You will always find Indians in the remotest parts of the world. Many families and businesses relocate overseas for business expansion, diversification of wealth or simply to live with children studying or working overseas. Overseas relocation has particularly picked up pace after the pandemic as well-placed families realise the need to have a base overseas too.
The entire process of relocation involves multiple things to be taken care of, including your own cherished business, which you may have established in India in your 20s or 30s. Selling your business and encashing its inherent value is certainly an option before you relocate. Yet, if you are passionate about your business with no intention to sell it, here are some tips that will help you navigate the different tax and regulatory aspects which must be taken care of while carrying on business in India post relocation.
Continuity of the entity
Your overseas relocation generally does not impact the continuity of the entities in India – be it a company, Limited Liability Partnership or a partnership firm. However, it may impact the operations and transactions with the entity. For instance, any further investment made by you in your company or LLP must comply with the sectoral and pricing guidelines applicable to non-residents making investments in an Indian entity. Further, any additional capital contribution in a partnership firm can be made only on a non-repatriation basis.
Regulations further provide that an entity incorporated in India (a company or an LLP) must have at least one resident director or managing director. In case you are relocating overseas and become a non-resident in India, you must appoint a resident nominee to be in charge of the entity.
Residential status and your Indian business
Once you relocate overseas, your residential status in India changes. For the purpose of foreign exchange regulations or Foreign Exchange Management Act (FEMA), you would become a non-resident right from the day you leave India for permanent settlement overseas. As a non-resident, you can still continue to hold stake in your company as well as other investments in India. In the future, if you make any new investments in your company, including capital or debt infusion, you must check compliance with the Foreign Direct Investment (FDI) and External Commercial Borrowings (ECB) guidelines. For instance, investment in some sectors requires regulatory approval if it exceeds the sectoral cap (eg. 51% in multi-brand retail).
The Indian income tax regulations have a different concept of residence. You may be considered as an ordinary resident, not ordinary resident or a non-resident based on the number of days you have spent in India – in a particular year and in the previous years. Your income is taxed in India based on (a) your residential status or and (b) the source of income in India. When you relocate overseas, there may be no change in taxability of income from your Indian business, i.e., your Indian business continues to be taxed in India as it is established in India. However, when you cease to be an ordinary resident in India, your foreign businesses are alienated from Indian and not taxed in India. Hence, you must maintain the status of a non-resident in India by restricting your Indian visits to 120 days in a year (182 days in certain cases).
Residential status and overseas businesses
Many businesses have operations in multiple countries. These entities often function in tandem and have transactions with group entities across the world. Non-resident individuals are not taxed in India on their income from overseas businesses. However, if you are considered a not ordinary resident depending on your days of stay in India or your Indian citizenship, overseas businesses may be exposed to tax in India if they are controlled from India. This possibility can be mitigated by ensuring that business operations or directors’ meetings are not conducted during your Indian visits.
Another important aspect is the reporting of foreign businesses, assets and investments in the Indian tax return. Ordinary residents must disclose their foreign assets and liabilities at the time of filing their tax return in India. Non-residents and not ordinary residents are not required to disclose their foreign assets in India. Thus, when you relocate overseas, and cease to be an ordinary resident (global income of an individual is taxed in India if he/she is an ordinary resident in India), your foreign assets and liabilities are alienated and are not required to be reported in India.
Compliances in India
Your Indian business (company, LLP or a partnership firm) would continue to be governed by the applicable laws, i.e., all Indian regulations pertaining to direct and indirect tax, stamp duty etc. would continue to apply. There may be certain additional compliances to be taken care of. These include:
Reporting at the time of receipt of foreign investment and annual reporting under FEMA;
Transfer pricing study and reporting under income tax in respect of international transactions between the company and its related parties like promoters, directors or group entities.
Beneficial tax rates
Your Indian business would continue to be taxed at the rates applicable to the entity – whether it is a company, LLP or a partnership firm.
At a personal level, when you earn a dividend from your Indian company, you would be entitled to beneficial tax rates under the tax treaty between India and your new country of residence. For instance, if you are relocating to the US and become a non-resident, any dividend income from your Indian business will be taxed in India at 25% (15% in certain cases) as per the tax treaty, as compared to slab rates which could be as high as 42.74%. Similarly, tax treaties also provide beneficial tax rates for income in the nature of interest, royalty and technical or professional fees received from India.
Besides the beneficial tax rates, you can also claim a tax credit for tax paid in India in your new country of residence. In most cases, the possibility of double taxation is mitigated.
The way forward
As families expand, different branches of the family tree grow in different nations. Businesses scout for new markets for expansion. Needless to say, global spread is inevitable. You can make the transition smooth by choosing the right investment advisors who can support you in continuing your Indian business from overseas.