November 2022

FROM TAXES TO
TRANSFER PRICING:

EVERYTHING YOU NEED TO

KNOW FOR A HEALTHY
INDIAN SUBSIDIARY

An eBook for CFOs

TABLE OF CONTENTS PAGE 02

Introduction 3

Export taxes 4
- Registrations: PAN card, IEC and GSTIN 5
- Import duties 9

Taxes 11
- Direct taxes: Corporate Income Tax 12
- Indirect taxes: GST 17

Legal structures 20
- Offices 21

- Partnerships 28

- Limiteds 32

Financing your Indian company 34

Transfer pricing 37

Dividend payout 44

Consultancy IndiaConnected and what we can 47

do for you
INTRODUCTION PAGE 03

INDIA'S FINANCIAL SYSTEM

An eBook for CFOs

India is one of the fastest growing markets in the world. More and more
European companies are already capitalising on this opportunity. But doing
well in India is not something that comes easily to any business; even the
world's largest companies regularly fail there. Success in India requires
strategic focus, understanding the market and immersing yourself in the
culture.

IndiaConnected is the partner of the European business community in India.

We help companies save time and costs, analyse risks and grow faster in
India. We know the pitfalls and help our clients get around them and
achieve success faster.

In this guide, we focus specifically on the challenges and questions of CFOs

and controllers. We offer insights into the complex tax and financial system
you will face in India. From applying for a PAN card to paying dividends
from your Indian subsidiary to your company in Europe. We can of course
guide and advise you throughout your entire India journey.

Do you have any questions? We would love to hear from you!

Team IndiaConnected

Consultancy firm IndiaConnected tries to provide its information as completely and accurately as
possible. However, laws and regulations are constantly changing in India. So always check what the
latest state of affairs is. You can contact our experts for this. No rights may be derived in any way from
the contents of this manual.
EXPORT TAXES PAGE 04

EXPORT TAXES
All the tax and practical matters that are necessary for a good start

Even at the earliest stage of doing

business in India, while exporting goods
to the country, European companies
encounter challenges. This is because
India has complex customs regulations. It
is therefore important at this initial stage
to be well aware of the necessary
registrations you need to hold before your
products head to India.

In this chapter, we cover the tax matters

you need to arrange before you start
exporting, such as applying for a PAN
card or registering your product with the
Bureau of Indian Standard. We also cover
the documentation required for smooth
customs clearance and discuss Indian
import tariffs.
EXPORT TAXES PAGE 05

REGISTRATIONS
Before you start exporting your products to India, you need to take care of
some tax matters. You need to check whether you need to apply for an IEC, a
GSTIN and a PAN card. The procedures can be incredibly time-consuming, so it
is important to start at least six months before your first export shipment
leaves the country.

Permanent Account Number (PAN)

The Permanent Account Number is an Indian tax number. The ten-digit
number is issued in the form of a card (the PAN card) by the Income Tax
Department of India. The PAN card allows the Indian tax authorities to
match all transactions of an individual or entity making financial
transactions in India. PAN registration is therefore mandatory for Indian
companies and optional for foreign exporters and service providers doing
business with India.

Despite not being mandatory, it is still wise to apply for a PAN card when
you want to start exporting to and selling in India. Because without a PAN
card, the Indian customer has to withhold and remit 20 percent TDS to the
Indian tax authorities.

TDS stands for Tax Deducted at Source, which is an input tax that Indian
companies who hire foreign service providers must deduct from the invoices
of these foreign companies and then remit to the Indian tax authorities. The
Indian client is required to withhold TDS if the foreign service provider does
not have its own branch in India.

In this case, it means that without a PAN card, you will receive only 80
percent of the invoice amount and the rest will be withheld. If you do have
PAN registration, the TDS rate is only 10 percent.
EXPORT TAXES PAGE 06

PAN card application

As a foreign entity, you apply for a PAN card by filing Form 49AA. The
application can be completed almost entirely online through the website of the
National Securities Depository Limited (NSDL). However, you must also send
the signed PAN application to the NSDL office in India via post.

For your PAN registration, you will need the following documents:
- Form 49AA;
- An extract from the Commercial Register of the Chamber of Commerce
legalised by the Ministry of Foreign Affairs and apostilled by the Indian
Embassy of the country of residence;
- A cover letter on the company's letterhead (must have the company's logo),
signed by one of the directors and legalised by the Ministry of Foreign Affairs of
the country of residence.
- Official copies of passport pages containing personal information of one of the
company's directors

Upon acceptance of the application, the PAN card will be sent by courier to the
address listed on the application. Application processing takes an average of 15
to 20 days.

Import Export Code (IEC) and GSTIN

Any company exporting to India is required to have an IEC and a GSTIN to
import its products. The IEC is a ten-digit identification number issued by the
DGFT (Director General of Foreign Trade). Without a valid IEC number, goods
will not pass through Indian customs.

You apply for an IEC online using form ANF 2A. In addition, you must submit
the following documents:
- Your bank details
- Bank statement
- A copy of your PAN card
EXPORT TAXES PAGE 07

- Two passport photos of the applicant

- A cover letter on the company's letterhead (must have the company's logo)
signed by one of the directors.

GSTIN (VAT number)

The GST is the Indian version of VAT and is a tiered system. Tax is levied any
time value is added to the product and a sale is made. Therefore, every business
will face it eventually.

The GSTIN (Goods and Services Tax Identification Number) is a 15-digit number
based on the applicant's pre-existing PAN. You will get your GSTIN during your
GST registration, which again can be completed entirely online through the GST
portal. The procedure requires quite a few documents, including:
EXPORT TAXES PAGE 08

Having a GSTIN is only mandatory if you turn a turnover of more than four
million rupees or around 45,000 euros, or if you sell through an e-commerce
platform. As a start-up international company, you may therefore choose to
skip these two tricky procedures for now and partner with an authorised, local
importer who already holds an IEC and is registered under the GST.

Check carefully whether your importer actually has these documents, because
if this paperwork is not in order, your products will not get through customs
and the importer will not be able to make payments to your foreign bank
accounts.
EXPORT TAXES PAGE 09

IMPORT DUTIES
India is known for its relatively high import duties, averaging between 27 and
30%. For alcohol, cars and other luxury products, the duties are even higher,
well over 40%.

