Ideal Structure for Holding a Commercial Property in India from USA

For a foreign entity to hold a commercial property in India, there are broadly 2 options.

Option 1- Choose the LLP route i.e. set up a Limited Liability Partnership in India exclusively to hold, sell, and receive profits from the asset.

Option 2- Setting up a Private Limited Company in India with the same objectives. Both have different tax implications and compliance requirements that must be followed.

This guide will take you through the important facts of both structures:

Nature of Structure:

Limited Liability Partnership (LLP):

1. An LLP is relatively easier to set up with an approximate period of 4 weeks until it is up and running.
2. However, Local Corporate Governance is non-existent, i.e. all the responsibility and exposure will be that of the foreign company.
3. It is far easier to wind up.
4. The funds for the business will be through the Partner’s Capital.
5. Requirement of a resident designated partner to be appointed as per Section 7 of the LLP Act. In the absence of corporate governance, it is difficult to contain the powers of the Indian partner.
6. Nominal MCA fees up to 15k shall be applicable on incorporation.

Private Limited Company (Pvt Ltd Co):

1. A private limited company will require extensive paperwork to set up with a period of around 6 weeks until incorporation.
2. There is Local Corporate Governance here which will allow the responsibility and exposure to be shifted and restricted to the company’s local directors.
3. The company will require a 2-year holding period before winding up.
4. Funds shall be infused through the share capital of the company; which would mean additional cost.

Funding India entity:

1. External Commercial Borrowings (ECB): Essentially debt from the holding company, ECBs are not allowed to be extended to LLPs.In India, private limited companies are not allowed to raise ECBs with the end use being the purchase of immovable property.
2. Funding to an LLP: Infusion of funds by way of capital from partners which can be returned without any income tax or dividend tax.
3. Funding to a Pvt Ltd: Infusion of funds by way of subscribing to share capital. The same can be returned to the extent of infusion without any tax on the closure of the company.

Tax Implications:

1. The property is rented out: In the case of an LLP renting the property out, if the gain is more than INR 10 million, the income tax rate will be 34.95%; otherwise, it will be 31.2%. In the case of a Pvt Ltd Co renting out the property, a tax rate of 25.17% will be applicable. In both cases, standard deductions and other deductions will be allowed.
2. Property is sold up to 24 Months of Possession: If an LLP sells the property within 24 months of possession if the gain is more than INR 10 million, the income tax rate will be 34.95%; otherwise, it will be 31.2%. In case of a Pvt Ltd Co selling the property within 24 months of possession, a tax rate @ 25.17% will be applicable, and Short Term Capital Gain deductions are allowed.
3. Property sold after 24 Months of Possession: In case of the property being sold after 24 months of possession, the LLP will be taxed at a rate of 14.56%, assuming the gain is more than INR 10 million. A Pvt Ltd Co will be taxed at a rate of 14.3%.

Repatriation:

LLP: An LLP may repatriate its post-tax profit without any further payment of tax.

Pvt Ltd Co: Dividend is taxable in the hands of shareholders at approx 21-22%, however as per the Double Tax Avoidance Treaty (DTAA) between India and US, there is a withholding tax of 15% which makes the effective tax on dividends 15%. However, full credit for this tax is available in the USA.

Further, the capital can be repatriated without payment of dividend tax by choosing to wind up the company, however, the management would have to wait for a statutory period of 2 years before they are eligible to wind up the company.

Conclusion

The form of structure most beneficial to your entity may be heavily dependent on several factors highlighted above such as the management structure, legislature of the home country, and the nature of business in India. To give a definitive conclusion would be impossible without analyzing several different Acts and laws together.

However, at KDP Accountants, our team of experienced professionals helps customers navigate the Double Taxation Avoidance Agreement (DTAA), maximize tax savings on global income, filing your tax returns in India and outside, and help you manage the complexities of understanding and planning through several books of legislature together.

From offering personalized advice to managing regulatory compliance, trust us to simplify your tax journey and secure your financial future.

If you have any specific queries on the topic or need assistance with managing not just your tax liabilities and ensuring compliance with Indian tax regulations but also structural planning and advisory, contact our experienced tax planning experts at enquire@kdpaccountants.com .

Disclaimer:

This note is prepared based on the facts provided by the client and prevailing tax provisions in India as of the current date. It serves as a guide to evaluating possible tax liability and does not constitute a formal opinion. The note is strictly confidential and intended solely for internal use by the company. It does not cover tax implications in the USA, which must be assessed separately. Any amendments may be made if new or updated information is provided.

Yuvan Kamdar
Author

He is a student pursuing a Bachelor of Commerce degree in Mumbai, specializing in foreign exchange laws, and is currently working with KDP.