India has received a good flow of investments in the form of Foreign Direct Investments (FDI). While most businesses have succeeded in India but a fair number have also lost money and for this reason or as a part of their global strategy, a call for closure of business in India becomes an absolute necessity from global standpoint. Repatriation of funds for companies with global existence upon closure of business is always arduous or is so considered in context of India. The same also proves to be the major factor affecting the decision of a Company/its promoters to move ahead with the closing of business by way of Voluntary Liquidation. While the Indian government is promoting easy corporate exits under its reform umbrella ‘ease of doing business’, it is important for foreign or non-resident shareholders to understand the repatriation aspect well in advance to assess the feasibility, cost factors, and the amount that will be received by them once the liquidation is completed.
A Foreign Company which has established its wholly-owned subsidiaries (WOS) in India may always have a concern about what will happen to the funds or assets lying in the Indian subsidiary while shutting down business operation in India. It is important to have an understanding for the treatment during Voluntary Liquidation proceedings of the available funds and the assets acquired by the Indian Company from the investments made by its holding company at the time of its incorporation of the Company and subsequently through investments or earnings.
To have a clarity on the option to be selected for discontinuation of your Indian business, you may also like to read Strike off vs. Members’ Voluntary Winding Up
We can take this discussion on repatriation of funds in the process of Voluntary Liquidation through certain FAQs, which we have noted while handling closure of business assignments by way of voluntary liquidation which will help promoters or the concerned persons for arriving at a swift and informed decision regarding closure as many a times a delayed decision would erode available funds.
The assets lying in the company shall be realized and these proceeds together with funds already available shall become Liquidation proceeds which after meeting liquidation costs and liabilities of the Company shall become funds available for distribution to the shareholders. The remittance of the available funds is to be taken care of by the liquidator with the help of authorized dealer bank and the Company.
The authorized dealer bank initiating the remittance require a certain set of documents from the liquidator like remittance form, request letters, certificates, declarations etc in accordance with the provisions of Foreign Exchange Management (Remittance of Assets) Regulations, 2016 and as per internal guidelines of the bank.
However, as the liquidator was not involved in the management of Company, so he will approach the Company for certain documents.
One of the crucial documents required by liquidator from the Company is RBI acknowledgment of Foreign Direct Investment (FDI) received by the Company.
Every company is required to maintain a copy of the acknowledgment issued by the Reserve Bank of India (RBI) against the reporting of the foreign inward remittance which had been reported by the Indian Company at the time of receipt of such fund. This ensures that the investment is in compliance with the foreign investment laws and regulations of the country. This is important for avoiding any legal issues in the future.
Through RBI acknowledgment of the FDI or FCGPR filed which would have been received by the company through letter or email, the AD Bank is able to properly track and account for the investment, making it easier to facilitate repatriation of funds. This also helps the AD Bank monitor the inflows and outflows of foreign funds, ensuring that the investment is being used in accordance with the approved purpose. This is important for ensuring that the country’s foreign investment policies are being adhered to.
Hence, to remit out the fund to the shareholders, the Authorised Dealer Banks have formulated internal guidelines which mandates them to verify whether the company has reported such inward remittance, and accordingly, they will allow the company to make the outward remittance to the shareholders.
Earlier, the companies in India were required to submit the return of inward remittance in Form FCGPR physically to the RBI and thereafter acknowledgement receipt of such submission used to be issued by the RBI. Further, the reporting requirements were shifted to on-line mode, previously through e-biz and since 2018 the reporting is required to be done through RBI FIRMS portal.
If the acknowledgement letters or FCGPR Approval are not readily available in the repository of Company, following could be the sources of tracing the same:
If the Indian company have not reported the foreign remittance received as a capital infusion, then the same needs to be reported to the RBI by the Liquidator before initiating the repatriation process to the shareholders as per the prevailing requirement.
While reporting the receipt of such FDI, the Company would be required to pay either Late Submission Fees (LSF) or/and RBI may direct the Company to go for compounding for regularisation of contravention of FEMA provisions, if any.
