REPATRIATION OF PROFIT BY A FOREIGN PARENT COMPANY

Where the Subsidiary Company is a Wholly Owned Subsidiary (WOS), in India, they have an
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 as well as a stronger legal foundation to do business in India.
The two ways of repatriating profits from a WOS in India are:
Payout of Profits as Dividends
Buyback of Shares by the Company
Dividends are freely repatriable without any restrictions as long as taxes are paid, notably the
Dividend Distribution Tax (DDT). 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 1 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 balancing2 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.The Dividend Distribution tax is charged
at the rate of 15 percent along with surcharge and cess3

1 Annexure E of the Foreign Exchange Management (Transfer or issue of security by a person resident outside India)
Regulations, 2000

2 http://dipp.nic.in/English/policy/changes/press6_99.htm

Profit can also be repatriated along with capital through buyback of shares as long as a buy back
tax of 20 percent 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. Tax on distribution of income through the buyback of shares is taxed at the rate of 20
percent along with surcharge and cess.4
Further the foreign parent company can also repatriate profits by paying Royalties and Fees for
Technical Services. The same is taxable. In December 2009, in the wake of the 2008 global
economic meltdown, as foreign investments and economic growth began to falter, the Government
of India liberalised payments for foreign technology collaborations and royalty fees under the
automatic route (including lump sum payments for transfer of technology, payments for the use of
trademark and brand name; see Table 1). This meant that foreign sponsors, who earlier required
government approval for charging royalty under the various heads, were now free to charge any
amount as royalty to their Indian subsidiaries.
In May 2010 the Government and the Reserve Bank of India (RBI) amended the Foreign Exchange
Management Rules, 2000, doing away with the need for the Commerce Ministry to approve royalty
payments exceeding 5 per cent of domestic sales and 8 per cent of export sales. All regulatory
requirements capping royalty payments to foreign collaborators were done away and thus, foreign
companies now have the independence to decide the rate of royalties which are to be paid.
Tax on Royalties and Fees for technical Services is charged at the rate of 25 percent along with
surcharge and cess for non-residents.5 However certain changes were made to the same by the union
budget of 2015 wherein the base withholding tax rate of 25 percent on royalties and fees for
technical services paid to a foreign company is proposed to be reduced to 10% with effect from 1
April 2016.6 Thus, the tax rate on the same with effect from 1 April 2016 will be 10 percent along
with the surcharge and cess.
3 https://www2.deloitte.com/content/dam/Deloitte/in/Documents/tax/in-tax-india-guide-2015-noexp.pdf- Page 12

4 https://www2.deloitte.com/content/dam/Deloitte/in/Documents/tax/in-tax-india-guide-2015-noexp.pdf- Page 13

5 https://www2.deloitte.com/content/dam/Deloitte/in/Documents/tax/in-tax-india-guide-2015-noexp.pdf- Page 13

6 https://www2.deloitte.com/content/dam/Deloitte/in/Documents/tax/in-tax-indiabudget2015-international-tax-alertnoexp.pdf

Another method is by way of Consultancy Services. Remittance of up to US$ 1m per project for
any consultancy service procured from outside India can be made without prior RBI approval. Limit
for entities in the power, telecommunications, railways, roads including bridges, sea ports and
airports, industrial parks, urban infrastructure (water supply, sanitation and sewage projects) sector,
is extended to US$ 10m per project.