Foreign direct investment (FDI) in limited liability partnership (LLP) has opened new avenues of opportunities for many foreign companies to enter India.
An LLP is essentially a hybrid form of corporate structure that combines benefits of both, a company (private or public) and a partnership firm. It embodies limited liability for its partners, like a company, and tax benefits of a partnership firm.
Any person resident outside India or a company incorporated outside India, other than those from Bangladesh and Pakistan, can invest in an LLP in the form of capital contribution or by way of acquisition of profit shares. That is, an investor can become a partner of an LLP, either by contributing to its capital or by acquiring a partnership share from an existing partner.
In this article, we highlight the benefits of using LLP business structure for foreign investors looking to operate in India, the latest changes pertaining to FDI in LLPs, as well as steps to register an LLP in India.
Advantages of setting up an LLP
- An LLP is simpler and less expensive to incorporate as compared to a company. The minimum amount of fees for incorporating an LLP is INR 500 (US$7) and the maximum amount is INR 5600 (US$82).
- LLPs have no mandatory requirement for account auditing unless annual turnover exceeds 40 lakhs or contribution of LLP exceeds INR 25 lakhs (US$36,244).
- There is no minimum capital requirement for the registration of an LLP.
- Unlike companies, LLPs are not subject to Dividend Distribution Tax (DDT) or Minimum Alternate Tax (MAT). Besides, LLPs enjoy a lower tax rate in comparison to that of a company.
- Being a separate legal entity an LLP limits the liabilities of its partners up to their agreed contribution and partners are not liable to pay the debts of the company from their personal assets. In other words, LLP safeguards partners including the foreign investors from unlimited liability risks, in contrast to sole-proprietorship or partnership firms.
- Unlike Company, there are no restrictions on the partners, if they wish to enter into any legal contracts outside India.
FDI in LLPs – Key reforms
To promote foreign holdings in LLPs, the Reserve Bank of India (RBI) liberalized its policy for accepting FDI in LLPs in March 2017, by making amendments to the Foreign Exchange Management Regulations, 2000.
New rules allow LLPs by foreign entities to perform downstream investment in any other company or LLP operating in sectors in which foreign investment is allowed.
In 2015, the RBI had partially liberalized FDI in LLPs by permitting investment under the automatic route only in sectors or business activities where:
- 100 percent FDI was permitted under the automatic route (without government approval); and
- There were no FDI-linked performance conditions.
Other changes include:
- Availing borrowing from abroad (External Commercial Borrowings or ECBs)
Previously, Indian law barred LLPs from availing borrowings from a source outside India, including masala bonds. The 2017 amendments have relaxed the norms – permitting LLP having foreign investments to access external borrowings at a lower cost.
- No government approval needed for conversion of certain companies to LLPs
A company that has received foreign investment can now be converted into an LLP under the automatic route without government approval. Previously, this required prior government approval.
LLP registration for non-resident investors
An LLP must have at least two designated partners (DPs) with one being resident in India for at least 180 days.
Steps for setting up an LLP
- Obtain Digital Signature Certificate (DSC) for at least two proposed designated partners of the LLP.
- Acquire Director Identification Number (DIN) or Designated Partner Identification Number (DPIN) of proposed partners.
- Apply for the availability of the name using Reserve Unique Name LLP (RUN LLP), which is a web service used for reserving a name for a new company or for changing its existing name. Ensure compliance with the Ministry of Corporate Affairs (MCA's) naming guidelines in this regard.
- Once the name of proposed LLP is approved, file form FiLLiP –for incorporation document of the LLP. FiLLiP is an integrated form that offers multiple services viz. allotment of DIN, reservation of name, and incorporation of LLPs.
- LLP Agreement is one of the most crucial documents as it governs the rights and duties of partners. Various aspects covered under the agreement may include the amount and manner of contribution, rights, and duties of partners, description of the business of proposed LLP, among others. The LLP agreement must be filed within 30 days of incorporation of LLP.
Documents of partners
- Permanent account number (PAN) card or ID proof of the partners;
- Address proof of the partners;
- Residence proof of partners;
- Photograph; and
- Passport (in case of foreign nationals, or NRIs).
Documents of LLP
- Proof of registered office address; and
- Digital Signature Certificate.
Prospective companies and investors seeking to take advantage of India's liberalized FDI caps must carefully consider their options for investment in the country, and choose a business or corporate entity that takes care of their liability as well as tax planning issues. Foreign companies planning to do business in India must pay special attention to available avenues for establishing a business presence, and corporate structuring to save taxes to the best extent.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.