Appointing an Indian National as a Director of a Foreign Company: FEMA and Tax Considerations

An Indian national can generally serve as a director of a foreign company incorporated and based outside India. The appointment must comply with the corporate and director requirements of the country where the company is incorporated.

Indian nationality does not, by itself, prevent an individual from becoming a director of an overseas company. However, if the individual is a person resident in India, under the Foreign Exchange Management Act (FEMA) 1999 transactions connected with the directorship, such as acquiring foreign securities or receiving certain forms of equity, may be subject to India’s foreign exchange and overseas investment rules. The individual’s tax residential status may also affect the Indian tax treatment of remuneration and other income.

It is therefore important to distinguish between the appointment as the director and the transactions or activities connected with that appointment.

Can an Indian national become a director of a foreign company?

Yes. An Indian national can generally be appointed as a director of a foreign company, provided the appointment complies with the corporate law of the country where the company is incorporated.

Before making the appointment, the foreign company should determine the law of its country of incorporation:

• Permits foreign nationals or non-residents to serve as directors
• Requires one or more directors to be resident in that country
• Requires the director to obtain a local tax identification number or other registration
• Requires the director to provide a local address or contact details
• Requires the director to hold qualification shares
• Imposes age, nationality, residency, or other eligibility requirements
• Requires shareholder or board approval for the appointment
• Requires the appointment to be reported to a corporate or regulatory authority

These requirements differ between jurisdictions. The foreign company should therefore confirm the applicable corporate requirements in its country of incorporation before appointing the Indian national.

Does Indian law prohibit an Indian national from becoming a director of a foreign company?

Find Business Support

Need help appointing an Indian national as a foreign company director? Our advisors can assist with FEMA requirements.

Indian nationality does not, by itself, prohibit an individual from becoming a director of a foreign company. However, Indian regulations may apply if the individual is a person resident in India under FEMA or if the directorship involves foreign securities, remittances, or other overseas transactions.

The RBI’s overseas investment framework governs certain foreign securities acquired or held by persons resident in India. The applicable framework includes the Foreign Exchange Management (Overseas Investment) Rules, Regulations, and Directions, 2022.

The company and director should therefore distinguish between:

1. Appointment as a director: The individual accepts a corporate position in the foreign company.
2. Acquisition or receipt of foreign securities: The individual receives or acquires qualification shares, foreign securities, employee stock ownership plans (ESOPs), or other securities in the foreign company.
3. Receipt of remuneration: The individual receives director’s fees, salary, professional fees, bonuses, or other compensation from the foreign company.

These matters can have different FEMA and tax consequences. Accepting directorship does not, by itself, constitute an overseas investment.

What if the Indian resident receives shares in the foreign company?

Under the FEMA 1999, if a director who is a resident in India receives or acquires shares in the foreign company, the transaction should be separately examined under India’s overseas investment framework.

This may apply where the foreign company provides:

1. Minimum qualification shares
2. Foreign securities
3. ESOP or other employee-benefit interests
4. Other equity as part of the director’s compensation

The FEMA treatment may depend on the type and value of the security, the percentage acquired, whether the individual obtains control, whether the transaction constitutes overseas direct investment (ODI) or overseas portfolio investment (OPI), and whether any remittance from India is involved.

Therefore, the directorship itself should not automatically be treated as an overseas investment. FEMA considerations arise from the acquisition or holding of foreign securities and other transactions covered by the overseas investment framework.

Can the director’s activities create an Indian tax presence for the foreign company?

An Indian national serving as a director does not automatically make a foreign company resident in India or establish a taxable presence in India.

However, the foreign company should assess the director’s activities if the director performs work from India. Relevant factors may include whether the director:

Related Reading

Tax Residency and POEM in India: An Overview

• Makes key commercial decisions from India
• Negotiates or concludes contracts in India
• Habitually exercises authority on behalf of the foreign company
• Conducts substantial business activities from India
• Performs executive or management functions from India

Depending on the circumstances, these activities may raise permanent establishment (PE) or place of effective management (POEM) concerns.

The foreign company should therefore distinguish between an Indian director who performs ordinary board functions and a director who conducts or manages the foreign company’s business from India.

Does an Indian director make the foreign company an Indian company?

No. A foreign company incorporated and based outside India does not become an Indian company merely because it appoints an Indian national as a director.

Similarly, the appointment does not automatically establish a place of business in India under the Companies Act, 2013.

The foreign company should separately examine whether it:

1. Maintains an office or other place of business in India
2. Has an agent acting on its behalf in India
3. Conducts business activities in India that trigger registration or other Indian compliance requirements

Thus, having an Indian director and having a business presence in India are separate issues.

Key takeaway

An Indian national can generally serve as a director of a foreign company incorporated and based outside India. The appointment must comply with the corporate law of the country where the foreign company is incorporated.

Indian requirements may apply separately depending on the individual’s FEMA residential status, foreign securities, remuneration, tax status, and activities in India.

Most importantly, appointing an Indian national as a director does not, by itself, make a foreign company an Indian company or establish a business presence in India. The relevant Indian implications arise from the transactions and activities connected with the directorship.

• Previous Article How to Execute a PD Bond for SVB Proceedings in India
• Next Article