Remitting Money from India: Procedures and Regulations for foreign businesses / South Korean Companies
Introduction
- Funds can be repatriated from one country to another by various modes.
- There are various schemes / modes and regulations that limit how much money can be remitted and for what purpose.
- The obvious implications are that such transactions entail foreign exchange risks, and companies also need to account for regulatory and tax risks.
- Investors and companies should, therefore, note that choosing the right strategy to repatriate funds can reduce their tax burden and increase net profit.
- In turn, such cost savings make it possible for reinvesting in innovation and improving the productivity of the business
Followings are some of the modes of remitting Money out of India
§ Dividends:
- Any foreign company having an equity contribution in an Indian company (Subsidiary) may demand dividend pay outs.
- Dividends are basically a share of the profits that the Indian subsidiary has earned.
- The payout may be annual (Final Dividend) or one or more times in a year (Interim Dividends).
Income Tax Act: The DDT earlier applicable on distribution of Dividend by company was abolished with effect from April 1, 2020.
Dividends are mostly taxed in the country where the dividends are being received. It is important to note that a number of bilateral Double Tax Avoidance Agreements (DTAA) offer either tax credits or exempt foreign-sourced income from taxation. However the recipient has to pay withholding tax of 15% as per “Double Tax Avoidance Agreement “between Republic of India and Republic of South Korea”
Companies Act-2013 : There is no restriction by companies act on declaration of dividend. However it is mandatory for a company to transfer a stipulated percentage of the profits to reserves prior to declaring and distributing dividends. The percentage generally ranges between 2.5 and 10 percent
Foreign Exchange Management Act: Under the FEMA guidelines dividends can be freely repatriated through automatic route.
§ Royalty
An Indian company using a technology or process that is patented / owned by the foreign company may be liable to pay Royalty for the same.
Income Tax Act: As per the provisions of Income Tax Act an Indian company paying Royalty to a foreign entity is required to cut withholding tax of 10% plus applicable surcharges
As per bilateral Double Tax Avoidance Agreements (DTAA) between Republic of India and Republic of South Korea” Any Royalty or fees for technical services may also be taxed in the Contracting State in which they arise, and according to the laws of that State, but if the beneficial owner of the royalties or fees for technical services is a resident of the other Contracting State the tax so charged shall not exceed 10 per cent of the gross amount of the royalties or fees for technical services
Foreign Exchange Management Act: Under the FEMA guidelines Royalty payments are categorized as Current Account Transitions and are permitted without any limits
§ Payment for Services
A foreign company may also offer various services to its Indian subsidiary such as Management Consultancy Services, Technical knowhow Services, IT Support Services for which it may charge consultancy charges.
Income Tax Act: As per the provisions of Income Tax Act an Indian company paying fees for technical services to a foreign company is required to cut withholding tax of 10% plus applicable surcharges.
Foreign Exchange Management Act: Payment for various services is qualified as Current Account Transactions and allowed through automatic route upto $100,000. However anything beyond the specific limit will require RBI Approval
Disclaimer: The above analysis is based on Laws in force as on the date. Various Limits, Restrictions and taxation criteria may change if there is any change in corresponding Statute