If, at the end of the year, that turns out not to be possible, the directors may be personally liable and be penalized as a mistake to declare interim dividends on the wrong judgment.
2. Technical consultancy fees, management fees, & royalty
The WOS may remit these to the parent company if tax is deducted at source on such remittances at the prevailing rates and deposited with the Government. Such remittances with the recipient country will be covered under the DTAA to avoid double taxation.
3. Buyback of shares
Funds can also be repatriated along with capital through the buyback of shares if a buyback tax of 20 percent is paid on profits distributed by companies to shareholders.
4. Surplus funds on closure or winding up of the WOS
Capital gains tax will be payable on the gains arising out of the share valuation at the time of winding up/closure of the WoS.
Tax is not applicable if the company concerned is a publicly listed company or a subsidiary of a publicly listed company.
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FAQs
One of the most used methods of profit repatriation is through dividend payments from a subsidiary to its foreign parent entity. The Indian tax system makes dividends a particularly attractive method of repatriation in many situations.
In India, the Finance Act 2020 changed the method of dividend taxation. Henceforth, all dividend received on or after April 1, 2020 is taxable in the hands of the investor/shareholder. In a case where the dividends are paid to non-resident shareholders, tax is required to be deducted at 20 percent (plus applicable surcharge and cess) subject to tax treaty benefits where a lower rate, if applicable, can be availed.
For a dividend payment to be an optimal solution, there are several factors that need to be considered, including India’s tax treaty status with the foreign country.
Provided that the foreign affiliate is situated in a country with which India has a tax treaty, dividends from the Indian subsidiary can be remitted to the foreign country simply by deducting withholding tax (WHT)at a rate of 15 percent or lowersubject to fulfilment of specified conditions.
Currently, India is a signatory to tax treaties with 96 countries, including a comprehensive agreement with countries such as Australia, Canada, Germany, Mauritius, Singapore, UAE, UK, and USA.
