Outbound Investment Structuring

Outbound Investment Structuring - An Overview

In order to understand the meaning of Outbound Investment Structuring, it is important to first understanding the meaning of investment structuring. Investment structuring is also known as business structuring. Structuring is understood as dividing a particular entity or breaking a transaction into smaller parts for the purpose of understanding. One of the main aims of structuring is to reduce tax burden. However, the applicant has to ensure that compliance is maintained to avoid any form of double taxation through this process.

Compliance related to Outbound Investment Structuring

The main regulatory authority for outbound investment structuring is the Reserve Bank of India. When a company is allowed to invest outside India, then compliance has to be maintained with the Reserve Bank of India. Either prior permission is required by the RBI.

There are various exchange control restrictions on the Indian company and hence the companies are taxed on the basis of income which is earned outside India. Hence it would be useful to consider utilising Offshore Holding Companies (OHC).

Routes under the RBI- Outbound Investment Structuring

For investing outside India, there are two routes which is applicable by the RBI. The RBI considers the following route:

• Automatic Route

  Under the Automatic Route 100% foreign investment is allowed to be put in the company, joint venture or the wholly owned subsidiary which is established outside India. As per the applicable rules this route would only be utilised for investment up to a maximum cap of USD 100 Million. Such investment would be applicable if the entity is a Joint Venture or Wholly Owned Subsidiary. However the following conditions have to be fulfilled by an Indian Company to make an investment abroad:

  • An investment is made in the foreign company which is in similar sector and carrying out similar line of activities.

  • The Indian Company is not present under the cautionary list of the RBI or under the investigation of the Enforcement Directorate.

  • All the transactions related to the investment are carried out through the branch of the authorised dealer.

• Approval Route

  Under the Approval route, prior permission is required from the RBI to carry out any form of investment outside India.

What are the entities preferred for Outbound investment structuring?

The following entities would be preferable when it comes to outbound investments:

• Setting up a Branch Office

  Setting up a branch office outside India is one of the most efficient methods for compliance related to outbound investment structuring. A branch office which is set up by an Indian Company outside India would be compliant with the relevant rules of the RBI. There are specific rules which the Indian company has to adhere with setting up of a branch office outside India.

• Setting up a liaison office

  A liaison office would not be carrying out any form of commercial operations outside India. Liaison office would be considered as an office which is solely set up for marketing purpose and also for carrying out any form of research and development activities. There are specific rules related to compliance for a liaison office which is set up outside India.

• Wholly Owned Subsidiary

  Indian companies are allowed to open and operate Wholly Owned Subsidiaries outside India to carry out different process.

• Partnership Firms

  As long as compliance is maintained by partnership firms, outbound investment structuring is allowed.

• Other Forms of Entities

  Any company which is established in India is allowed to outbound investment structuring. Such processes can be carried out through Special Purpose Vehicles (SPVs) also. Special purpose vehicles are set up as foreign branches which are allowed to carry out operations. There are lot of advantages using this form of business structure to reduce tax liability. Apart from this, operational efficiency can be secured by the parent company through the special purpose vehicle.

Benefits of Outbound Investment Structuring

• Compliance with Rules

  There are particular rules laid down by the Reserve Bank of India related to outbound investment structuring. Usually structuring would be allowed to be carried out by the entity if particular form of compliance is followed by the entity.

• More Growth

  When the company invests abroad through outbound investments, there is more growth and reputation for the entity.

• More Investment

  More investment would flow into the Indian company as a result of the outbound investment structuring.

Procedure for Outbound Investment Structuring

There is no specific procedure for outbound investment structuring. Compliance has to be maintained by the party, ensuring that there is no form of double taxation through this process. Outbound Investment is also known as Overseas Direct Investment (ODI). The following procedure has to be considered for investment:

• Consider the type of entity formed

  First and foremost, the applicant would have to consider a suitable entity which is formed for carrying out the process related to outbound investment structuring. There are different forms of entities which can be considered for the above process.

• Procedural Requirements

  The applicant would have to fill up the application using Form ODI. Then if the investment is more than USD 5 million, then the principles related to valuation should be carried out. Usually the valuation should be carried out by a SEBI registered merchant banker or a chartered accountant.

  • The applicant should consider if the investment has to go through the automatic route or the approval route.

  • The applicant must also select a designated authorised bank to carry out the above process.

• Send Application to the RBI

  The application would be sent to the RBI through the authorised bank or the authorised dealer. If the outbound investment is allowed, then the Authorised Bank should carry out the remittance as required by the RBI. There are particular Documents which required to be submitted in accordance to the Form ODI.

Documents required for Outbound Investment Structuring

The following Documents are required for outbound investment structuring:

• Copy of Certificate of Board Resolution
• Form ODI with all the respective attachments and annexure
• Valuation Report by a Chartered Accountant or a SEBI Registered Merchant Banker
• All Parts of the Form ODI
• Annual Return on the Respective Foreign Liabilities and Assets
• Information on the Indian Entity and the Overseas Entity
• Summary or Background related to the proposal of the company
• Note or Reasons for Securing this form of approval
• Letter From the Authorised Bank

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