The import duty payable for your product is the sum of six different taxes.
This illustrative example shows how such a calculation is made:

*CIF stands for costs, insurance, freight and is the sum of invoice value + insurance + freight
+ ex-work costs (if applicable).
*Basic Custom Duty is calculated on the assessed value (CIF) of the goods landed at Indian
Customs. Depending on the HS code of the product, the percentage of BCD varies between 0%
to 100%.
EXPORT TAXES PAGE 10

The Indian government has been pushing for a more self-sufficient India since
2020, indicating that high import duties will be maintained for the next few
years. At the same time, the Indian government is trying to attract more
international producers, by offering cheap land and through special tax breaks.
It is therefore interesting for European companies to avoid the high import
duties by setting up their own factory or production site in the country.
TAXES PAGE 11

TAXES
Here's how to do business in India as cost-efficiently as possible

There are two types of taxes in India:

direct taxes and indirect taxes. Direct
taxes are levied on the income earned by
companies or individuals in a financial
year. The income tax paid by companies
on their income in India is the Corporate
Income Tax (CIT).

As the name suggests, indirect tax is not

imposed directly on the taxpayer. Instead,
this tax is levied on goods and services.
An example of an indirect tax in India is
the aforementioned Basic Custom Duty.
The most important indirect tax is the
Goods and Services Tax (GST), which we
discuss in this chapter.
TAXES PAGE 12

DIRECT TAXES
In India, domestic companies pay a different corporate tax rate than foreign ones.
Under the Indian Income Tax Act, you are a domestic company if you have a
registered office, head office or subsidiary in India. With a branch office, project
office or permanent establishment, you are taxed as a foreign company. Despite a
foreign company being taxed only on income made in India, the rate for domestic
companies is much lower. We put both options side by side.

Corporate Income Tax - Domestic Companies

The Corporate Income Tax (CIT) rate applicable to a domestic company for the
financial year 2022-23 is as follows:
TAXES PAGE 13

Sections 115BAA and 115BAB

In September 2019, the Indian government added a new section, 115BAA, to the
existing Income Tax Act 1961. This section offers domestic companies a reduced
corporate tax rate from the 2019-2020 financial year (AY 2020-21) onwards, if
such domestic companies meet certain conditions. The tax rate will no longer
be 25 or 30%, but 22%.

The conditions for section 115BAA

Firstly, domestic companies must not already be using other exemptions or
incentives to qualify for the deduction under 115BAA. Therefore, the total
income of such companies should be calculated without:
Claiming any deduction available specifically for units located in special
economic zones (section 10AA).
Application for additional depreciation under Article 32 - Deduction for
investment in new plant and machinery in designated backward areas in
the states of Andhra, Pradesh, Bihar, Telangana and West Bengal under
Article 32 AD.
TAXES PAGE 14

- Claiming deduction under section 33AB for tea, coffee and rubber companies.
- Claiming deduction under section 33ABA for deposits made in land
rehabilitation funds by companies engaged in the extraction or production of
petroleum, natural gas or both in India.
- Claiming deduction under section 35 for scientific research.
- Claiming deduction for capital expenditure of specific farms under Section 35
of the Agriculture Act.
- Section 35CCC - Expenditure on agricultural extension project.
- Section 35CCD - Expenditure on skill development project.
- Claims for deductions under Chapter VI-A (80IA, 80IAB, 80IAC, 80IB, etc.) are
not allowed, but deductions under Section 80JJAA are excepted. Section 80JJAA
allows an employer to reclaim part of the salary of new employees through tax.
- Claiming credit for any losses carried forward from earlier years, if such
losses were incurred in respect of the above deductions.

The conditions for section 115BAB

- The company is incorporated and registered after 1 October 2019.
- Production commences before 1 April 2023.
- The company should engage in the manufacture or production of any product,
and/or the research related to such product. The company may also engage in
the distribution of the item produced by them.
- The company cannot invoke this condition if it is formed by demerger or
reconstruction of a pre-existing company within the meaning of Section 33B.
- The company cannot invoke this condition if it uses a plant or machinery that
has been used earlier for any purpose. Used imported machinery is allowed if
such machinery has never been installed in India and no claim has ever been
made for depreciation of such machinery in India.

Be careful!
It is incredibly important for companies to be sure that they are more
favourably off by opting for the lower tax rate of 115BAA before actually taking
that step, because once a company applies the reduction, it will perpetuate in
subsequent tax years.
TAXES PAGE 15

Since there is no time limit within which the option under section 115BAA can
be exercised, it is better to take your time and first test if other exemptions and
incentives can offer your business higher benefits . Thereafter, one can always
opt to apply 115BAA, but note that once it is exercised, it must be continued.

Corporate Income Tax - Foreign Companies

As explained earlier, you are taxed as a foreign company if you have a branch
office, project office or permanent establishment in India. While a domestic
company is taxed in India on its universal income, a foreign company is taxed
only on the income made in India.

The Corporate Income Tax (CIT) rate applicable to a foreign company for the
financial year 2022-23 is as follows:
TAXES PAGE 16

Be aware!
These rates are higher than the rates for domestic companies and you, as a
foreign company, cannot claim tariff reductions like the 115BAA either. If you
are just starting out in India and your turnover is still low, these high tariffs are
still manageable. But once you start growing, it is advisable to set up your own
entity in India so that you can benefit from the favourable tax rates for
domestic companies.

Filing income tax returns in India

All companies, including foreign companies, must file their income tax returns
on or before 30 October each year. Even if the company is incorporated in the
same financial year, income tax returns must be filed for the period before
October 30. In addition, companies that have a turnover, profit or gross receipts
of more than INR 10 million or about EUR 110,000 are required to have an audit
carried out. This audit report has to be submitted to the Indian Tax Department
along with the income tax return. The audit report should be submitted
annually, if the rule applies to your business, by September 30.
TAXES PAGE 17

INDIRECT TAXES
Goods and Services Tax is the Indian version of VAT and has five rates: 0%, 5%,
12%, 18% and 28%. Under the GST system, tax is levied at any point when value is
added to the product and a sale is made. This increases up to the final sale to the
customer. In addition, GST is a destination-based tax. This means that if a
product is manufactured in the state of Andhra Pradesh but sold in Karnataka,
the tax goes to Karnataka in its entirety.

