Which one is better "Company or LLP" In case of FDI Comes or Overseas Shareholder?
Practicing Company Secretary In Delhi
Divyanshu Sahni & Associates
Company Secretaries
512-B, Kirti Shikar Tower, District Centre, Janakpuri, New Delhi-110058
Mob: 9871027426
Mail id: info@finlegalforte.com
Web: www.finlegalforte.com
While
allowing FDI in LLP, the Government of India, has taken a very precautionary
approach by only allowing FDI under approval route in sectors where 100% FDI is
allowed, under the automatic route and there are no FDI-linked performance
related conditions, for example sectors like power, roads, information technology,
manufacturing etc .
Please
check the policy details below
- LLPs with FDI will be allowed,
through the Government approval route, in those sectors/activities where
100% FDI is allowed, through the automatic route and there are no FDI-linked
performance related conditions.
By FDI-linked performance related conditions, it is meant that in sectors, where conditions like minimum capitalization etc are prescribed like development of Townships, NBFC, even though 100% FDI is allowed under automatic route, LLP’s will not be allowed to bring FDI with the approval of Government of India.
- LLPs with FDI will not be
allowed to operate in agricultural/plantation activity, print media or
real estate business.
- LLPs with FDI will not be
eligible to make any downstream investments, which mean LLP having FDI,
cannot make further investment in LLP or companies engaged in any
business, even though 100% FDI is allowed under those sectors.
The
Government of India has also prescribed the following conditions relating to
funding, ownership and management of LLP’s:
- Funding of LLPs:
(a) Downstream Investment by Company: An Indian
Company, having FDI, will be permitted to make downstream investment in LLPs
only if both the company, as well as the LLP is operating in sectors where 100%
FDI is allowed, through the automatic route and there are no FDI-linked
performance related conditions.
(b) Investment by Cash Consideration: Foreign
Capital participation in the capital structure of the LLPs will be allowed only
by way of cash considerations, received by inward remittance, through normal
banking channels, or by debit to NRE/FCNR account of the person concerned,
maintained with an authorized dealer/authorized bank. For making non
cash/intangible contribution towards the capital of the LLP, permission of
Government of India will be required.
(c) FII/ Foreign Venture Capital: Foreign
Institutional Investors (Flls) and Foreign Venture Capital Investors (FVCIs)
will not be permitted to invest in LLPs.
(d) External Commercial Borrowings: LLPs will
also not be permitted to avail External Commercial Borrowings (ECBs.)
- Ownership and management of
LLPs:
(a) Determination of Designated Partner: The
LLP Act 2008, provides that atleast one designated partner shall be person
resident in India.
As per explanation to section 7 of the LLP Act 2008, the term
“resident in India” means a person who has stayed in India for a period of not
less than one hundred and eighty-two days during the immediately preceding one
year.
But for the purpose of determination of the designated partners
in respect of LLPs with FDI, the term “resident in India” would have the
meaning, as defined for “person resident in India”, under Section 2(v) (i) (A)
& (B) of the Foreign Exchange Management Act, 1999;
As per section 2(v) (i) (A) & (B) of the Foreign Exchange
Management Act, 1999, a person resident in India means
(i) a person residing in India for more than one hundred and
eighty-two days during the course of the preceding financial year but does not
include -
(A) a person who has gone out of India or who stays outside
India, in either case—
(a) for or on taking up employment outside India, or
(b) for carrying on outside India a business or vocation outside India, or
(c) for any other purpose, in such circumstances as would indicate his intention to stay outside India for an uncertain period.
(b) for carrying on outside India a business or vocation outside India, or
(c) for any other purpose, in such circumstances as would indicate his intention to stay outside India for an uncertain period.
(B) a person who has come to or stays in India, in either case,
otherwise than—
(a) for or on taking up employment in India, or (b) for carrying
on in India a business or vocation in India, or (c) for any other purpose, in
such circumstances as would indicate his intention to stay in India for an
uncertain period.
(b) Body Corporate as Designated Partner: In
case of LLP having FDI and a body corporate is a designated partner, than the
body corporate should only be a company registered under the Companies Act and
not any other body, such as an LLP or a trust.
