Repatriation of Funds
Remitting from branch offices
Branch Offices are often used by foreign companies engaged in manufacturing and trading activities in India. They are allowed to represent the parent company, but have limited operational capacity. Notable operations not allowed by branch offices include retail trading activities and manufacturing or processing activities.
All investments and profits earned by branches of a foreign company are repatriable after taxes are paid, but there are two uncommon exceptions. First is that certain sectors are subject to special conditions, such as defense. For these sectors, there will be 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.
According to sections 11C.1 and 11C.2 of RBI’s Exchange Control Manual, application for remittance of profits by branches of foreign companies require the following documents:
Authorized dealers will scrutinize the documents to make sure that the income is derived from RBI-approved activities, and that calculations of the amount sought to be remitted are correct. An authorized dealer is a bank specifically authorized by the Reserve Bank under Section 10(1) of FEMA to deal in foreign exchange. Most large international banks are authorized dealers.
Remitting from Wholly owned subsidiary
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 to do business in India.
The two ways of repatriating profits from a WOS in India are:
Dividends are freely repatriable without any restrictions as long as taxes are paid, notably the Dividend Distribution Tax (DDT), which currently are levied at an effective rate of 20.358%. Tax credit and/or tax relief is not applicable for the DDT or for repatriation of dividends. No permission of the Reserve Bank of India (RBI) is needed but the remittance needs to be done through an Authorized Dealer.
There is a limited list of 22 consumer goods industries where repatriation of dividends is subject to several requirements, most notably that dividends must balance against export earnings for a period of seven years from commencement of production. The list includes manufacturing of food products, coffee, soft drinks and others. Dividend balancing is not required beyond the seven year period.
Also notable is that 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. If at the end of the year that turns out not to be possible, the directors may be made personally liable and be penalized, as a mistake on their part to declare interim dividends on wrong judgment.
Profit can also be repatriated along with capital through buyback of shares as long as a buy back tax of 20% 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.