To clarify this, a simplified example:

TAXES PAGE 18

Despite tax being levied on each sale, there is no so-called waterfall effect in the
GST system. This is because tax is levied only on the value added at each step
and not on the total value of the product. In the case of biscuits, this works as
follows:

The GST consists of three components or taxes:

- IGST: this form of the GST was covered earlier, as it is levied by the central
government for an inter-state sale (e.g. from Maharashtra to Tamil Nadu), as
well as for the import of goods into the country.
- CGST: this is the 'central version' of the IGST and is levied on an intra-state
sale (e.g. a transaction taking place within Tamil Nadu).
- SGST: this form of GST is similar to CGST, but is not levied by the central
government, but by the state government on a sale within the state.

An example to clarify this further:

A manufacturer in Gujarat sells tractor axles worth 50,000 INR to a tractor
company in Punjab. The tax rate on the axles is 18% and falls under the IGST
because it is a sale between two companies in two different states. The
manufacturer has to charge an IGST of 9,000 INR, which is paid to the central
government.
TAXES PAGE 19

The tractor company then sells a tractor to a consumer in Punjab worth INR
500,000. The GST rate for a tractor is 12%. Of this 12%, 6% goes through the
CGST to the central government and 6% through the SGST to the state
government. Thus, the tractor company has to retain 60,000 INR of the total
amount as tax, of which 30,000 INR goes to New Delhi and 30,000 INR to the
Punjab government.

Compliances under the GST

All matters surrounding the GST can be arranged online. From paying taxes to
getting the right documentation for transporting your goods. This is because the
GST has a centralised system of notes of lading called 'E-way bills'.
Manufacturers, traders and carriers have to generate an E-way bill through the
GST portal when moving goods between states. This not only gives the Indian
tax authorities visibility on what GST needs to be paid, but also shortens the
time at checkpoints at state borders.

There are also billing requirements under the GST, for example, invoices for
different goods and services must be issued by a specific deadline:
- For sale of goods, the invoice should be issued no later than the day of
delivery;
- For goods supplied to the same customer on a regular basis, the invoice should
be issued no later than the payment date;
- For services, the invoice should be issued no later than 30 days after the
delivery of the services;
- In case the services are provided to a bank or other financial institution, the
invoice should be issued 45 days after the delivery of the services.

An invoice must contain the following mandatory fields for the GST:

- Invoice number and date; - HS code/ SAC code of the product;

- Customer name; - Item details, such as description,
- Shipping and billing address; quantity, unit and total value;
- GSTIN of the customer and - Taxable value and discounts;
taxpayer; - Rate and amount of taxes;
- Delivery address - Supplier's signature.

LEGAL STRUCTURES PAGE 20

LEGAL STRUCTURES
Choose the legal entity that suits your needs

If you are just starting to export to India,

the high import duties and tax rates that
apply to international companies are still
manageable. But as your activities in the
country increase, so will the costs. In that
case, it could be worth it to explore
setting up your own sales organisation or
manufacturing location.

Before you start, you want to make sure

you choose the right legal structure for
your business that both suits your
objectives, and minimises your
compliance obligations and taxes. India
has three types of legal forms: the Office
structures, the Partnership structures and
the Limited structures. All three have
their own advantages and limitations.
LEGAL STRUCTURES PAGE 21

OFFICE STRUCTURES
India has three types of 'offices': the liaison office, the branch office and the
project office. All Office structures are lightweight entities that are considered an
extension of the foreign parent company. Therefore, the legal liability of these
three business structures lies with the parent company and the Indian tax
authorities consider offices as foreign companies. Nevertheless, the office
structure may well be the right legal structure for your first steps into the Indian
market.

Liaison Office
A liaison office is the representation of a foreign company in India. The Central
Bank of India defines such an office as "an office that may undertake only
liaison activities". These include:
- Gathering information about the market and potential Indian consumers;
- Advertising, promoting and carrying out other marketing-related activities;
- Promoting exports to or imports from India;
- Establishing technical and financial collaborations between the head office
and Indian companies;
- Providing a communication channel between headquarters and local partners.

A liaison office may not generate revenue in India and therefore may not
produce and sell goods or provide services. The costs of a liaison office must be
paid in full by the parent company outside of India. A liaison office not only
makes sense for companies that want to explore the Indian market, it is also an
interesting legal form for international investors who do not want to bring their
products or services directly to the Indian market, but, for example, want to
outsource work to India.
LEGAL STRUCTURES PAGE 22

Setting up a liaison office

Setting up a liaison office in India requires going through various registration
and approval processes with various Indian government agencies. The process
consists of seven steps:

1. Apply for approval from an Indian bank to open a bank account for the
liaison office. This bank will automatically become the 'Authorised Dealer
Bank' for the new office.
2. Submit a request, with all necessary documents, to the Reserve Bank of
India (RBI) through the Authorised Dealer Bank.
3. Once the RBI has given approval, a 'Certificate of Establishment of Place of
Business in India' should be requested from the Indian Chamber of
Commerce: the Registrars of Companies (ROC).
4. Next, a Tax Deduction Account Number (TAN) and a Permanent Account
Number (PAN) have to be obtained from the Indian tax authorities: the
Income Tax Authority.
5. Once these are in, the liaison office's bank account with the authorised
bank can be officially opened.
6. The liaison office should be registered with the state where the office is
located under the Shop and Establishment Act and for Professional Tax.
7. If samples are imported to the liaison office, the office should also be
registered under the Import Export Code.

Setting up a liaison office takes three to six months on average, and without
experience it is difficult to figure out which documents need to be filed where.
It is therefore recommended to hire an experienced, local partner to guide you
through this process smoothly. Without help, setting up an entity will on
average take an additional three months.

