International Payments and Cross-Border Remittances under a Franchise Agreement

All financial transactions involving the transfer of foreign currency into or out of India are governed by the Foreign Exchange Management Act, 1999 (FEMA), as well as the rules and regulations established under the FEMA. All of them are collectively known as "foreign exchange control regulations." The Reserve Bank of India (RBI) is the central bank of India and is responsible for overseeing and enforcing the laws governing foreign exchange. The terms and circumstances for transactions that are permitted as well as those that are banned are outlined in these rules. The majority of fees—which are normally paid by franchisees under a franchise agreement—can be paid to overseas franchisors without the RBI's prior approval, although in some exceptional cases or for some particular transactions, it can be necessary. Franchisees are also required to abide by all other terms and conditions of the foreign currency laws, even for operations that are legal without RBI authorization. The highest interest rate that the foreign franchisor may impose on overdue payments, the maximum period allowed to settle payments, and limitations on putting off payments between the parties are a few of these requirements. Franchisors need to make sure that the conditions of their franchise agreements adhere to the laws governing foreign exchange.

?A.??Remittance Procedures?

The current processes for sending money abroad from India are quite time-consuming and complicated. According to the current legislation, Indian franchisees must abide by the relevant tax laws before applying to their bank for the transmission of funds to international franchisors. Before making a payment to their international franchisor, Indian franchisees must first get a certificate from an Indian chartered accountant certifying the amount of withholding taxes to be withheld in India.

The franchisee must submit a copy of the invoice, the franchise agreement, a statement from the franchisor stating that it does not have a permanent operation in India, as well as a copy of the franchisor's tax residence certificate to calculate the relevant withholding tax. The Indian franchisee must additionally file a declaration with the Indian Income Tax Department regarding the intended payments and taxes withheld, according to regulations. A declaration must contain payment details in a predetermined manner if the amount is less than five hundred thousand (INR). A declaration must include payment information in a pre-specified format, a certificate from an assessing officer, an order from the assessing officer, or a certificate from an accountant, as applicable, when the payment is over five hundred thousand (INR). The declaration must include payment details in a pre-specified manner when the payment is not tax-deductible. Franchisees may not always be required to provide any information, though. After these steps are finished, the Indian franchisee can apply to their bank to send money to their international franchisor. Remittances from India often take seven to 10 working days to complete the full procedure. To guarantee that the Indian franchisee can adhere to India's foreign exchange control requirements, the frequency of payments made by the Indian franchise and their due dates must be carefully decided.

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B. Payment of Interest?

Foreign franchisors frequently charge interest on any sums that an Indian franchisee fails to pay after the due date. The maximum amount of interest that can be paid by an Indian party to a foreign party is capped, despite the applicable legislation permitting this.

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C. Payment of Damages?

The payment of damages and/or compensation by an Indian party to a foreign party for breach of a contract is neither expressly permitted nor prohibited under foreign currency control laws. Although it appears that the FEMA authorises an Indian party to send compensation or damages without first obtaining the RBI's consent, some Indian banks may still need the RBI's approval before they will carry out the desired transaction. The payment of damages by an Indian party to a foreign party must result from a legitimate business transaction and cannot be done in order to swindle money out of India.

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D.?Loan by the Franchisor to the Franchisee?

Some franchise agreements call for the foreign franchisor to lend money to the Indian franchisee as financial support. According to the Foreign Exchange Management (Borrowing or Lending in Foreign Exchange) Regulations, 2000 (ECB Regulation), both foreign lenders and Indian borrowers must meet certain requirements in order to be eligible for a variety of loans. The ECB regulations additionally specify other restrictions, such as the interest payment due date and RBI approval prerequisites. The parties' agreement should be examined in light of ECB Regulation and current foreign currency control requirements if the franchise arrangement anticipates any financial support by the franchisor to the Indian franchisee.

Authored By: Adv. Anant Sharma & Lehar Saini

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