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Remitting Profits From India

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By: Nishant Maddineni, Dezan Shira & Associates

Prior to investment, it is very important for foreign companies to know how they will repatriate their profits from India as there are numerous remittance procedures that are contingent on an entity’s investment model.

Foreign companies in India typically operate through one of three entities. Liaison offices promote the parent company’s business interests, spread awareness of products and/or explore further opportunities. They are not allowed to undertake business activities and cannot earn any income in India. Expenses must be met entirely through inward remittance of foreign exchange from the head office outside India.

Project offices are set up to execute specific projects in India and can remit outside India a surplus upon completion of the project.

Branch offices are 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. Notable operations not allowed by branch offices include retail trading activities and manufacturing or processing activities. All investments and profits earned by branches are repatriable after taxes are paid, with certain exceptions.

According to sections 11C.1 and 11C.2 of RBI’s Exchange Control Manual, application for remittance of profits by branches of foreign companies require the following documents.

  • Certified copies of audited balance sheet and profit and loss account statement for the year to which the profit relates
  • Certificate from auditors covering how the remittable amount was calculated and confirmation that entire income of the branch office had accrued from sources in India and that requirements of the Companies Act, 1956, have been met
  • Certificate from auditors citing RBI’s approval number and date, to the effect that the branch office has carried on business in compliance with approval granted by RBI
  • Certificate from auditors that shows sufficient funds have been set aside to meet Indian tax liabilities, or that they have already been met
  • Declaration from applicant that profits sought for remittance are purely earned in the normal course of business and do not include profits from any other source

Authorized dealers will scrutinize the documents to make sure that the income is derived from RBI-approved activities and that calculations of the amount sought to be remitted are correct. Remittances of winding-up proceeds of a branch office are also permitted but are subject to prescribed procedures and the submission of:

  • Tax clearance certificate from Income Tax Department
  • Auditor’s certificate confirming that liabilities in India have been fully paid or adequately provided for
  • Auditor’s certificate that the winding up is in accordance with provisions of the Companies Act, 1956
  • In case of winding up otherwise than by a court, an auditor’s certificate stating that there are no legal proceedings pending against the applicant or the company under liquidation, and there is no legal impediment in permitting the remittance

Wholly owned subsidiaries in India have independent legal status distinct from the parent foreign company, and they provide longevity, flexibility and a stronger legal foundation to do business in India.
The two ways of repatriating profits from a WOS in India are:

  • Payout of profits as dividends
  • Buyback of shares by the company

Dividends are freely repatriable without restrictions as long as taxes are paid, notably the Dividend Distribution Tax (DDT). Tax credit and/or tax relief is not applicable for the DDT or for repatriation of dividends. No permission of the Reserve Bank of India is needed, but the remittance must be through an authorized dealer.

There are 22 consumer goods industries where repatriation of dividends is subject to several requirements most notably that dividends must balance against export earnings for seven years from commencement of production.

Also, profits can be repatriated in the middle of the year, with interim dividends after the DDT is paid. However, if using interim dividends, the company must have enough book profits to pay the dividend and enough money to pay taxes in India. If, at the end of the year, that is possible, the directors may be personally liable and penalized.

Profit can also be repatriated along with capital through buyback of shares, as long as a buyback tax of 20 percent is paid on profits distributed by companies to shareholders. The tax is not applicable if the company is a publicly listed company or a subsidiary of a publicly listed company.

This article was first published on India Briefing.

Since its establishment in 1992, Dezan Shira & Associates has been guiding foreign clients through Asia’s complex regulatory environment and assisting them with all aspects of legal, accounting, tax, internal control, HR, payroll and audit matters. As a full-service consultancy with operational offices across China, Hong Kong, India and emerging ASEAN, we are your reliable partner for business expansion in this region and beyond.

For inquiries, please email us at info@dezshira.com. Further information about our firm can be found at: www.dezshira.com.