Mandatory compliance requirements of a liaison office

Six months after the Central Bank of India (RBI) gives its approval for your
liaison office, you must declare the official address, your PAN and the
LEGAL STRUCTURES PAGE 23

'Certificate of Establishment of Business Place in India' from the Indian

Chamber of Commerce (ROC) to the RBI. In addition, an 'Annual Activity
Certificate' must be obtained from a Chartered Accountant. This is a full-time
practising accountant who is officially registered with the Institute of Chartered
Accountants of India (ICAI). This certificate must also go to the RBI.

Once the liaison office is established, the same chartered accountant has to
submit an annual payment statement and an annual financial statement from
the head office (notarised by the Indian Embassy in the country where the HQ
is located) to the Registrar of Companies (ROC). The liaison office is initially
approved for a period of three years and can be extended for another three
years thereafter. To do so, an application must be submitted by your
'Authorised Dealer Bank' to the RBI one month before the expiry of the first
approved period.

Branch Office
A branch office is a suitable business model for foreign companies looking to
establish a temporary presence in India. It serves as an extension of the head
office and carries out the same activities as the parent company. Therefore, the
difference with a liaison office is that a branch office is allowed to provide
services or sell products. A branch office is not allowed to carry out activities in
the retail sector. Also, a branch office is not allowed to produce in India unless
this production takes place in a special economic zone (SEZ) and the products
are specifically intended for the Indian market. However, a branch office may
outsource production to an Indian manufacturer.

In order for a foreign company to set up a branch office in India, the company
already has to carry out trading and manufacturing activities in its country of
origin. A branch office may carry out the following activities in India:
- Export or import of goods;
- Providing professional or consultancy services;
- Research work;
LEGAL STRUCTURES PAGE 24

- Representing and acting as buying or selling agent for the parent company;
- Promoting technical or financial cooperation between Indian companies and
the parent company;
- Providing IT and software development services;
- Providing technical support for the products provided by the parent company.

Setting up a branch office

As with a liaison office, there are several registration and approval procedures
to go through to set up a branch office.

Foreign companies must first apply for a licence from the Reserve Bank of India
(RBI):
a. If the company carries out activities within a sector in which India
allows 100% foreign direct investment (FDI), then you apply for the
licence using the FNC form and add the necessary documentation.
b. If this is not the case, then you have to submit the FNC form to the Indian
Ministry of Finance and, like liaison offices, your application must then
also be submitted to the RBI through an 'Authorised Dealer Bank'.

If the foreign entity wants to set up branch offices at more than one location in
India, approval should be sought from the RBI for each separate office and for
each separate activity that the different branch offices will undertake in India.

To register a branch office, the following forms must be submitted:

- FNC form;
- An extract translated into English from the trade register of the parent
company certified with an apostille from the Indian embassy in the country of
origin;
- The incorporation documents of the branch office to be established in India;
- Registration for PAN, TAN and GST;
- Note on location or proposed activity;
- The latest audited balance sheet of the applicant entity;
LEGAL STRUCTURES PAGE 25

- Official documentation of the board's decision to open a branch office;

- Information on the local representatives of the parent company in the branch
office.

When setting up a branch office, it is again very difficult to figure out exactly
what documentation is needed and where it should be submitted without any
experience. It is therefore recommended to bring in an experienced, local
partner to guide you through this process.

Mandatory compliance requirements of a branch office

Once you receive approval from the RBI for your branch office, you need to
acquire real estate for carrying out the permitted/incidental activities and get
registered with the Indian Ministry of Corporate Affairs. Upon this registration,
a CIN, i.e. Corporate Identity Number, is issued by the Registrar of Companies.
To obtain this number, you need to submit the following documents:
- Formulier FC-1
- Charter/statuten/memorandum/Articles of Association
- Director(s) details – individuals
- Director(s) details – bodies corporate
- Letter of approval from the Reserve Bank of India
- Power of attorney or board resolution in favour of proxy(s).

In addition, the branch office has to file Annual Activity Certificates (AACs) and
an annual audited balance sheet with the RBI to prove that it has undertaken
only those activities that are permitted upon approval. A branch office, like the
other two 'office' structures, is taxed as a foreign company in India and thus
falls under the 40% rate. But profits made by the branch office, after paying all
taxes, can be freely remitted from India to the parent company.

Closing a branch office

Since a Branch office is a legal form that lends itself well for a temporary stay
in India, its licences are valid for three years. If you want to close your branch
LEGAL STRUCTURES PAGE 26

office in India, your Authorised Dealer Bank should submit the necessary
documents to the RBI:
- Copy of initial approval from the RBI for the establishment of your Branch
Office;
- An auditor's report indicating how the residual amount to be transferred to
the branch office account has been arrived at, that all liabilities in India,
including arrears and employee benefits, have been fully met and that there is
no income from sources outside India (including export earnings) that has not
been repatriated to India;
- Statement of no objection from the Indian tax authority;
- Confirmation that no legal proceedings are pending in India and that there is
no legal impediment to the closure;
- A statement from the Registrar of Companies that the provisions for dissolving
an office in India have been met.

Project Office
Project offices are set up to carry out a specific task in India. For example, if
you win the bid on an infrastructure project and want to open a temporary
office to carry out that task. The main requirement for opening a project office
in India is that the parent company must have obtained a contract from an
Indian company and that the cost of the project is paid in full by the foreign
entity (in most cases this is the parent company, but it can also be an
international organisation such as the World Bank).

Setting up a project office

As with the other office forms, you first need to find an 'Authorised Dealer
Bank'. With this bank, you then need to submit the FNC form and the
documents mentioned in the form. The AD Bank is authorised to grant you
approval for the project office if it believes you meet all the criteria. To do so,
the bank checks the following:
- A background check of the applicant;
- Nature and location of the applicant's activities;
LEGAL STRUCTURES PAGE 27

- Sources of funding;

Mandatory compliance requirements of a project office

If the bank has given approval for the office, the project office should be
opened within six months of the date on the letter of consent. The project office
then notifies the incorporation date to the bank, which in turn informs the RBI
and submits the following documents to the Registrar of Companies:
- The articles of association or an extract of commercial register of the parent
company certified with an apostille from the Indian embassy in the country of
incorporation and translated into English;
- Het volledige adres van de hoofdvestiging;
- The full address of the head office;
- List of the directors of the parent company;
- Names and addresses of the individuals authorised to represent the company
in India;
- Full address of the office in India;
- Declaration that none of the company's directors or authorised
representatives in India has ever been convicted or barred from establishing
companies and management in India or abroad.

