Repatriating Your Profits from India: Commonly Asked Questions
Managing profits and repatriating funds can often be daunting for foreign companies operating in India as it involves various inter-connected local and international laws and regulations – such as The Companies Act, The Foreign Exchange Management Act, relevant income tax regulations, Double Tax Avoidance Agreements, as well as transfer pricing rules.
Prior to investing in India, companies must know how to repatriate their profits from the country. There are various schemes and regulations that limit how much money can be remitted from India and for what purpose.
In this Q&A session, we speak with Shubham Dua, Corporate Accounting Services, to discuss some of the most commonly asked questions that we receive from our subscribers regarding repatriating profits from India.
What are the ways in which profits can be repatriated from India?
Prior to entering any international market, an investor must understand how to repatriate profit from that country. While sending company profits 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.
In India, profit can be repatriated using the following methods:
- Buyback of shares
- Reduction of share capital
- Fees for technical services
- Consultancy service/business support services
What are the legal entity types through which a foreign company/investor can repatriate profits out of India?
The procedure to repatriate profit to the foreign investor/parent company depends upon an entity’s investment model. Typically, foreign companies in India operate through either a liaison office, project office, branch office, or wholly owned subsidiary (WOS) – depending upon the nature of their activities.
- Liaison offices are only meant to promote the parent company’s business interests, spread awareness of the company’s products, and/or explore further opportunities for business. They are not allowed to undertake any business activities and thus cannot earn any income in India. Expenses must be met entirely through inward remittance of foreign exchange from the head office outside India. Therefore, companies are not permitted to repatriate money from a liaison office.
- 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 a surplus outside India – only upon completion of the project.
- Branch offices are often used by foreign companies engaged in manufacturing and trading activities in India. They are allowed to represent the parent company but have limited operational capacity. All investments and profits earned by branches of a foreign company are repatriable after the taxes are paid and compliance ensured with such rules and regulations as may be applicable.
- Wholly owned subsidiaries in India have independent legal status distinct from the parent foreign company. Foreign entities with long-term business objectives often choose to establish their presence with a WOS because it provides longevity, flexibility, and a stronger legal foundation for doing business in India. Profits can be repatriated from a WOS via dividend, buyback of shares, reduction of share capital, fees for technical services, consultancy service/business support services and royalty.
Why is dividend considered the most optimal method to repatriate profits from India?
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 dividend 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), which ranges from five percent to 15 percent, depending on the nature of income and activities carried out in India.
Currently, India is a signatory to tax treaties with 96 countries which include a comprehensive agreement with countries such as Australia, Canada, Germany, Mauritius, Singapore, UAE, UK, and USA.
How can a company use fee for technical services (FTS) as a way of repatriating profits out of India?
As per the Income Tax Act, 1961 “fee for technical services” means any consideration (including any lump sum consideration) for the rendering of any managerial, technical, or consultancy services (including the provision of services of technical or other personnel) but does not include consideration for any construction, assembly, mining, or similar project undertaken by the recipient or consideration that would be the income of the recipient chargeable under the head “Salaries”.
To qualify under the definition of FTS, the consultancy or technical services should be rendered by someone who has special skills and expertise in rendering such services. Thus, both managerial and consultancy services involve expert professionals.
Most foreign companies or non-residents provide technical and consultancy services in the form of management/ business support services that their Indian counterpart uses – to establish best practices or kickstart the growth of the business in India. In turn, the Indian company makes a payment for the services used in the form of a service fee. While making payment to the foreign affiliates, transfer pricing provisions also need to be considered to determine whether the amount or percentage of payment is in line with industry standards.
How can a company use royalty as a way of repatriating profits out of India?
Royalty is generally a consideration received by a person (a creator or an innovator) for allowing their work of art or scientific invention to be used commercially. However, in commercial and industrial terms, the concept of royalty is wider. Royalty is generally a payment received by the owner of an intangible right or know-how under license in any technology transfer.
