Foreign Direct Investment (FDI) in Limited Liability Partnership (LLP)

Why should a Multi- National Company (MNC) looking to start a offshore development center in India consider LLP structure of entity?

Let's have a look on concept of MNC and objective of FDI before we start digging on suitability of LLP structure for FDI.

Multinational Company:

Multinational Corporation (MNC), also called Transnational Corporation, any corporation that is registered and operates in more than one country at a time. Generally, the corporation has its headquarters in one country and operates wholly or partially owned subsidiaries in other countries.

Objective behind FDI by MNC

The Chief motive for shifting of Capital to different regions is the expectation of higher rate of return than what is possible in home country.

• To have a captive center in India
• Desire to capture large and rapidly growing high potential emerging markets with substantially high & growing population.
• To safeguard the market of product from Import restrictions being imposed.
• To ensure Qualitative product satisfaction to customer instead of franchising
• To ensure optimal utilization of Capital, human and technical resources of organization
• To reap the benefits of economies of large scale production.
• To ensure rapid accessibility of product and customer service to customers located globally.

LLP Structure for FDI by MNC

An MNC is free to establish subsidiary entity either through Company, Limited Liability Partnership (LLP) form of Legal constitution.

In this article we will specifically discuss points to be considered in case of FDI by MNC through LLP Structure.

LLP is a hybrid form of Legal constitution where in it will possess benefits of Company and Partnership form of legal constitution. LLP have the flexibility of Partnership and benefit of limited liability.

An LLP is a legal entity separate from its partners, treated as Body Corporate. It can hold property such as movable, immovable, shares, securities etc. in its own name. All the assets and liabilities of the LLP are assets and liabilities of LLP alone.

Here in below mentioned some aspects of LLP from the view of MNC.

Eligible Investors :

A person resident outside India or an entity incorporated outside India may contribute foreign capital in sectors/activities where 100% FDI is allowed through the automatic route and there are no FDI-linked performance conditions, either by way of capital contribution or by way of acquisition/transfer of profit shares in the capital structure of an LLP

However the following persons cannot make FDI in LLP

• Citizen of or an Entity incorporated in Pakistan or Bangladesh
• Foreign Portfolio Investor or Foreign Institutional Investor
• Foreign Venture Capital Investor

FDI Reporting :

An LLP receiving amount of consideration for capital contribution and acquisition of profit shares is required to submit a report in Form Foreign Direct Investment-LLP (I) within 30 days from the date of receipt of the amount of consideration with RBI.

And an Annual Return on Foreign Liabilities and Assets: LLP which has received investment by way of capital contribution in the previous year(s) including the current year, shall submit form FLA to the Reserve Bank on or before the 15th day of July of each year.

LLPs shall also report disinvestment/ transfer of capital contribution or profit share between a resident and a non-resident (or vice versa) within 60 days from the date of receipt of funds in Form Foreign Direct Investment-LLP (II) with RBI.

FDI - Capital Contribution Pricing :

FDI in an LLP either by way of capital contribution or by way of acquisition of profit shares would have to be more than or equal to the fair price as worked out with any valuation norm which is internationally accepted/adopted as per market practice.

And a valuation certificate to that effect shall be issued by the Chartered Accountant or by a practicing Cost Accountant or by an approved valuer from the panel maintained by the Central Government.

In the case of an LLP which is recently incorporated and has not done any business activities to date, the methodologies mentioned above cannot be applied to determine the fair value of the LLP and hence the percentage of FDI in the capital contribution of the LLP should be considered as the fair value of the LLP.

Further, in case of transfer of capital contribution/profit share from a non-resident to a resident, the transfer shall be for a consideration that is less than or equal to the fair price of the capital contribution/profit share of an LLP.

External Commercial Borrowing - LLP :

Technically speaking capital contribution by MNC in LLP is termed as Foreign Investment.

And as per FEMA regulations only entities eligible to receive FDI are allowed to go for External Commercial Borrowing (ECB).

As per FEMA “FDI is the investment through capital instruments by a person resident outside India (a) in an unlisted Indian company; or (b) in 10 percent or more of the post issue paid-up equity capital on a fully diluted basis of a listed Indian company”.

Therefore, currently LLP's are not allowed to borrow from outside India.

Taxation:

An LLP will be considered as Partnership firm for the purpose of Taxation purpose under Income Tax Act,1962. At present an LLP will be subject to normal tax rate of 30% on normal incomes and surcharge rate of 12%, if Total Income exceeds Rs One Crore.

And the profit distributed to Partners will be Tax free in the hands of Partners, but whereas dividend distributed by Company will be taxable in the hands of share holder (Normally which will be 20% u/s 115A of Income Tax Act,1961 incase of Foreign Body corporate without providing deduction of any expenses incurred).

For better understanding , let us go through an illustration, let us assume an entity earned revenue of Rs Ten Lakh and an allowable expense of INR Six Million for Income tax purpose and there by Taxable Income of INR 4 Million.

Note :

1. Tax rate applied on Taxable Income incase of company is 25% assuming Turnover for PY2018-19 is Rs 400 Crore, otherwise taxable rate applicable will be 30%.
2. Surcharge and health & education cess (4%) excluded purposefully for easiness.

From above an LLP will have edge over company form of organization with regard to Taxation