(c) Compliance of FDI Policy: The designated
partners will be responsible for compliance with the above conditions and
liable for all penalties imposed on the LLP for their contravention.
(d) Conversion into LLP: Any conversion of a
company with FDI into an LLP will be allowed only if the company is engaged in
sectors/activities where 100% FDI is allowed, through the automatic route and
there are no FDI-linked performance related conditions and prior approval of
FIPB/Government is obtained.
The
Government of India has issued a Press Note for amending the consoldiated
Foreign Investment Policy in order to allow FDI in LLP, Click here http://dipp.nic.in/English/Policies/FDI_Circular_2016.pdf
Differentiate in TABULAR FORM
BETWEEN COMPANY AND LLP
S. No.
|
Particulars
|
Company
|
Limited Liability Partnership
|
1
|
Legal
status
|
Independent
legal status
|
Independent
legal status
|
2
|
Setting
up requirements
|
If
activities/sector fall under the ambit of the automatic route, no prior
approval required but only post-facto filings to be undertaken with the RBI.
In
other cases, GoI/FIPB approval required and thereafter post-facto filings
required to be undertaken with RBI
|
Foreign
investments allowed in sectors, which are under 100% automatic route with
prior GOI/FIPB approval. The sectors should also not be subject to
performance linked conditions
|
3
|
Permitted
activities
|
Any
activity specified in the memorandum of association of the company. Wide
range of activities permitted, subject to FDI guidelines
|
LLP
should be engaged in sectors/activities for which 100% FDI is allowed without
any approal. LLP's with foreign investment will not be eligible to make any
downstream investments
|
4
|
Funding
of local operations
|
Funding
to be through equity or other forms of permitted capital infusion or
borrowings (local as well as overseas as per prescribed norms) or internal
accruals.
|
Contribution
in the capital of the LLP should be through inward remittance or by debit to
NRE/FCNR account of the designated partner. LLP's are not eligible to raise
ECB
|
5
|
Limitation
of liability
|
Liability
limited to the extent of equity participation in the Indian company
|
Liability
of the partners is limited to their agreed contribution to the LLP except in
case of fraud, wrongful act, etc
|
6
|
Compliance
requirements under companies act
|
Significantly
high statutory compliance and filing requirements
|
Registration
with ROC required. Filing annual accounts and submitting annual statement on
solvency
|
7
|
Compliance
requirements under foreign exchange management regulations
|
Required
to file periodic and annual filings relating to foreign liabilities and
assets, receipt of capital and issue of shares to foreign investors
Filing
of FCGPR and ARF form against investment in shares by foreign body corporate.
|
No
filing requirements prescribed as of now
|
8
|
Compliance
requirements under the Income tax act
|
Liable
to be taxed on global income at 30% plus surcharge and education cess on a
net income basis. In case above tax is not applicable than Subsidiary company
liable to MAT of its book profits. Dividend declared freely remittable but
subject to distribution tax of 15% plus surcharge and edu. cess on dividends,
pursuant to which dividend is tax free for all shareholders. Distribution tax
to be paid only on amount of dividend.
|
Liable
to be taxed on global income at 30% plus education cess on net income basis.
In case above tax is not applicable then LLP liable to MAT at the rate of
18.5% plus cess of its book profits no DDT leived on profit distribution and
Indian transfer pricing regulations are applicable
|
<9 o:p="">9>
|
Permanent
establishment (PE)
An
independent taxable entity and not a PE of the foreign company.
An
independent taxable entity; however, whether interest in LLP results in PE
for a foreign partner, is still an ambiguous position under LLP
10
Repatriation
of funds on ongoing basis
Subsidiary
does not require any approval for remittance of post-tax profits; dividends
declared will be subject of distribution tax
LLP
does not require any approval for remittance of post tax profits
11
Exit
mechanism
Exit
can be through sale of shares or winding up or liquidation
Foreign
partner permitted to transfer its stake in LLP and can also dissolve the LLP
Thus, by using suitable LLPs
structures, profits can be efficiently distributed to overseas parent.
While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.
For Publising any article at www.csdivyanshusahni.com .Please mail us a word copy of the same at divyanshu.sahni@yahoo.in
Which one is better "Company or LLP" In case of FDI Comes or Overseas Shareholder?
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on
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