Finally, the project office has to submit a special Annual Activity Certificate
(AAC) to the 'Authorised Dealer Bank' every year. In this AAC, the project status
should be outlined and include an audit of the project office's accounts by an
auditor.
LEGAL STRUCTURES PAGE 28

PARTNERSHIPS
Partnership structures are forms of cooperation between at least two partners,
where the partners are personally liable. In India, the relationship between the
partners of a partnership is governed by a partnership deed and the partners
share the profits in the proportions they have agreed among themselves. Indian
law does not recognise this type of company as a separate legal entity that is
independent of its partners, but there is one exception. It's one of the most
interesting forms of partnership for foreign companies: the Joint Venture.

Joint Venture (JV)

Setting up a joint venture is a smart way to enter the Indian market, as you
don't have to spend time and money setting up distribution channels, raising
capital and making contacts/building a customer base. This is because you can
lean on your Indian partner's already existing network. A joint venture (JV) is a
tactical partnership in which two or more individuals or companies agree to
contribute goods, services and/or capital to a unified commercial project. For a
successful joint venture in India, or anywhere else in the world, compatibility
between the parties is essential and a clear goal must be formulated.

Different types of joint ventures

Once you have found a suitable partner, you can define what kind of joint
venture you would like to set up together: an equity joint venture or a
contractual joint venture.

- An equity joint venture is an agreement whereby an independent legal entity

is created by two or more parties, who invest capital in the joint venture. This
structure is ideal for long-term, broad-based joint ventures.
- A contractual joint venture can be set up when the creation of a stand-alone
legal entity is not feasible, such as in the case of a temporary assignment or a
joint venture created for a limited time.
LEGAL STRUCTURES PAGE 29

Then, to actually set up the joint venture, you and your partner need to draw
up some important agreements: a Memorandum of Understanding, the Articles
of Association and the Joint Venture Agreement.

Memorandum of Understanding (MOU)

A joint venture almost always involves setting up a new company owned by
two or more partners, who contribute their assets (people, machinery, capital
and know-how). It is therefore recommended that before you set up a new
entity with an Indian partner, you as a foreign company do your due diligence.

In addition, drafting a memorandum of understanding (MOU) is very common

in India. Such an MOU ensures that all parties fully understand and agree on
the purpose, responsibilities and risks of the joint venture. It is a short
document without much legal jargon, which states what the tasks of both
parties are and lays down a roadmap for the future on the parties' intentions,
management structure and cost allocation.

Articles of Association (AoA)

Most joint ventures in India are structured in the form of private limited
companies. It is mandatory for a private limited to have at least two directors
and at least one director who is resident in India, i.e. someone who has resided
in India for a period of at least 182 days in the previous calendar year.

In a private limited, the Articles of Association (AoA) are a very important

document. The AoA are a requirement when setting up a private limited in
India and contain regulations for the internal management of the company.
The Companies Act 2013 gives companies the freedom to determine the content
of the AoA themselves. The AoA almost always contain a clause on the steps to
be taken in case of conflict or termination of a joint venture in case of an
impasse. It is therefore advised to spend time and thought in drafting the AoA
and not depend on a standard off-the-shelf concept.
LEGAL STRUCTURES PAGE 30

The Companies Act, 2013 requires every company to have an MOU and AoA.
The MOU and AoA are the charter documents of the company. As such, both
have to be filed with the Registrar of Companies (the Indian Chamber of
Commerce) of the province where the foreign company wants to establish itself.

Joint Venture Agreement (JV Agreement)

Once the MOU and the AoA have been drafted, the foundation for the joint
venture has been laid and the Joint Venture Agreement (JV Agreement) can be
drafted. This is a working document that explicitly focuses on what decisions
the partners can and may take on the shares, management structure,
withdrawal rights, competition issues, dispute resolution, intellectual property
rights and any warranties. The JV Agreement is a non-binding document and is
drafted purely to define the collaboration between and responsibilities of the
partners. Indian law gives parties sufficient flexibility to set out their own
arrangements in a final agreement.

The JV Agreement or other joint venture agreements necessarily require skill in

drafting the documents without room for ambiguity. Complicated and vague
documentation can be fatal to the joint venture and hinder the interest of the
parties. One issue that requires expertise is the exit strategy. The JV Agreement
establishing a joint venture should also include a planned exit strategy so that
all parties are protected once the partnership has achieved its purpose. Most
joint ventures are dissolved through a partner buyout. It is recommended to
include clear terms for terminating a JV in the agreement.

Once the parties have determined the key points for the JV Agreement, it is wise
to hand over the matter to a lawyer in India. Taking into account Indian laws
and regulations, he can convert the key points into the official Joint Venture
Agreement document.
LEGAL STRUCTURES PAGE 31

LIMITED STRUCTURES
There are two types of limited structures in India: the Private Limited (Pvt. Ltd.)
and the Public Limited (PLC). The Pvt. Ltd. is the most commonly chosen
corporate form by foreign companies and investors in India. A PLC is the legal
form for listed companies.

Private Limited Company (Pvt. Ltd.)

As mentioned earlier, a Pvt. Ltd. is the Indian version of a limited liability
company and is owned by private shareholders. It is one of the most popular
legal forms for foreign companies wishing to start independently in India as it
carries little risk. The Pvt. Ltd. is a separate legal entity and the shareholders or
partners are liable only for the share of the company they own. In addition, it is
one of the fastest business forms to set up and Pvt. Ltds. can benefit from tax
benefits for domestic companies.

Setting up a private limited company

To set up a Pvt. Ltd, a minimum of two shareholders and two directors are
needed. More shareholders may of course participate, but the maximum
number is fixed at 200.
The directors of the Pvt. Ltd. must meet the following conditions:
- Each of the directors must have a DIN, i.e. a director identification number,
issued by the Ministry of Corporate Affairs;
- One of the directors must be a resident of India, meaning he/she must have
resided in India for at least 182 days in the previous calendar year.

