For most of the sectors, foreign direct investment (FDI) is allowed in the company as well as LLP in India, under the automatic route of approval. When we say the automatic route of FDI, it means that the investment in the equity share capital of the company or as a contribution to an LLP is made without seeking any prior approval, however, after the incorporation of the company the share capital is to be remitted in the Bank Account of the company or LLP from the foreign bank of the investor/shareholder. Though there are some similarities in bringing FDI whether you incorporate a company or LLP which are as follows:
1. No difference in reporting requirements under FEMA
After the remittance is made the Indian company or LLP has to file Form FC-GPR to the RBI through AD Banker. On the contrary, if the investment is not available through the automatic route then before the incorporation of the company or LLP, prior approval is required from the Central Government.
There is no difference in reporting requirements, whether the investee entity is a company or LLP. After incorporation of the company or LLP, the capital amount should be paid by the investor by way of inward remittance through banking channels or out of funds held in NRE or FCNR(B) account maintained in accordance with the Foreign Exchange Management (Deposit) Regulations, 2016.
2. No difference in Accounting & Tax Compliances
From the compliance point of view, the LLP and company both have to comply with the same accounting & tax compliances in a similar manner.
However, if you are confused whether to incorporate a company or LLP, analyze the significant differences as mentioned below in formation of company & LLP before incorporating:
3. Significant Differences in LLPs & Companies
Reporting requirements under Companies Act, 2013
1. Annual Compliance in Case of a Company
All companies are required to maintain various statutory registers, file annual returns, conduct meetings for corporate actions, among other compliances as follows:
2. After the conclusion of the AGM, the company has to file the following annual returns to the registrar of companies within its due date with the prescribed filing fee.
3. Annual Compliance in Case of an LLP
An LLP is required to get their books of account audited only when the turnover during the previous year has reached INR 40,00,000 or the capital of the LLP is INR 25,00,000. In all other cases, the statutory audit is not required. apart from the statutory audit, the LLP following are the returns which have to be filed before the ROC
1. Form 11:This is the annual return of the LLP to be filed before 30th May for the year ended on 31st March of the year.
2. Form 8:This is the report of the financial statement to be filed before the ROC before 30th October.
4. Tax Benefits
Difference in Taxation in the hands of Shareholder/Partner-
LLPs enjoy a slightly beneficial tax regime compared to companies since share of profit paid to partners is not subject to tax in the hands of the partners (domestic or foreign). Whereas dividend paid by a company is subjected to tax in the hands of the shareholders. This is close to 20% savings when compared with the applicability of tax on dividends on foreign shareholders of companies.
Difference in Taxation of Company & LLP
LLPs are at a disadvantage with respect to tax on profits since they are taxed at a higher rate of 30-34% on their profits in India, compared to a company which is taxed in the range of 25-28%. But this seeming disadvantage could also be used to an FI’s advantage depending on its tax jurisdiction. Although Indian tax laws consider an LLP as a separate legal entity, in certain jurisdictions an LLP is considered as a pass-through vehicle for tax purposes. Due to this, any income earned by the LLP in India would be treated as the foreign controlling partners direct income. To that extent, the FI could also claim the tax paid in India on the LLP’s profits as a set off against their collective tax liability in their home jurisdiction. Hence, FIs should assess the tax implications in their home jurisdiction and preferably invest through a special purpose vehicle in a jurisdiction that offers the best tax advantage.