SKP Connect Volume I Issue 6 - Structuring Investments in India

November 2009

volume I issue 6

Structuring Investments in India

While setting up shop in India foreign companies are often saddled with various questions ranging from - Which industry one can invest? Is there any cap on the investment? Various compliances to be made? Liability of the Directors, etc. This article attempts to outline certain critical factors that foreign companies need to examine while deciding their sojourn into India.

The first and foremost issue to be examined is the permissibility of investment in the proposed sector from Indian exchange control perspective. For instance, the Indian exchange control laws do not allow investment in real estate sector by a foreign company and there are also sectoral caps on the limit of investment.

Proper selection needs to be made in respect of entity structure to be used for setting up operations in India such as Liaison Office, Branch, Wholly Owned Subsidiary, etc or the

investment could be in a Joint venture with a local partner. For a joint venture or collaboration one needs to carry out a proper due diligence of the Indian partner.
The next step is to determine the mode of funding the Indian entity keeping in mind tax and exchange control

regulations. Various options of funding include equity, debt, advance/deferred payments, hybrid instruments.

Thus, one needs to check the possibility of debt and various possible options prior to making the investment in the Indian entity.

Structuring of investments in India should be managed in a tax efficient manner so as to achieve higher post tax cash flow to the parent company. For instance, one of the options could be by using an offshore holding company jurisdiction for investment in India so as have least tax outflow.

Decision needs to be undertaken in respect of the location of the proposed operations followed by negotiations with various vendors, landlords, obtaining necessary permits etc.

International Tax Issues for the foreign company in India such as Permanent Establishment (PE) exposure of the foreign company in India (resulting in a portion of the foreign company’s income getting taxed in India), withholding tax implications on payments from India, etc. are relevant aspects to be considered in cross border transaction.

Various Operational models (Trading, Distributor, Manufacturing, etc.) need to be devised considering the proposed operations in India. Different models may entail different implications in India especially from income tax, indirect tax and India’s tax treaties with the concerned country.

Transactions between related / associated enterprises would have to meet the tests of Indian transfer pricing regulations. A proper transfer pricing study and documentation would have to be carried out in this regard.

Possibility of extraction of profits in a tax efficient manner needs to be considered.

Recurring Compliance with procedural formalities under various laws will have to be done on setting up of entity in India.

INSIDE THIS ISSUE

SKP Connect is published by SKP Crossborder Consulting Pvt Ltd and is meant for private circulation only. The information provided here is of a generic nature and we recommend that you take professional advice before acting on any topics discussed herein. For further information and assistance, visit our website – www.skpgroup.com or write to us at info@skpgroup.com.