Foreign investments in India are generally allowed to be repatriated along with capital appreciation after payment of applicable taxes, if any. Under Voluntary Liquidation, the liquidator distributes the surplus to the shareholders in accordance with their rights. The typical modes of cash/profit repatriation under Voluntary Liquidation are:
The mode of distribution will depend on the availability of accumulated profits in the books of accounts of the Company. Any distribution made to the shareholders of a company on its liquidation, to the extent to which the distribution is attributable to the accumulated profits of the company immediately before its liquidation, whether capitalized or not, the same shall be distributed in form of a dividend. Any distribution made beyond deemed dividend shall be treated as capital repayment to the shareholders.
The distributions are taxable in the hands of the foreign shareholder.
The first step for a non-resident is to determine if a DTAA exists between the home country and the country where the income is generated, which in case of WOS is India. Further, the person may be required to obtain a Tax Residency Certificate (TRC) from the home country, which serves as proof of tax residency. For claiming the DTAA benefits the TRC and other relevant documents shall be provided to the tax authorities in the country where the income is generated. This will help the tax authorities to determine the applicable tax rate and apply the lower rate as per the DTAA.
The non-resident must file tax returns in both the home country and the country where the income is generated, declaring all relevant sources of income.
If the holding company does not want to avail of the Double Taxation Avoidance Agreement (DTAA) benefit, it may not be necessary to take any specific action. In such cases, the holding company will be taxed on its income in both the home country and the country where the subsidiary is located, as per the domestic tax laws of each country.
It is important to note that the decision to forgo DTAA benefits must be made after considering the specific tax implications and other factors, such as the compliance requirements and the impact on the holding company’s overall tax position. Therefore, it is advisable to seek professional tax advice to understand the specific consequences of forgoing DTAA benefits in each case.
In order to claim the benefits of a DTAA, a foreign shareholder may be required to furnish their PAN or other identification number to the Indian tax authorities. This is because DTAA provisions typically require the taxpayer to file Income Tax Returns in India and the same return shall be utilized as a proof of payment of tax in India.
In case of transfer of shares of an Indian Company from a resident to a Non-Resident/Non-Resident Indian and vice versa by way of sale, Form FCTRS is required to be filed with RBI to report such transactions. Banks usually ask for FCTRS declaration as the shares of the Indian entity are cancelled in process of Voluntary Liquidation.
However, it is pertinent to note here that as per clarification from RBI, filing of form FCTRS is not required in case of repatriation of FDI because of voluntary liquidation of the Indian company.
Therefore, a clarification w.r.t the non-applicability of such a declaration will be required to be submitted to the Bank.
It is very important to address the existing ongoing litigation or assessment before considering liquidating the affairs of the company. The Directors have to sensitize these concerns to the Insolvency Professional proposed to be appointed as a liquidator and assist him with a settlement of those before he proceeds with the dissolution application before the tribunal.
Some of the common assessment procedure which has been observed in case there is any involvement of non-resident:
Repatriation of funds requires compliance with a range of local and international regulations, including anti-money laundering laws, exchange control regulations, and tax laws. The liquidator must ensure that all regulations are followed in order to avoid any penalties or legal consequences.
A significant challenge faced by liquidators is the requirement to gather and organize all necessary documentation, such as the liquidation order, share certificates, and tax returns. Incomplete or incorrect documentation can result in delays and additional costs, so it is important for the liquidator to ensure that all necessary documentation is in order.
It can be a time-consuming process, especially if the company has a large number of shareholders or if the funds are being repatriated to shareholders in different countries. This can result in significant delays and additional costs during liquidation.
Repatriation of funds requires the involvement of banks, which can also be a challenge for the liquidator. Banks may require extensive documentation and may impose additional requirements, such as Anti-Money Laundering checks and Know Your Customer (KYC) procedures. The liquidator must ensure that all bank requirements are met and that the repatriation process is not delayed due to bank processing issues.
It is important for the liquidator to be prepared for these challenges and engage experienced professionals as needed to ensure timely repatriation of funds.
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