Why do ordinary Indians find it difficult to invest outside the country? That’s because of the tax collected at source (TCS), which applies on remittances above ₹7 lakh in a year. The TCS rate was hiked from 5% to 20% in Budget 2023. Indian residents are also subject to a limit of $250,000 on remittances under the Liberalised Remittance Scheme (LRS) per year. But, where rules are concerned, there is always some loophole that can be exploited. And, incorporating a Limited Liability Partnership (LLP) offers a way around these restrictions. Needless to say, this can only be done by high networth individuals or wealthy families.
LLPs are permitted to invest abroad via two modes: overseas direct investments (ODI) and overseas portfolio investments (OPI). The restriction on ODI is a maximum of four times the net worth of the LLP. In case of OPI, the limit is 50% of the LLP net worth. Besides, there is no overall cap of $250,000. Nor does TCS of 20% apply.
Here’s how it works. Let’s say you incorporate an LLP. Do note that incorporating an LLP requires at least two people as partners. You can hold 99% stake in the LLP and the remaining 1% can be held by your spouse or a trusted friend. You then infuse ₹1 crore of your money into the LLP. Alternatively, you can use the LLP as a vehicle to pool money from investors and infuse capital from various investors. You can then remit this money for investing in overseas stocks.
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Since this LLP is registered as an ‘Indian entity’ as per the Reserve Bank of India (RBI) circular of August 2022, it is not subject to the usual LRS rules and TCS on remittances above ₹7 lakh. However, the benefits of slab-wise taxation that individuals get is not applicable to an LLPs and its income will be taxed at a flat 30%. So, for example, if you get dividends or capital gains on your investments, the LLP will have to pay 30% tax.
LLPs lose out on slab-wise tax benefit available to individuals but only till gains are less than ₹1 crore. “An LLP is taxed at a flat rate of 30%. If income exceeds ₹1 crore, surcharge rate for individuals varies with the income level and can go as high as 37%, but an LLP is subject to a flat surcharge of 12%. Accordingly, the highest effective tax rate applicable on an LLP would be around 35%; however, for individuals, this may go over 42% in certain cases. The tax impact tilts in favour of an LLP at about ₹2 crore. That said, this route of overseas investment is largely relevant for HNIs, for whom income below ₹2 crore and consequently slab rates available for individuals would not have much relevance” said Vishwas Panjiar, Partner, Nangia Andersen LLP.
The aforementioned RBI circular essentially offers a tax-efficient method to create a global portfolio. Note that only LLPs can work for this purpose since a company with more than 50% of revenues or assets from investments can come under the ‘deemed NBFC’ rules of RBI. There are some minor costs associated with the incorporation of LLP. However, these costs are negligible, said experts.
Another benefit of this route seems to be investing in overseas PE/VC funds. “The definition of ODI includes investment in all unlisted foreign securities, irrespective of control. Even investment less than 10% of an unlisted entity’s shares is treated as ODI. Things get interesting when you consider offshore private equity/venture capital funds. Resident individuals ordinarily cannot make overseas direct investments in financial services firms (and this also means funds run and operated outside India). However overseas portfolio investment (OPI) by Indian entities is allowed in such firms provided the shareholding is less than 10% in such an entity and there is no control exercised by the Indian entity,” said Vanishri Shankarnarayana, Partner, Acer Tax and Corporate Services LLP, a Bengaluru-based lawyer specializing in FEMA.
“There are certain expenses involved in forming an LLP but these can come to just a few thousand rupees. Apart from this, the LLP needs to file its overseas holdings details with RBI every year. An annual audit is also required and the LLP has to disclose all overseas holdings in Schedule FA of its Income Tax Return (ITR). However, the benefits of using the LLP can outweigh such things,” said Ajay Rotti, founder, Tax Compaas.
There are restrictions on the assets that LLPs can invest in. “The LLP cannot invest in overseas real estate, gambling or entities that invest in India (round tripping). However, derivatives have not been prohibited, which conventional LRS prohibits. Families were earlier using this route to invest in crypto companies or assets using this as an intermediate holding entity,” he added.
LLP to GIFT City
The government has introduced a new entity—Family Investment Fund (FIF)— in GIFT City, that can be used to route a family’s global portfolio from GIFT. A tax holiday of 10 years applies on the business income of such FIFs and, as per some experts, this can also include income from portfolio investments. Yet, there is a risk of this being challenged by the income tax department. Getting money into GIFT City via the conventional LRS route is subject to the $250,000 cap and TCS of 20%. However, wealthy families can use LLPs to fund an FIF in GIFT City. An FIF needs to have a minimum corpus of $10 million ( ₹82 crore) and this cannot be met using the conventional LRS cap unless you have a very large family.
While the RBI circular seems to offer a loophole to the stringent rules under India’s LRS, it may be plugged at some point, said experts. Families using this route must comply with all the norms laid down in the circular..