India has relaxed its rules for foreign direct investments (FDI) for limited liability partnerships (LLPs), with a recent abolishment of the requirement of regulatory approval for a foreign-invested LLP in India. This change was announced with effect just over a week ago, on November 24, 2015. Prior to this change, foreign investment in an LLP was permitted only with the approval of a government body in India called the Foreign Investment Promotion Board (FIPB). Now, FIBP approval is no longer required provided that the following two prerequisites for establishing an LLP (which had existed prior to the rules change) are met: (1) the LLP is in a sector where 100 percent foreign direct investment in an Indian entity is permitted under the automatic route, meaning that it is permitted without approval from the FIBP; and (2) where the foreign investment is not subject to conditions (such as minimum capitalization norms).
This is a helpful development for foreign companies considering establishing operations in India. Limited liability partnerships (LLPs) generally receive more favorable tax treatment than private limited companies (PLCs). Income of an LLP, like a partnership, is taxed in India only once, i.e., at the corporate tax rate of 30 percent (exclusive of surcharge and cess). There is no further taxation in India upon distribution of an LLP’s profits to its partners. This becomes important in comparison with the taxation of PLCs, particularly in a foreign investment context.
The profits of a PLC are subject to corporate tax at 30 percent (exclusive of surcharge and cess) and thereafter, the profits of the PLC are subject to an additional dividend distribution tax (DDT) at 15 percent (exclusive of surcharge and cess) on a grossed-up basis (effectively around 20.36 percent, including surcharge and cess) at the time of distribution as dividends. DDT is a tax levied on the company, not the shareholder, and therefore it is difficult to claim relief under tax treaties which restrict taxation on dividends in India 5 percent to 15 percent. Further, with respect to the tax liability of the shareholder in its country of residence, it may not be able to claim tax credit on DDT paid in India, unless the applicable tax treaty mandates tax credit for corporate taxes paid in India. The distributions of an LLP, on the other hand, are not subject to DDT in India, though the partner of the LLP may be subject to taxation in its country of residence.
While November 24, 2015 is the effective date of the abolishment of the requirement of FIPB approval, we are still waiting for the Indian authorities to issue binding regulations applicable to these circumstances. These regulations are expected to be published within the next week or so, although a firm date has not yet been set.