A name for the company must then be submitted to the Registry of Companies
(ROC). This name must contain the following three elements:
- Main name
- The activity to be carried out
- Mention of "Private Limited" at the end.
LEGAL STRUCTURES PAGE 32

Since you cannot check whether your chosen name is available, it is a

requirement that each company sends 5-6 names to the ROC for approval at the
time of registration. Also because the names submitted should not be very
similar to already existing companies. At the same time, a digital signature has
to be requested by which the company can guarantee the authenticity of
company documents.

Like a joint venture, a private limited company also requires mandatory

documentation to be prepared and filed. These include a Memorandum of
Association (MOA) and the Articles of Association (AoA). The MOA or
Memorandum of Association is a legal document that specifies the scope of
business activities of the Pvt. Ltd. and shareholding information. It is the most
important document of a company as it contains the objectives and
responsibilities of the company. Drafting an AoA in a private limited without a
partner is done in exactly the same way as explained in the case of the joint
venture. These documents must both be filed with the ROC.

Next, a PAN and TAN have to be requested from the ROC, which after approval
will issue the company registration, PAN and TAN at once. Now you can open a
bank account and establish a business location for you company. You also need
to re-register this information with the ROC. Setting up a Pvt Ltd, if you file
everything correctly, is one of the fastest processes to go through. You can
register a Pvt Ltd in seven days.

Finally, a Pvt. Ltd. must have and maintain a minimum capital of 100,000
rupees, which is about 1150 euros, during its existence.

Public Limited Company

A public limited company is a limited liability company that offers shares to the
general public. It is not advisable for foreign companies to get started in this
legal form in India, so we'll cover the features only briefly.
LEGAL STRUCTURES PAGE 33

As the name suggests, the liability of each shareholder is also limited in this
case. Thus, partners and company owners are not jointly and severally liable
for the company's debts. A public limited is strictly regulated and is required to
disclose the figure to shareholders on an annual basis. A public limited must
have a minimum capital of 500,000 rupees or about 5660 euros.

To set up a public limited, at least 7 shareholders are needed and the company
is required to have at least 3 directors. Then, the same steps need to be followed
as for a private limited.
FINANCING PAGE 34

FINANCING YOUR INDIAN BUSINESS

The various strategic options

As the Indian operations of foreign

companies grow, foreign
shareholders often struggle with
how best to finance these
operations, given India's restrictive
regulations.

We therefore cover a number of

strategic options for financing your
subsidiary in India.
FINANCING PAGE 35

Start-up capital
The financing options for your Indian company depend on the legal form of
your business in India. The most common legal forms are the Private Limited
(Pvt. Ltd) and the Joint Venture (JV) with an Indian company as co-owner. At
incorporation, the capital the company will start with is determined by the
number of shares issued. The minimum start-up capital of a company in India
is set by law at 100,000 INR (about 1175 euros). Many companies choose to put
in this minimum start-up capital, but putting in more capital at the outset can
solve financing issues in the future. This is because bringing in working capital
at a later stage is subject to more regulations.

Working capital
Do you need working capital in India? A quick and easy way to raise working
capital is to pre-invoice planned exports of products or services to the parent
company. The subsidiary may invoice services it provides or intends to provide
in the near future (pre-invoicing) to the European parent company. An
advantage of pre-invoicing is that it can quickly generate the necessary cash
flow for the Indian company. In the case of a joint venture with an Indian
partner, financing through (pre)invoicing depends on the agreements between
the two JV partners.

Loan for your Indian entity

Does your Indian subsidiary need capital to make investments in India? There
are several options for that, but none of them are easy, quick or cheap. The
subsidiary can take a loan from the parent company in Europe, but this is only
possible under a so-called External Commercial Borrowing construction (ECB).
Applying for an ECB is a bureaucratic and time-consuming process, but has a
big advantage: the interest rate on an ECB loan to an Indian party is based on
LIBOR + a premium of up to 300 basis points.

Financing through an Indian bank

You can also get a loan from Indian banks, but the enormously high interest
FINANCING PAGE 36

rates rarely make this option attractive or feasible. Interest rates on credit from
local Indian banks start at 10-12% and can easily rise above 15%. Only with a
cash deposit as a guarantee a lower rate can be negotiated in some cases.
Besides the sky-high interest rates, Indian banks routinely ask for collateral if
you want to apply for a loan. To organise the paperwork with the bank, you
need a local consultant. In addition, you pay the bank another administration
fee of 1% on average. With local banks, you can raise a maximum of 1-2 million
euros. If you need more capital, you can approach several banks at the same
time, which can provide a loan as a consortium. Of course, this only makes
obtaining the loan more complex and expensive.

In short, borrowing from an Indian bank is really only an option if the Indian
branch's cash needs are incredibly high and an almost certain and substantial
return on investment is going to take place by taking out the loan.

International development banks

What other options are there? For projects supported by the Indian
government, you can turn to development banks, such as IFC (World Bank) and
the Asian Development Bank. In addition, Chinese banks can be an option,
although these often impose the condition that the loan is spent on products or
services from Chinese (state-owned) companies.

Issuing additional shares

Finally, it is also possible to raise capital by issuing additional shares in the
Indian company. Increasing the share capital is a relatively sustainable, formal
and institutionalised way to grow the Indian subsidiary. Moreover, it signals to
the outside world that the parent company is serious about developing the
subsidiary's services or products in India. There are two drawbacks to this
route. Issuing new shares is a bureaucratic and time-consuming process and
thus cannot be arranged at short notice. Thus, in case of acute cash flow
problems, this does not provide relief. It might also affect the ownership of the
company, especially in JVs with Indian partners.
TRANSFER PRICING PAGE 37

TRANSFER PRICING

India's key TP regulations at a glance

It is probably no news to you that, as a

company, you need to comply with legal
rules on Transfer Pricing if you operate
in multiple countries. These rules were
drafted by the Organisation for
Economic Cooperation and Development
(OECD) to prevent companies from
dropping their profits in countries with
very low tax rates through ingenious
constructions, thus evading tax.

