Investment by NRIs in LLP structure

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. Photo: iStock

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 investment-linked 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 (non-resident 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.

FAQs

I am an NRI based in Singapore. I intend to invest in pharmaceuticals and/or the medical devices business in India. Can I use the LLP structure?

Even though 100% foreign investment is permitted in a greenfield project under the automatic route, it is subject to conditions. Hence, it may not be possible to use the LLP route for investing in the pharmaceuticals business. Nonetheless, you may still invest on a non-repatriation basis. Such conditions are not applicable to the manufacturing of medical devices. Therefore, an LLP model can be used for a greenfield project.

We are a group of NRIs. We have invested in an LLP in India which is engaged in the information technology (IT)/and IT-enabled services business. We now intend to transfer a part of our share in the LLP to another Indian company. Can we transfer the profit share at a mutually agreed price? Will there be any tax payable on such a withdrawal?

Profit share can be transferred to an Indian company at a mutually agreed price, but such a price should not exceed the fair price determined in accordance with pricing guidelines of the policy. Excess consideration over and above the accumulated capital balance will be subject to tax in the hands of the transferor.

I invested in an LLP a few years ago. Now I wish to make a partial withdrawal from my capital account balance accumulated over a period of time. The profit sharing ratio of the LLP will remain unaltered. As an NRI, can I make a withdrawal from my capital account freely? Do I need to observe pricing guidelines for this purpose? Do I need to pay tax on this?

In case of transfer/acquisition of profit share, regulations require you to meet the fair price basis. While there is nothing specific mentioned in the regulation for withdrawal of capital, the law requires pricing guidelines to be followed in case of transfer of profit share. In the present case, since the profit sharing ratio remains unaltered, it can be argued that the withdrawal of accumulated capital balance need not meet pricing guidelines. Post-tax profits of an LLP are tax-exempt in the hands of the partner. So no tax is required to be paid in the given case.

Source:-Livemint