What it takes to float an offshore company

A resident individual is not among entities eligible to incorporate a foreign company, but resourceful people find a way around

The expose last month by the International Consortium of Investigative Journalists showed that hundreds of Indians were shareholders and/or directors in companies incorporated in distant islands across seven seas.

Obscure names from small town India brushed shoulders with non-resident corporate honchos in the database that threw up as many as 498 results for the search India.

Is it so easy to float a company abroad? Does it save you a lot of money in taxes? How much does it cost? Business Standard explores.

By the Reserve Bank of India (RBI) guidelines under the Foreign Exchange Management Act, individuals are not recognised as a class of eligible investors allowed to float a company in a foreign country.

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However, there is a liberalised remittance scheme (LRS) available under which individuals can send up to $200,000 (Rs 1.2 crore today)  each year abroad under self declaration. The same also includes making investments in equities as portfolio investments.

“Though the scheme prohibits setting up companies abroad, many individuals and advisers are making use of this LRS route to acquire companies abroad. According to them, setting up is incorporation while acquiring is transfer that they interpret is permitted in law,” said Chander Sawhney, vice-president, Corporate Professionals, a New-Delhi-based corporate and legal services firm.

The capital requirements are not much for floating an offshore company in the tax havens. “In some places, this could be as little as $1,” Sawhney said.

Most countries require compliance of know your customer (KYC) norms and some even ask for the source of funds in case of acquisitions.

“In some jurisdictions, the KYC norms are more liberal than others,” said a merge and acquisition expert with a leading consultant.

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But legal intermediary and advisory services are not available over the counter for everyone. Private banking and wealth management arms of leading banks offer such services to the high net worth customers.

This is where often the line is drawn. These services look for customers with deep pockets may not offer services to people with investible surpluses of $1 million (Rs 6 crore today).

Some of the local banks and wealth managers have lower threshold for investments but their wherewithal in pulling off these multinational transactions may be suspect.

Experts said there might be misuses of the bilateral agreements between India and other countries by offshore entities that invest back in India to avoid taxes.

The most common use is for avoidance of capital gains taxes by routing investments through offshore entities located in tax heavens such as Mauritius, British Virgin Islands, etc.  

“Money is fungible. It’s difficult to establish trail if investments are routed through multiple layers. Most illegal activities happen this way. That does not mean all investments from these tax havens are round-tripped or illegal money,” said the consultant.

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RBI, in general, discourages such round-tripping of money, which is routed solely for the purposes of misuse of any bilateral investment benefits extended to investors from other countries.

RBI also prescribes guidelines on overseas direct investment and anti-money laundering standards under the Prevention of Money Laundering Act issued from time to time. Anyone who is trying to own such foreign companies need to keep these in mind before venturing into this activity. “The essence is that the transaction should be legitimate,” said Sawhney.

While remittances by individuals are capped at $200,000, if you are looking at a larger investment abroad, the company or partnership route can be explored.

Currently, a company incorporated in India, a body created under an Act of Parliament and a partnership firm are eligible to invest outside India in accordance with Overseas Direct Investment (ODI) Regulations.

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Such eligible entities are allowed to invest up to 400 per cent of their net worth in a joint venture or a wholly owned subsidiary abroad.

RBI allows eligible entities under ODI regulations/guidelines to open bank accounts abroad in the name of the overseas entity in which investment is made.

Money can be freely transferred without any prior approval (except in cases covered under approval route) to the overseas bank account of the investee company through normal banking channels.

Post-transfer compliances need to adhere to, which include reporting to RBI through the authorised dealer bank of such transfer and submission of annual performance report, etc.

In case of non-resident Indians (NRIs), no transfer of money takes place from India so these provisions are not applicable to NRIs. They have to abide by the laws of country of their residence.