INVESTMENT BY NRIS IN LLP STRUCTURE
Limited liability partnerships (LLPS) are governed by the LLP Act, 2008. Here is a look at some of the salient features of an LLP:
— It is a corporate body separate from its partners with perpetual succession — An LLP can only be set up for profit — The LLP Act allows for a multi-disciplinary professional LLP
— An LLP requires a minimum of two partners, individuals and/or corporate entities
— An LLP must have at least two designated partners (DPS) with one being resident in India for at-least 180 days
— A company/partnership firm can also be converted into an LLP.
The LLP structure has found wide acceptance among professionals and entrepreneurs for its liberal and flexible approach.
Foreign investment in India is governed by the foreign direct investment (FDI) policy of India. The policy cautiously opened the doors to foreign investment in an LLP starting in 2011.
FDI is permitted by foreign entities, including non-resident Indians (NRIS), barring citizens of Bangladesh and Pakistan. Investment in an LLP can be in the form of capital contribution or by way of acquisition of profit shares.
NRIS can invest in an LLP which is engaged in a business activity where 100% foreign investment is allowed under the automatic route without any investmentlinked performance conditions. As such, NRIS cannot invest in an LLP engaged in a business which is subject to Fdi-linked conditions, for instance development of townships and housing.
The consideration for such investments and/or transfer of profit share, decided commercially, should comply with the pricing guidelines i.e. the fair price is determined in accordance with any internationally accepted valuation method. Capital infusion is to be by way of inward remittance or by use of funds in NRE (nonresident external)/fcnr(b), or foreign currency non-resident (bank) account in India. Conversion of outstanding dues into capital is not permissible in case of an LLP. Further, deferred payment for capital infusion is not permissible.
It is interesting to note that recent amendments have relaxed the norms by lifting the bar on borrowings from a source outside India. As a result, an LLP having foreign investment can access external borrowings at a lower cost. The operational guidance in this regard is awaited. Having said that, it will be worth seeing if regulations also permit payment of interest on a foreign partner’s capital.
Another significant change that was brought in is regarding meeting the “residency test” by a DP. A DP is no more required to meet the residency test within the meaning given under FEMA (Foreign Exchange Management Act). Thus, it is sufficient for an individual to remain physically present in India for 180 days during a fiscal year or more and actively participate in managing the affairs of the LLP.
Alternatively, an NRI (including companies owned by an NRI) may invest in sectors where 100% foreign investment is not permitted under the automatic route on non-repatriation basis. Such investment is treated on par with domestic investment and capital including any appreciation thereto cannot be repatriated out of India.
While the scheme for foreign investment in LLPS has been significantly liberalized, there are still some areas that require clarity, namely, transfer of NRI interest in an LLP to a non-resident entity or to a resident by way of a gift. Such transactions are not allowed in case of an LLP in the absence of a specific provision.
With regard to taxation, an LLP is treated on par with the conventional partnership entity, where a firm pays the tax and the partner is not taxed on the share of profit. Any remuneration drawn by a partner is subject to tax in India. Similarly, any consideration received by a partner for transfer of his profit share in an LLP will be subject to tax as a capital gain.
Pankaj Khodaskar contributed to this article.
Vikas Vasal is national leader-tax, Grant Thornton India LLP.
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