FDI IN INDIA: LLP OR COMPANY?

It has been over a decade since the Government of India (GoI) introduced the Limited Liability Partnership Act, 2008 (LLP Act) to ....

It has been over a decade since the Government of India (GoI) introduced the Limited Liability Partnership Act, 2008 (LLP Act) to facilitate formation of limited liability partnerships (LLP). An LLP is a hybrid that provides the flexibility of a traditional partnership with the protection of limited liability as in a conventional company structure. The LLP was considered an alternative to the limited liability company and expected to be used by professionals and smaller businesses. However, under the then prevailing foreign direct investment (FDI) policy, an LLP was not eligible for investment by foreign investors (FIs). Thereafter, from 2011 till date, the GoI steadily liberalised the FDI regime for investment in LLPs. The GoI has also recently proposed amendments to the existing LLP Act to make the provisions more business friendly. In this article, we will discuss the FDI regime with respect to LLPs and the advantages it presents to strategic FIs.

FDI

FDI is allowed in LLPs operating in sectors where 100% FDI is allowed under the automatic route without any conditions. Due to this restriction, certain sectors (aviation, financial services, private security etc.) are not open for investment by FIs. However, under the FDI route most areas like tourism, hospitality, hospitals, manufacturing etc., can be operated under the LLP form. Existing companies with FDI do not need any government approval to convert into an LLP provided they satisfy the requirements for an LLP to receive FDI.

Investment Structuring

FDI is allowed either by way of capital contribution or by way of acquisition/transfer of profit shares. The law governing LLPs allows the partners to contractually determine their ownership and profit shares irrespective of the quantum of each of their contribution. Hence, the contractual agreement can be drafted to provide the investor with preferential returns, contingent voting rights, liquidation preferences etc. A foreign partner could also provide debt financing to an LLP in which it has invested by way of FDI.

LLP Partners

In an LLP, the designated partners are responsible for management including ensuring compliance under various provisions of the LLP Act. As per the LLP Act, there should be minimum two designated partners who are individuals and at least one of them should be a resident in India. However, all the partners of an LLP could be foreign entities, provided they nominate 2 individuals as designated partners.

Tax Benefits

LLPs enjoy a slightly beneficial tax regime compared to companies since share of profit paid to partners is not subject to tax in the hands of the partners (domestic or foreign). Whereas dividend paid by a company is subjected to tax in the hands of the shareholders. This is close to 20% savings when compared with the applicability of tax on dividends on foreign shareholders of companies. 

However, LLPs are at a disadvantage with respect to tax on profits since they are taxed at a higher rate of 30-34% on their profits in India, compared to a company which is taxed in the range of 25-28%. But this seeming disadvantage could also be used to an FI’s advantage depending on its tax jurisdiction. Although Indian tax laws consider an LLP as a separate legal entity, in certain jurisdictions an LLP is considered as a pass-through vehicle for tax purposes. Due to this, any income earned by the LLP in India would be treated as the foreign controlling partners direct income. To that extent, the FI could also claim the tax paid in India on the LLP’s profits as a set off against their collective tax liability in their home jurisdiction. Hence, FIs should assess the tax implications in their home jurisdiction and preferably invest through a special purpose vehicle in a jurisdiction that offers the best tax advantage.

Easy Compliance

Another significant advantage that an LLP has over a company is the reduced level of compliances under the LLP Act. All companies are required to maintain various statutory registers, file annual returns, conduct meetings for corporate actions, among other compliances. An LLP on the other hand has much fewer compliances such as: filing the agreement between partners within 30 days of its incorporation, filing an annual return and a statement of account and solvency each year etc. Barring some material compliances, an LLP has significant freedom to determine its operations in accordance with the agreement between its partners.

To sum up; while LLPs may not be the desired vehicle of investment for most financial investors, it can certainly be an instrument of use for many strategic investors. The reduced compliance burden along with the overall tax advantages make this a very attractive option for FIs.

Authors: Ajay Joseph, Partner and Nicolas Seizou, Director | Veyrah Law

The team can be reached at ajay.joseph@veyrahlaw.com and nicolas.seizou@veyrahlaw.com.

Views expressed above are for general information purposes only and should not be considered as a formal legal opinion or advice on any subject matter therein.