India is becoming a hub to set up Global Captive Centres (GCCs) for multinationals. The export from these centres will nearly double by FY 2025. These centres are also generating enormous employment and contributing remarkably to the overall growth of the Indian Economy.
Often these centres raise an invoice to their parent companies on a cost-plus basis due to transfer pricing regulations. The cost-plus markup may range between 10% – 20% (if not higher). As a result, profits get accumulated each year with the GCCs resulting in the accumulation of significant reserves over a period of time. Repatriation of such income is always challenging in light of limitations under corporate law and tax inefficiencies.
These Centres have the option to set up a Wholly Owned Subsidiary company (WOS) or Limited Liability Partnership (LLP) to pursue their operations in India. Let us evaluate these options in detail.
The profits of WOS will be subject to corporate tax at 25% and thereafter withholding tax shall be applicable at the time of distribution of profits through dividends. Though treaty reliefs/ benefits can be claimed, it will be taxable to the Parent Company in its resident country as a dividend. Thus, the effective tax shall be between 35% to 45%.
In the case of LLP, its profits are taxed at 30%. However, the distribution of profits to partners of the LLP is specifically exempt from tax. This becomes very crucial in comparison with the taxation of companies, and more so in situations where Indian companies have accumulated reserves. Thus, profits can be efficiently distributed to the Parent Company.
Repatriation of Capital:
The Company can repatriate capital through buy-back up to a maximum of 25% of Capital plus Free Reserves. Further, Company is liable to pay tax on the distributions made on a buy-back at 20% of the quantum of gains arising to the shareholders from such buy-back. Since such tax is paid by the Indian Company, Foreign Parent may not be able to claim treaty reliefs/ benefits.
In a LLP, repatriation of capital contribution is permissible without any statutory thresholds. Further, there is no tax on the distributions made hence the gains made by a partner on such repatriation would be taxable only in the hands of the partner in its residing country. Therefore, in the event of a capital contribution received by an overseas partner, it may be possible for such an overseas partner to claim relief under an applicable tax treaty.
Conversion of Company into a LLP
A company, having foreign investment and operating in sectors/activities where 100% FDI is allowed through the automatic route and there are no FDI-linked performance conditions, can convert into an LLP with the relaxations in FEMA. Such conversion to LLP shall be exempt from Income Tax in the hand of the Company subject to certain conditions as prescribed under section 47 of the Income Tax act. It will be a good option for the existing foreign-owned captives/ subsidiaries to convert into LLPs.
With the relaxations in FDI norms, LLP is becoming the preferred structure to operate in India for the Global Captive Centres. LLPs are more efficient on multiple fronts, especially for the repatriation of capital in a tax-efficient manner.
CA Shreyans Dedhia