Entity set up
India
Private limited company
- Preferred choice of corporate entity by foreign investors because it is simpler to administer.
- India is an exchange-controlled economy, and there are certain restrictions or conditions in case of foreign investment in identified sectors. Under the Foreign Direct Investment (FDI) policy of India, 100-percent FDI is permissible in various sectors (including manufacturing, services sectors, single brand product retail trading). FDI is prohibited in a few sectors (such as gambling and lottery business). In certain sectors, there are limits on the permissible FDI under the automatic route (such as 74% FDI is permitted in brownfield pharmaceutical). In sectors like print media and multi brand retail trading, the prior approval of the government is required for FDI.
- The Indian foreign exchange control regime was amended in April 2020 to restrict FDI from certain countries. The prior approval of the government will be required in case of investment from an entity of a country which shares land borders with India (such as, among others, China and Hong Kong), or where the beneficial owner of an investment into India is situated in or is a citizen of any such country. Similarly, in case of transfer of ownership of any existing or future FDI in an entity in India, directly or indirectly, resulting in the beneficial ownership falling within the purview of para above, such subsequent change in beneficial ownership will also require approval of the government.
- All issuances and transfers of shares involving foreign investors have to comply with the prescribed ‘pricing guidelines’ issued by the Reserve Bank of India (RBI) from time to time. The shares of unlisted companies can be acquired by a foreign investor at a price which is not less than the fair value of the shares of the Indian company determined by a chartered accountant or a SEBI registered merchant banker or a practicing cost accountant, in accordance with internationally accepted accounting principle and on an arms’ length basis.
- For tax purposes, companies are broadly classified as follows under the (Indian) Income Tax Act 1961:
- domestic company: an Indian company formed under the Companies Act, 2013 or Companies Act,1956
- foreign company: a company which is not a domestic company
Indian companies are taxed in India on their worldwide income, irrespective of its source and origin. Foreign companies are taxed only on income which accrues from operations carried out in India. In certain cases foreign companies may be taxed on income which is deemed to have arisen in India and includes royalty, fees for technical services, interest, gains from sale of capital assets situated in India (including gains from sale of shares in an Indian company) and dividends from Indian companies.
Limited liability partnership
- The Limited Liability Partnership (LLP) Act, which was notified in 2009, allowed LLPs to be incorporated in India.
- LLP is a hybrid form of business with the features of both a legal entity as well as traditional partnership.
- Government approval dispensed with for foreign investments in the LLP where FDI is allowed under the automatic route; in sectors or activities where 100-percent FDI is allowed and no-FDI linked performance condition has been stipulated.
- Minimum of 2 partners (ie, owners) are required. There is no limit to the maximum number of partners. A legal entity or an individual can be a partner of an LLP.
- Every LLP must have at least 2 designated partners who are individuals, and at least 1 of them must be a resident in India. In case of an LLP where all partners are legal entities or 1 or more partners are individuals and legal entities, at least 2 individuals who are partners of such LLP or nominees of such legal entities must act as designated partners.
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Designated partners are responsible for all acts of an LLP, and designated partners must be accountable for regulatory and legal compliances. No minimum capitalization requirements.
- Similar process of incorporation to a private limited company.
- Designated partners must secure a Designated Partners Identification Number (DPIN) and digital signature prior to incorporation. If designated partners already have a DIN, the DIN may be used.
- Recently, LLPs have also been permitted to convert into a company under the automatic route.
- Typical charter documents include the LLP agreement. Partners typically contribute to the LLP as defined in the LLP agreement and agree on a profit-sharing ratio.
- An LLP is required to get audit done only if:
- Contributions of an LLP exceed INR 2.5 million or
- Annual turnover of an LLP exceeds INR 4 million
- An LLP’s income is subject to tax at 34.94 percent (assuming highest applicable surcharge and cess). No further tax on repatriation of the profits of an LLP to an overseas parent entity, and, hence, the effective tax rate in the case of an LLP is 34.94 percent.
- The FDI policy allows foreign direct investment under an automatic route in an LLP in specified sectors and has removed the specific prohibition on LLPs availing external commercial borrowings (ECBs). An LLP which has existing foreign investment is permitted to make downstream investments in another company or LLP in sectors in which 100-percent FDI is allowed under the automatic route and there are no FDI-linked performance conditions.
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May not be suitable for all types of business. Suited best for professionals and small to medium businesses.
Branch office
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A foreign company needs prior approval from the RBI to establish a branch and is not permitted to expand its activities or undertake any new trading, commercial or industrial activity other than that expressly approved by the RBI.
- Must register itself with the Registrar Of Companies and file audited accounts.
- Only specified activities permitted; cannot undertake any manufacturing activity in India.
Liaison office
- Suitable for foreign companies that wish to set up a representative office as a first step to explore and understand the business and investment climate in India.
- Serves as a communication channel between the parent company overseas and its present or prospective customers in India.
- Must obtain prior approval from RBI before establishing a liaison office.
- Must register itself with the Registrar of Companies and file audited accounts.
- Limited activity: may establish business contacts and may gather market intelligence to promote the products or services of the overseas parent company but cannot undertake any business activity in India or earn any income in India.
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