Repatriation of Profits from India – Legal & Tax Considerations

Expanding into India is exciting as the country offers a huge consumer base, competitive personnel, and numerous growth opportunities. However, as the business grows and becomes profitable, the question is  how to send the money back to the parent company?

Foreign entities in India may find it difficult to manage profits and repatriate funds due to the interconnected local and international rules and regulations. Repatriation of funds is regulated by various laws like the Companies Act, FEMA, DTAA, and transfer pricing rules.

Let’s delve into these.

Repatriation Procedure

The procedure depends on the type of entity and the transaction. Here is a detailed look at these:

• Liaison Office: These companies bring product awareness or do market research and cannot enter into any business transactions
• Project Office: Only activities related to specific projects are allowed, and surplus can be remitted upon completion
• Branch Office: All profits and investments are repatriable after taxes are duly paid; surplus funds upon winding up are also repatriable
• Wholly Owned Subsidiaries: Funds can be repatriated as dividends, share buyback, decrease in share capital, surplus on closure, fees, and royalties

Types of Remittance

• Dividends: Freely repatriable without any restrictions after tax deducted at source (TDS), no permission needed from the RBI, and must be done via an authorized dealer
• Fees and Royalty: After deducting TDS that must be deposited with the authorities, fees and royalty payments can be remitted to foreign companies and are covered under DTAA as applicable
• Buyback: Indian subsidiaries may buyback shares from the parent company, and these transactions are subject to tax in India
• Capital Reduction: Share capital reduction requires NCLT approval with the right structuring and requires legal opinions, a valuation certificate, and ROC filing
• Intercompany Transactions: Applicable transfer pricing regulations ensuring arm’s length in transactions and maintaining relevant documentation
• Surplus on Closure: Surplus is repatriable and is subject to regulatory approval and applicable capital gains tax

Legal and Regulatory Framework

Repatriation of funds from India is governed by several legal and regulatory frameworks, which include:

• The Companies Act, 2013: Rules related to capital reduction, dividends, and buyback of shares
• Double Taxation Avoidance Agreements: These provide relief to the companies, ensuring profits are not taxed in India as well as the foreign country
• Foreign Exchange Management Act, 1999: FEMA regulates international remittances, ensuring compliance with RBI guidelines
• Income Tax Act, 1961: Provides guidelines on tax implications on different types of fund repatriations

Applicable Taxes: Withholding Tax, Minimum Alternate Tax, and Foreign Exchange Credit

Fund repatriations from India are allowed subject to several legal and tax considerations. These vary on the basis of the type of entity and nature of remittance. Adhering to the procedure and ensuring accurate documentation is important to avoid audits, penalties, and, in extreme cases, shutting down the business.

Ensuring companies stay abreast of evolving laws is important, but can be cumbersome. We offer the right structuring, adhering to all compliances, ensuring smooth cash flows, and avoiding nasty surprises.

Let’s connect; call on +91 8237857853 or drop us a mail at info@greenvissage.com.