Such intangible rights are given for making use of intellectual property, such as patents, inventions, models, secret formulae, processes, designs, trademarks, service marks, trade names, brand names, franchises, licenses, commercial or industrial know-how, copyrights, cultural activities, films, or television rights, literary, artistic or scientific works, computer software, exclusivity rights, etc. Royalty essentially signifies payment for ‘user right’.
Such user rights could be an annual payment or a pre-decided periodical payment. Thus, embedded in the concept of royalty is the rentals received as consideration for use of, or the right to use any patent, trademark, design or model, plan, secret formula, or process.
With the increased inflow of foreign direct investment (FDI) to India, it is expected that Indian firms will use more improved technology and frontier research and development (R&D) to expand or advance their industrial production and service capabilities.
It is a common practice for foreign companies to provide their trademark or brand name as well as access to their patented technologies and products to their counterparts in India. The increasing use of technology is linked to the increased royalty and license fee payments by business firms.
While making payment to the foreign affiliates, transfer pricing provisions also need to be considered to determine whether the amount or percentage of payment of royalty is in line with industry standards
Consideration (including lumpsum consideration) in the form of royalty can be for any of the following:
- Transfer of all or any rights (including license) in:
a) invention, patent, model, design, secret formula or process or trademark, etc. (IP)
b) copyright, literary, artistic, or scientific work, including films or video tapes/tapes for use in TV/radio broadcasting
- Imparting of any information concerning:
a) the working of or use of IP
b) technical, industrial, commercial, or scientific knowledge, experience, or skill
- Use of:
a) any IP
b) right to use any industrial, commercial, or scientific equipment
How are royalty & fee for technical services taxed in India for non-residents or foreign companies?
Several foreign companies or non-resident entities run their business in India and their income is directly accrued or received in the country. In some other cases, the income is indirectly accrued or received in India or is deemed to accrue or be received in India.
Whatever the case may be, if the earning of the foreign entity is from royalty or for providing technical services, the payer of such royalty or FTS generally enters into some agreements with the foreign entity. The payer or the user of the royalty or recipient of the technical service may be the government or any other Indian concern. If the agreement is an eligible one, such income is taxed at a lower, preferential tax rate.
Royalty/FTS for non-residents is taxable in India – if sourced in India, such as in cases where a brand name or technical services is given to an Indian entity. Simply understood, FTS or royalty income is liable to tax at a place where the service is consumed or received by any person.
FTS payable by an Indian company, to a non-resident or foreign company, shall be deemed to accrue or arise in India unless it falls under the following two exceptions:
- Where the FTS is payable by a company in respect of technical services utilized in a business or profession carried on by the company outside India.
- Where FTS is payable in respect of technical services utilized for the purpose of earning any income from any source outside India.
As per the Income Tax Act, 1961 – an Indian company, while making the payment to its foreign affiliates/parent towards the royalty, fee for technical services, or consultancy services shall withhold the tax at 10 percent (plus surcharge and applicable cess), subject to the fulfilment of such conditions as may be applicable.
Also, the role of tax treaties comes into play here in taxing the royalty or fee for technical services. The Income Tax Act authorizes the Indian Government to enter into tax agreements with the other countries for avoiding double taxation of the taxable base.
These tax agreements are called Double Taxation Avoidance Agreements (DTAAs). The purpose of such treaties is to set some ground rules to avoid double taxation of the same income. The treaties become even more important as every country likes to tax based on the residence principle (as India has for its residents) or source principle (as India has for non-residents).
The tax liability as determined under India’s income tax law may undergo change by application of the provisions of these tax treaties. In such a scenario, whichever provision (per the Income Tax Act or per the Tax Treaty) is beneficial to the non-resident will prevail.
India Briefing is produced by Dezan Shira & Associates. The firm assists foreign investors throughout Asia from offices across the world, including in Delhi and Mumbai. Readers may write to firstname.lastname@example.org for more support on doing business in in India.
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