In India these intercompany

transactions are also closely monitored.
It is therefore essential for an European
company with cross-border
intercompany transactions to be well
aware of and comply with the Transfer
Pricing rules in India.
TRANSFER PRICING PAGE 38

Transfer Pricing (TP) are internal prices for supply of goods, services or
intellectual property rights within related companies. By having a transfer
pricing policy in place, it is made clear where the international company earns
its profits and in which countries those profits should be taxed. A transfer
pricing policy also clarifies how inter-company prices are established.

Transactions taking place between related parties must follow the so-called
arm's-length principle according to OECD guidelines. This means that the
transfer price between related parties must be equal to the price charged to
each other by independent parties in uncontrolled circumstances. It covers
transactions such as:
- the purchase, sale or lease of tangible or intangible property;
- provision of services;
- the borrowing or lending of money;
- any transaction affecting profits, income, losses or assets;
- mutual agreement between AEs for sharing costs and expenses.

Sections 92 to 92F of the Indian Income Tax Act, 1961 include guidelines for
calculating TP and the procedures to be followed for transactions entered into
between two or more companies belonging to the same group. Indian TP
legislation is largely influenced by OECD TP guidelines, but they are adapted to
specifically meet the needs of the Indian tax system.

Scope of Transfer Pricing Regulations

Transfer Pricing Regulations (TPR) apply to all companies entering into an
International Transaction or cross-border transactions with an Associated
Enterprise (AE). The aim is to arrive at an Arm's Length Price (ALP). This is a
transfer price equal to the price charged to each other by independent parties
in uncontrolled circumstances. In India, this would amount to Market Retail
Price (MRP). MRP is the maximum price charged by the manufacturer for a
product sold in India. However, retailers may choose to sell products for less
than the MRP.
TRANSFER PRICING PAGE 39

Arm’s Length Price (ALP)

The Arm's Length Price (ALP), or the transfer price that parties would have
charged if it had been a transaction between two unknown parties, must be
determined in India through one of the following methods laid down in law:
- Comparable uncontrolled price (CUP) method;
- Resale price method (RPM);
- Cost plus method (CPM);
- Profit split method (PSM);
- Transactional net margin method (TNMM);
- Other such methods.

In this regard, the Central Board of Direct Taxes has informed that 'such other
methods' can be any method that takes into account the price charged for the
same or similar transactions, with or between non-associated companies, under
similar circumstances and taking into account all relevant facts. None of the
methods is considered as prioritised by the Indian tax authorities. The most
appropriate method for the transaction is determined based on the nature and
class of the transaction or the persons and functions associated with it.

Associated Enterprise (AE)

A company is an Associated Enterprise (AE) if it participates in the management
of and/or has control over another company (as shown in the example on the
next page). Participation can be direct or indirect, or through one or more
intermediaries. Control is defined more broadly than having shares, voting
rights or the power to appoint the management of a company. Having debt and
control over various parts of the company's operations, such as over raw
materials, sales and intangible assets is also included in the legal definition.
TRANSFER PRICING PAGE 40

Transfer Pricing Documentation

In India there are documentation requirements for transfer pricing. It is based
on OECD guidelines and requires companies to prepare three documents:
- Master file: This is required to maintain information on the company,
including information on its financial and non-financial activities.
- Local file: This must contain all relevant information on intercompany
transactions of the company, in each individual country.
- Country by Country Report (CbCR): CbCR should contain information on
revenues, taxes paid and measures of economic activities in countries where
the company operates.
TRANSFER PRICING PAGE 41

In addition, it is also mandatory to obtain an independent auditor's report for

all international transactions between AEs. Information must also be kept on
the selection of the most appropriate method for determining ALP. Concerns
that remain below the threshold of 10 million rupees with international
transactions are not required to keep these records. But even in these cases, it
is imperative that documentation could be handed over to substantiate the
arm's-length price selected for the international transactions.

Burden of proof
The responsibility to determine the correct ALP lies with the taxpayer, or,
company. The ALP must comply with the applicable Transfer Pricing Law and
be supported by the prescribed documentation. If the tax officer considers that:
- the price charged in the international transaction has not been determined in
accordance with prescribed ALP methods;
- information and documents relating to the international transaction have not
been kept and maintained in accordance with the TPR;
- the information or data used to calculate the ALP is not accurate or reliable;
- the company failed to submit information or documents that it should have
submitted;
- the company has failed to provide information or documents it should have
submitted;
then it can reject the company's ALP and transfer the case to a Transfer Pricing
Officer (TPO), who will launch an investigation. If this reveals that the company
has failed to disclose certain income, the taxpayer's or ALP's reported income
may be adjusted to an amount consistent with the TPR. In many cases, a fine
will also be imposed. An overview of the fines for faulty transfer pricing in
India, can be found on the next page.
TRANSFER PRICING PAGE 42

Advanced Pricing Agreements (APAs)

The dispute resolution process in India is slow and very time-consuming.
Therefore, the government has introduced an alternative: the Advance Pricing
Agreement (APA). APA is a procedural agreement between the taxpayer and the
tax authority to avoid transfer pricing disputes by defining a set of criteria in
advance to be applied to specific cross-border controlled transactions within a
certain period of time and thus the ALP is determined in advance.

Unilateral APAs with the CBDT protect companies from India-initiated ALP
adjustments. It also helps in creating fiscal certainty, reducing litigation costs
and avoiding double taxation. However, the taxpayer must file an Annual
Compliance Report (ACR) every year. APAs can also be entered into bilaterally,
between two countries.
TRANSFER PRICING PAGE 43

Transfer pricing checklist

Indian tax authorities are cracking down hard on TP violations. Non-
compliance with current TP regulations results in fines and significant
interference in business operations by tax authorities. Regardless of size,
companies should pay close attention to ensuring that their international
transactions comply with India's TP guidelines, are robust enough to be audited
by tax authorities and are designed to mitigate unintended tax consequences.
Therefore, keep the following checklist at hand and make sure you are always
prepared:
- Do you know the arm's-length principle? Make sure you are familiar with TP
regulations in India to avoid being in the dark.
- Know how the arm's-length principle is calculated in India and whether your
intercompany pricing complies with current TP standards.
- Is your TP documentation in order? Create thorough documentation. Prepare
annual transfer pricing documentation where necessary.
- Review your policies regularly.
- Always be audit-ready. Typically, audits can go back 3-5 years, making it even
more difficult to have all the right paperwork in place at a moment's notice.
DIVIDEND PAYMENTS PAGE 44

DIVIDEND PAYMENTS

How to move funds smoothly

Besides investing in your Indian

company, you also want to know how best
to repatriate profits to the parent
company's home country.

