Remitting Money from India
Choosing the Right Profit Repatriation Strategy
As discussed in the tax planning section, transferring profits generated by the Indian Business to the foreign promoter or investor can be expensive due to incidence of Income Tax at dual stages in case of Private Limited Company.
Many companies use following strategies to transfer profits from Indian Entity
Royalties
Commonly, Indian companies pay a royalty to either a holding company or the foreign owner company for technological collaboration. The payment is made for the right to use manufacturing processes, technical expertise, design, drawings, trademarks, and brand names.
If the Indian company uses a technology or process or brand name that is patented or trademarked by the parent foreign company, then the Indian company is liable to pay royalties to the foreign company for using the foreign company’s intellectual property.
Royalty payments to a foreign company usually attracts withholding of taxes at 10-15% Under the Income Tax Act, plus any applicable surcharge and education cess. The tax is calculated on a gross basis on the total royalty payments. Taxability of royalty may also differ based on DTAA with recipient country.
Such payments are deductible expense for the Indian company under section 37 as it a business expense, hence reduces the tax outflow for the Indian Company. The Foreign parent company can claim credit of the withholding of taxes paid in India, while filing Income Tax returns in respective country. However, if the Indian Company is a captive unit of the parent company then this mode of payment can be counter intuitive as every cost has to be billed back to the parent company as per Transfer pricing guidelines.
Under FEMA, royalty payments are categorized as current account transactions and are permitted under the automatic route without any limits.
Interest on Loan
RBI allows Investment in Indian Companies through Equity (FDI) as well as Debt. Debt as per FEMA is termed as External Commercial Borrowings (ECB).
ECB even though is not as simple as FDI compliances (read ECB guidelines), it is an effective way of raising finance for capital intensive businesses. The Compliances include initial reporting of ECB and monthly ECB returns to be filed with RBI. It is important to note that ECB is allowed only for investment in Machinery and Capital assets and not for working capital purposes like salaries.
Advantages of ECB are that
The capital invested is not locked like FDI forever and it can be repaid by the Indian Company along
Interest on ECB can be paid by Indian company which is tax deductible
Another option if you find ECB route as complicated would be to issue convertible debentures, which are considered as FDI under the FEMA however can carry interest on the same which is payable by the Indian Company.
Under FEMA, Loan Repayment and Interest is allowed under automatic route only monthly reporting is required
Management Fees
The parent company can charge management fees for the Indian Company for deputing management staff like Group CFO will take care of finances of all subsidiaries, similarly HR policies may be framed at the group level, headed by Group HR and similarly certain other management fees like the training and ERP deployment consulting as well as marketing strategic services might be provided as group level which is benefiting the Indian Company business. The Indian Company can pay for such service fees.
Payments for services, such as management and consultancy fees or IT services by Indian company may or may not attract withholding of taxes, depending on the nature of payments and definitions as per DTAA. Withholding of taxes may range from 0% to 10% plus surcharge, cess. Such payments are deductible expenses for the Indian Company as per Income Tax. Captive centers will attract provisions similar to Royalties.
Meanwhile, under FEMA, payments for services qualify as current account transactions. Service fees up to US$1,000,000 per project (US$10,000,000 per infrastructure project) can be remitted under the automatic route. However, any remittance exceeding this amount requires RBI approval.
Share buyback
Due to the removal of dividend distribution tax (DDT), now the profits distributed by a private limited company is fully taxable in the hands of the recipient and many Indian companies are looking at different options through which they can distribute the profits generated by the company. One of the ways is that Company can explore the share buyback option. Here the company can utilize reserves by offering to buy the shares at a pre-defined price. Usually, this price will be at a premium, that is more than the acquisition price. After the buyback of shares, the company will cancel the shares and reduce their share capital so the share holding pattern will remain unchanged.
However, there is a withholding tax of 20 percent on distributed income at the time of buyback. Distributed income is the difference between the amount paid at the time of buyback and amount received by the company at the time of issue of shares.
Taxation will depend on the DTAAs, in the event of share buybacks, operate diversely, and the tax liability depends on the specific tenets of each DTAA.
The Companies Act of 2013 also creates several regulatory obligations for companies that want to use share buybacks:
The Articles of Association (AOA) for the Indian company should be amended to authorize share buybacks.
Each buyback should be authorized through a special resolution passed at the general meeting of the respective company and completed within 12 months of any such resolution.
A limit of 25 percent per financial year (FY) applies on equity share buyback. The consideration for such shares is capped at 25 percent of the total paid up capital plus free reserves per FY.
In addition, no free securities should be issued for six months after a share buyback and the debt-to-equity ratio post buyback should be 2:1.
Capital reduction
Capital reduction is similar to share buyback however under capital reduction, there is no limit described as per companies act of 25% of share capital and free reserves for the financial year. Hence this method is used when amount exceeds share buyback limit as per Companies Act.
The Companies Act, 2013 states that approval is required from the shareholders (as a special resolution), creditors, and the state High Court for capital reduction.
Under FEMA, the pricing of capital should adhere to RBI guidelines; no approvals are required for non- resident investors for capital reduction, so long as a few procedural compliances are ensured.
Exit from FDI
*Indian here refers to Resident Indian as per definition of residential status provided by RBI
Form FC-TRS or Foreign Currency Transfer of Shares needs to be filed in case of transfer of shares of an Indian Company from a resident to a Non-Resident/Non-Resident Indian and vice versa through its authorized dealer bank.
The form shall be filed with the Authorized Dealer bank within Sixty days transfer of capital instruments or receipt/remittance of funds whichever is earlier.
The penalty for non-filing of FC-TRS is imposed by the way of Late Submission Fee (LSF)
| Amount involved (₹) |
LSF as % of amount involved |
Maximum amount of |
|
Up to ₹10 million
|
0.05%
|
300% of the amount involved or ₹1 million, whichever is lower
|
|
More than ₹10 million
|
0.15%
|
300% of the amount involved or ₹10 million, whichever is lower
|
* The % of LSF will be doubled every twelve months.The floor (minimum applicable amount) for LSF will be Rs. 100. Company can apply for compounding of Violation as mentioned in Initial Investment Section
