FEMA Regulations for Indian Residents: Setting Up a Business in Dubai

Expanding business overseas is an exciting opportunity. Indian residents who want to setup a company in Dubai must be aware of the regulatory framework under the Foreign Exchange Management Act (FEMA), 1999. The RBI governs outbound investments, money remittances, and compliance requirements to ensure foreign transactions comply with Indian laws.

What is ODI, and when is Reporting Required?

Any decision by an Indian resident, whether an individual or a business, to invest in a foreign company may be covered by Overseas Direct Investment (ODI). This includes investments in unlisted equity or subscribing to the Memorandum of Association (MOA). Depending on the type of transaction and its structure, these investments are permitted under the Automatic or Approval route.

Reporting to RBI is triggered as soon as the investment is committed, often on the day of signing the MOA. Filing is done through the Authorized Dealer (AD) bank, and a Unique Identification Number (UIN) must be obtained.

Key FEMA Provisions for Overseas Business Investments:

ODI Limits for Indian Entities:

1. According to the most recent audit financial statements, Indian businesses are permitted to participate in overseas ventures up to a certain percentage of their net worth.
2. An Indian entity can invest in a foreign entity engaged in financial services, subject to prescribed conditions.
3. Complex structures resulting in more than two layers of subsidiaries are not permitted.
4. Deferred consideration is permissible for the acquisition of shares/disinvestment.

Investment Limits and Restrictions:

1. Up to a certain proportion of their net worth, Indian entities are permitted to invest with additional approvals required beyond this threshold.
2. The Liberalised Remittance Scheme (LRS) permits investments by resident individuals, which allows remittances up to a maximum of 250k USD annual limit.
3. Prohibited sectors include real estate activities (except for development projects), gambling in any form, and trading in financial instruments linked to the Indian rupee.

Repatriation and Reporting Requirements:

1. Any income or profits from overseas investment must be repatriated to India within a specified timeframe.
2. Investors must comply with the Annual reporting requirements to the RBI.
3. Failure to submit required forms within the prescribed timeframe may attract late submission fees.

Income Tax Implications:

1. Any business with having place of effective management (POEM) as India will render its income earned (wherever in the globe) liable for tax in India. This is subject to exemptions and regulatory guidelines.
2. There would be ‘transfer pricing’ applicable to all transactions between the Indian entity and the Dubai entity.
3. A Dubai company could be liable to 9% corporate tax, subject to many exemptions available.

Mainland Vs Zone company:

1. Companies desirous of carrying out local business within the UAE would be mandated to operate out of mainland Dubai . However, companies desiring to carry out global business out of a Dubai entity can be set up in a Free Zone.
2. Dubai offers multiple options of zones where companies could be set up. One may choose an appropriate zone based on Visa requirements, the kind of bank account required, the nature of the activity, and costs.

Conclusion:

Setting up a business in Dubai as an Indian resident requires strategic planning and compliance with FEMA guidelines. The regulatory framework permits global expansion, but to avoid potential issues, investors ensure adherence to reporting, fundraising, and investment limits.

For professional guidance on Foreign Exchange Management Act (FEMA), Overseas Direct Investments (ODI), or related matters, feel free to contact us at enquire@kdpaccountants.com. We are here to help you navigate the regulatory landscape with clarity and confidence.

The above note is subject to further study and clarification. This note does not form an opinion from our end and before taking any decision based on the above, it is recommended to consult our experts on the subject. Kamdar, Desai & Patel will not be liable for any damages (including, without limitation, damages for loss of business projects, or loss of profits) arising in contract, tort, or otherwise from the use of or inability to use this article or any of its contents, or from any action taken (or refrained from being taken) as a result of using this article or any such contents.