Mint Asia ST - - News - BVY IKAS VA SAL

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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