For foreign businesses operating in India, repatriating the hard-earned profits and surplus funds can be taxing because of the many interconnected local and international laws and regulations that must be followed. These laws and regulations include the Companies Act, the Foreign Exchange Management Act, applicable income tax laws, Double Tax Avoidance Agreements, and transfer pricing guidelines. Let us understand and find a way out through this guide here,
What is Repatriation?
First and foremost, let’s be clear about what repatriation means. It’s essentially the process of moving the money your foreign company earns in India back to your home country. This isn’t as simple as it sounds; it involves careful planning and following the rules and laws that govern how business money can be moved between the countries involved.
Connection Between the Legal Entity Type and Repatriation:
The choice of legal entity in India significantly impacts the profit repatriation process. Here’s how different entity types affect repatriation:
Liaison Offices: These offices serve to promote the parent company’s interests and products in India. However, they cannot engage in business activities or earn income, and therefore, repatriation of funds is not allowed.
Project Offices: Set up for specific projects in India, project offices can repatriate surplus funds outside India upon project completion.
Branch Offices: Foreign companies engaged in manufacturing and trading often use branch offices. Profits earned by branch offices are repatriable after taxes are paid and regulatory compliance is ensured.
Wholly Owned Subsidiaries (WOS): WOS entities have independent legal status distinct from the parent foreign company. They offer flexibility and a stronger legal foundation for doing business in India. Profits/surplus funds from WOS can be repatriated through various methods as stated below.
Methods of Profit Repatriation from India: Selecting the most suitable method for repatriating profits from India is contingent upon the specific nature of your business operations and investment model. Here are some widely employed approaches:
Dividend: This method involves the distribution of profits to foreign investors or shareholders of the Indian subsidiary. Dividends are favored for their preferential tax treatment and straightforward nature. Dividend payments from an Indian subsidiary to a foreign parent entity are a commonly chosen method for profit repatriation. There are several reasons for this preference:
- Tax Treaty Benefits: India has signed tax treaties with many countries, allowing for reduced withholding tax rates on dividend payments.
- Comprehensive Tax Treaties: India’s tax treaties cover a wide range of countries, including Australia, Canada, Germany, Mauritius, Singapore, UAE, UK, and the USA, offering further tax benefits.
Buyback of Shares: Companies can opt to repurchase their own shares from shareholders. This strategy not only reduces the number of outstanding shares but also increases the ownership stakes of the remaining shareholders. One should always understand the limits of the funds, which can be remitted via Buyback options as prescribed by the Companies Act, 2013.
Reduction of Share Capital: This entails a reduction in the share capital, resulting in the return of surplus funds to foreign investors. It offers a means of repatriating capital to shareholders. Same like Buyback of shares, reduction of share capital involves understanding of Law and the limits prescribed under law.
Essential Tool – Double Taxation Avoidance Agreements (DTAAs): These are crucial in profit / surplus funds repatriation methods. These agreements determine tax liabilities and prevent double taxation, which can be a financial burden for businesses. The treaty with more favorable terms typically governs, allowing companies to optimize their tax-efficient profit repatriation from India. This involves assessing various DTAAs to choose the most advantageous one. Additionally, DTAAs may offer tax credits and exemptions in the home country based on taxes paid in India. These agreements promote transparency and information exchange between tax authorities, aiding in preventing tax evasion. In short, DTAAs are essential tools for businesses navigating profit repatriation and international tax regulations.
Why is Transfer Pricing Important?
Effective transfer pricing policies and documentation have gained prominence in recent years as tax authorities worldwide focus on preventing profit shifting and ensuring fair taxation. In India, the Transfer Pricing Regulations mandate that intra-group transactions be priced at arm’s length, reflecting the prices that unrelated parties would agree upon. Failure to adhere to these regulations can result in penalties and disputes with tax authorities. Therefore, businesses operating in India must establish robust transfer pricing policies and maintain comprehensive documentation to support their pricing strategies and decisions relating to the repatriation of profits / surplus funds.
Repatriating profit / surplus funds from India requires a deep understanding of the available methods, legal entity types, and the intricacies of India’s tax laws and international tax treaties. To successfully navigate this process and maximize returns while staying compliant, it’s crucial to seek expert guidance and develop a well-thought-out profit / surplus funds repatriation strategy. With the right approach, repatriating profit / surplus funds from India can be a smooth and tax-efficient process for foreign companies.
