In 2009, the government enforced Limited Liability Partnership Act, 2008 for the formation of limited liability partnerships in India. The Limited Liability Partnership is a popular form of business because of its simplified registration process and maintenance. They allow many small and medium-sized companies to have a separate legal entity and improve the transferability along with limited liability protection to promoters. Recently, the Reserve Bank of India (RBI) has given permission for foreign direct investment in limited liability partnerships in India.
In this article, we will analyse the foreign investment in limited liability partnerships in India, the recent amendments pertaining to FDIs in LLP, and the benefits of having an LLP in India.
Section 3 of the Act defines LLPs as a body corporate incorporated under the 2008 Act. LLP are hybrid corporate entities with qualities of both companies and partnership firms. Small and medium-sized companies choose LLPs because of their flexible nature.
RBI has liberalized Foreign Direct Investment in LLPs, and now it is subject to the government’s approval. Foreign investments in limited liability partnerships in India are allowed under the automatic route without approval and downstream investments as well. The liability is restricted to the capital contributed by the partners.
Benefits of LLPs In India
Based on the recent amendments, some of the benefits for having LLPs in India are-
Tax Efficient: In LLP the profits are taxed at the rate of 30%. But the distribution of profits to partners is exempt from taxation. Indian companies have significant cash as a result of operating on a cost-plus basis. The cost-plus mark-up is high, therefore the cash keeps on getting accumulated. So in LLPs, the profits are efficiently distributed to the overseas parent.
Repatriation of Capital: The repatriation of capital contribution is permissible in LLPs without any statutory thresholds, and there is no buy-back equivalent tax on the distribution. The gains made by partners on the repatriations are taxed in the hands of the partner. The overseas partner can claim tax relief under the applicable tax treaty. So when one chooses LLPs, the repatriation of capital contribution becomes simple and tax-efficient.
Eligibility of LLPs
FDIs can be accepted by LLPs operating in sectors where 100% FDI is allowed by the government under automatic route
LLPs engaged in the following activities are not eligible for accepting FDIs-
Sectors accepting 100% FDI under the automatic route but which are subject to the FDI-linked performance-related conditions.
Sectors which are eligible to accept less than 100% GDI under the automatic route.
The sectors which accept FDI under the government approval route
The agricultural activity or print media
Lastly, the sectors which are not at all eligible to accept FDI.
Since the inception of LLPs, it was necessary for them to obtain prior approval from the government for receiving FDI and they had a blanket ban on downstream investments In 2015, the FBI partially liberalized FDI in LLPs in furtherance of their ease of doing business in India campaign. They permitted investments under the automatic route only where 100% FDI was permitted under the automatic route and where no FDI-linked performance conditions were laid.
For increasing the foreign holding of the LLP, the RBI has furthermore liberalized the policies governing foreign investment in limited liability partnership in India in 2017 as well by amending The Foreign Exchange Management Regulations, 2000.
Now the LLPs are permitted to do downstream investment in any other company or LLP which are operating in sectors allowing foreign investments.
These entities can avail borrowing from abroad. Previously they were barred from availing borrowings from abroad. The 2017 Amendments relaxed these stringent contingencies and permitted LLP to have foreign investments to access external borrowings at a lower cost. Now, no government approval is necessary for the converting certain companies into LLPs. Now companies receiving foreign investments can be converted to LLPs under the automatic route without government approval.
So we can briefly state that 100% FDIs are now permissible under the automatic route in sectors where 100% FDI was allowed and where no FDI-linked performance conditions are laid down. Moreover, now downstream investments by such LLPs are allowed in sectors where the foreign investments can be made.
Who can Invest in LLP?
Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) (2nd Amendment) Regulations, 2017 were notified in March, 2017.
After the amendment, a person who is resident outside India or an entity which is incorporated outside India may contribute foreign capital either by way of capital contribution or by transfer or acquisition of profits in LLP.
A person resident outside or business incorporated outside India can contribute FDI by acquiring/transferring or contributing to the capital of the LLP. However, some people are prohibited to introduce FDI in LLPs, like citizens of Pakistan, Bangladesh, foreign portfolio investors, and any foreign venture capital investor.
Mode of Investments in LLP
Investments can be made by inward remittance through banking channels or by debit to BRE or FCNR(B) account of the concerned person which is maintained with AD Category-I bank according to Foreign Exchange Management (Deposit) Regulations, 2016. Investments can be done on a non-repatriation basis and repatriation basis.
How to step up an LLP?
Following is a step by step guide for opening an LLP in India-
The applicant has to download and fill the e-form from the LLP portal and attach the necessary documents.
They have to obtain DSC, DIN, and DPIN for at least two proposed partners of the LLP. Once done, the applicant has to digitally sign the document.
The applicant has to apply for checking the availability of name. they have to make sure that they comply with MCA’s naming guideline and every LLP should have limited liability partnership words as the last words of their name. they have to fill form RUN-LLP for reserving the name.
Once the approval of the name is complete, FiLLiP is filed for incorporation of LLP. It is an integrated form with multiple features.
The applicant has to upload the e-form and make the payments.
LLP agreement is filed within 30 days of incorporation. The LLP agreement is an agreement with the partners determining the mutual rights and duties in the partnership.
Documents of partners
PAN card or ID proof.
Address and residential proof of the partners.
The passport of foreign nationals/NRI.
Proof of registered office address along with the Digital Signature Certificate.
Converting a Private Company or unlisted Public Company into an LLP
A private or unlisted public company can convert into an LLP by applying in Form 18. Form 18 is an application for conversion. The applicant has to file form 18 along with form 2.
Tax liability of the LLP
The LLP is liable to pay an income tax of 30% on the income. In case the income is exceeding Rs. 10 million, they have to pay a surcharge at 12% on the income tax. The LLPs have to pay a health and education cess of 4%.
Restriction with respect to foreign investments in LLPs
Foreign capital participation is only allowed by way of cash considerations, which is received by inward remittance, through normal banking channels, or by debit to NRE/FCNR account.
If someone makes a non-cash or intangible contribution towards the capital of LLP, then government permission is required.
Foreign institutional investors and foreign venture capital investors are not permitted to invest in LLP.
They cannot avail ECBs i.e. external commercial borrowings.
Prospective companies wanting to take the advantage of liberalized rules for foreign investment in limited liability partnership in India must consider this option for investment in India. They should choose a business that takes care of their liability and tax issues as well. The foreign companies wanting to do business in India have to carefully choose the type of companies they invest in so as to avail avenues for establishing a good business presence and save taxes.
Since the LLPs have come into picture, people are seeing them as an attractive vehicle for undertaking business in India. They have received tremendous support from small-time business owners. With the introduction of reforms allowing FDI in LLPs under the automatic channel, the LLPs are likely to grow in the near future. Moreover, it would be encouraging to see the developments and growth of such companies.
Neelansh Gupta is a dedicated Lawyer and professional having flair for reading & writing to keep himself updated with the latest economical developments. In a short span of 2 years as a professional he has worked on projects related to Drafting, IPR & Corporate laws which have given him diversity in work and a chance to blend his subject knowledge with its real time implementation, thus enhancing his skills.
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