Prior to investing in India, companies must know how to repatriate their profits from the country of investment. Though sending company profits from India is much simpler than remitting personal income, the procedures to remit money to the parent company depend upon an entity’s investment model.
Typically, foreign companies in India operate through either a liaison office, project office, branch office or wholly owned subsidiary (WOS).
A. Remitting from Branch Offices:
All investments and profits earned by branches of a foreign company are repatriable after taxes are paid. There are, however, two uncommon exceptions to this; first, certain sectors such as defense are subject to special conditions. For these sectors, there is a lock-in period where companies have to wait for permission to be granted by the Indian government. The second exception is only when non-resident Indians (NRIs) specifically choose to invest under non-repatriable schemes.
Besides profits, remittances of winding-up proceeds of a branch office are also permitted under the Indian law. They are subject to prescribed procedures and require the submission of certain documents.
B. Remitting from Wholly Owned Subsidiaries:
Wholly owned subsidiaries in India have independent legal status distinct from the parent foreign company. Foreign entities with long-term business objectives often choose to establish their presence with a WOS because it provides longevity, flexibility and a stronger legal foundation for doing business in India.
The two ways of sending profits from a WOS in India are:
- Payout of profits as dividends; and
- Buyback of shares by the company.
Dividends are freely repatriable without any restrictions as long as taxes are paid, notably Dividend Distribution Tax (DDT). Tax credit and/or tax relief is not applicable for DDT or for repatriation of dividends. Companies do not require permission from the RBI, but the remittance must be made through an authorized dealer.
Secondly, 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.
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 concerned is a publicly listed company or a subsidiary of a publicly listed company.
- Filing of application for repatriation of Funds with respective authorities/AD
- Preparation of required documentation and obtain necessary certificates from respective persons