While transferring corporate profits from

India is much easier than transferring
personal income, the appropriate
procedure depends on the type of entity
you have in India.

Since the (branch) office and private

limited company are the most common
legal forms, we will specifically look at
the options for these types of companies.
DIVIDEND PAYMENTS PAGE 45

Dividend repatriation from a Branch Office

All investments and profits of a branch office of a foreign company are
repatriable after all taxes are paid. The branch office must then submit an
application for profit repatriation to the Reserve Bank of India (RBI) along with
the following documents:
- Certified copies of the audited balance sheet and P&L statement for the year
from which the profit is distributed;
- Certified document from an auditor showing how the amount to be
transferred has been calculated;
- Confirmation that the entire income of the branch office comes from Indian
sources;
- Confirmation that all requirements of the Companies Act, 1956 have been met;
- Certificate from an auditor that the branch office has conducted its business in
compliance with the approval granted by the RBI;
- Certificate from auditors showing that sufficient funds have been set aside to
meet, or have already been met, all Indian tax liabilities;
- Declaration by the applicant that the profits earmarked for remittance do not
include profits from sources other than the operations of the branch office.

Besides profits, the transfer of liquidation proceeds from a branch office is also
allowed. The following documents must be submitted for this purpose:
- A tax exemption certificate from the Income Tax Department for the transfer;
- An audit certificate confirming that all debts in India have been paid in full or
adequate provisions have been made;
- An auditor's certificate that the liquidation is in accordance with the
provisions of the Companies Act, 1956;
- An auditor's certificate that no legal proceedings are pending against the
applicant or the company.

Dividend repatriation from a Private Limited Company

There are two ways in which profits from a Pvt. Ltd. in India can be repatriated
to the parent company:
- by paying out the profits as dividends;
DIVIDEND PAYMENTS PAGE 46

- or by buying back shares by the parent company.

Dividends are generally freely repatriable, as long as taxes are paid. This tax is
called the Dividend Distribution Tax (DDT). Private Limiteds do not need
permission from the RBI for the transaction, but it is mandatory to go through
an Authorised Dealer bank. There is also a list of 22 sectors for which
repatriation of dividends is subject to specific requirements. This mainly
focuses on food processing and applies to manufacturers of products such as
coffee and soft drinks.

Dividends may be repatriated at the end as well as in the middle of the year as
long as the DDT is paid. However, when paying interim dividends, the company
must have sufficient profit available to pay the dividend and have enough
money saved to pay Indian taxes. If that turns out that by the end of the year
the company comes up short, the directors could be held personally liable and
will be fined for paying interim dividends on the basis of misjudgement.

If you choose to repatriate the profits along with the capital through share
repurchases, this is allowed provided a 20% repurchase tax is paid on the
profits distributed to shareholders.
INDIACONNECTED PAGINA 47

WHAT CAN INDIACONNECTED DO FOR YOU?

The partner of Dutch business in India

Whether you are at the start of your adventure in India or looking for support
to improve your activities in the country, IndiaConnected always has the right
solution for your problem. We understand complex and difficult situations
that companies encounter in this sometimes complex country and know how
to solve them. Be it finance, tax, compliance issues or operational matters, we
will help you find the right solution and implement it.

Unsure about how best to enter the Indian market? Our

business incubator offers you a smooth market entry.
IndiaConnected offers you the opportunity to set up your office in India
quickly, easily and cost-effectively without having to register your own
entity. We call this the business incubator.

The business incubator is a low-threshold and cost-effective way to set up

your market entry in India. You get your own business with well-established
processes and structures, without the cost of setting up your own office. No
compliance costs, no audits, no transfer pricing, no registrations required.
You will easily save 1,000 to 2,000 euros per month. You have your own
employees on our payroll with well-established control mechanisms
(according to your needs). No costs for setting up your own entity, no share
capital needs to be brought in and all expenses can be included in the profit
and loss statement in your home country.

Of course, we can also help you set up your own entity in India (Pvt Ltd.), set
INDIACONNECTED PAGINA 48

up a partnership with an Indian company (joint venture) or support you

when you want to acquire an Indian company (M&A).

Need support for your already existing entity?

India is notorious for its bureaucracy and opaque tax system. At our offices
across India, we take care of all kinds of administrative matters for our
clients. We make sure you are compliant with India's constantly changing
legislation. We take care of the entire back office so that you can fully focus
on selling your products in India. IndiaConnected offers an all-in-one
package:

Are you not looking for a total solution, but rather support
for a specific problem? Then we always have the right experts
available for you.
IndiaConnected supports more than 100 companies a year with their
activities in India. Our experienced in-house team can therefore offer you
assistance in every field: Accounting, Taxation, Supply Chain, Legal &
Regulatory, Human Resources and IT.
INDIACONNECTED PAGE 49

Our people not only have years of experience in successfully guiding

European companies into the Indian market, but also possess the necessary
local knowledge and speak the language. They can give your company a
push in the right direction in many ways.

For instance, is your Indian entity not showing the desired results, but are
you not doubting your business strategies? Our local experts always find the
weak spot through our corporate restructuring process.

Or are you looking for someone who can strengthen your organisation with
knowledge of your sector and of India? Many of our Senior Managers join
the Board of Directors of the Indian branches of our clients as resident
directors to make these organisations more robust and successful.

We also have an extensive pool of experienced local CEOs, CFOs and CCOs
who can get your Indian branches up and running quickly. They can operate
effectively, understand both the Indian and the European business culture
and are 'hands on'.

THE PARTNER OF EUROPEAN BUSINESSES IN INDIA