- Our Case study involves two Assessee. Assessee 1 is a US Resident but has stayed in India for more than 182 days in FY 2024-25, making her a Not-Ordinary Resident in India in FY 2025-26.
- Assessee 1 plans to incorporate an entity in the UAE along with Assessee 2 Ordinary Resident in India.
- Assessee 1 has been earning income from house property in India, and Indian Income Tax Returns have been filed in previous years disclosing the same. Assessee 1 also owns a limited liability company in Delaware, US.
Transactions involving non-resident investors may include complex reporting requirements in the context of compliance with the Foreign Exchange Management Act (FEMA). One such scenario arises when multiple resident shareholders sell their equity stake in an Indian private limited company to a non-resident buyer. This process necessitates multiple FCTRS (Foreign Currency Transfer of Shares) filings, making documentation and coordination challenging.
In this article, we explore an efficient approach to streamlining the FCTRS filing process ensuring timely compliance, and reducing the possibility of late submission costs.
The decision to incorporate an entity in the UAE shall lead to several important queries relating to reporting requirements and tax compliance:
Global income, i.e., income earned in India as well as abroad, is taxable in the hands of an assessee who is an ordinary resident. However, for a non-ordinary resident (RNOR), only income arising or accruing in India is taxable.
Since Assessee 1 is an RNOR for FY 2024-25, foreign income may not typically be taxable in India. However, in consultation with a professional tax advisor for accurate compliance, such as income and other factors, should be carefully evaluated.
Foreign assets are required to be disclosed by an assessee who is an ordinary resident.
Indian assets and liabilities are required to be disclosed by any assessee whose income exceeds 50 Lakhs, irrespective of the residential status. In the given case, only if Indian income crosses this threshold, disclosure of Indian assets may be required. For an RNOR, disclosure requirements for foreign assets can be based on income type and changing regulations.
We advise a customized evaluation to determine if and what disclosures are applicable.
As per Section 6 of the Income Tax Act, 1961, a company is said to be a resident in India if its place of effective management is in India. The Place of Effective Management (POEM) is an internationally recognized test for the determination of residential status. Place of decision-making, people engaged in making key managerial and commercial decisions, and where active business takes place are the factors taken into consideration while determining POEM.
It is to be noted that, while determining POEM, it is the substance that matters more rather than the form, as a place where the decisions are made is more crucial than the place where the same are implemented.
Since Assessee 2 is an Ordinary Indian Resident and a partner in the entity in Dubai, there’s a risk that Indian authorities may treat the Dubai entity as managed from India, leading to tax implications. To ensure proper compliance and structuring, expert advice is recommended.
Hence, the active business should be conducted overseas for the entity to escape from being a resident in India and end up making UAE income subject to Indian taxes. One can escape POEM applicability, companies may consider structuring their operations and decision-making processes in accordance with international tax standards. It is to be noted that POEM is a very thin line and might get crossed if special attention is not focused thereon, leading the foreign income to be taxable in India due to the residential status of the key managerial personnel of the foreign entity.
Overseas Direct Investment (ODI) by a person resident in India is governed under the Foreign Exchange Management Act (FEMA). The process involves various compliance requirements at different levels, such as annual filings, document submissions, and investment reporting.
Documents Required:
Depending on the nature of the foreign investment and remittance structure, a few documents such as:
- Incorporation papers of a foreign entity.
- Investment Agreements.
- Banking details may be required.
Additional documents might be necessary based on the specific case requirements, sector, and investment route involved. For a complete checklist, it’s advisable to consult with professional advisors, You can reach out to KDP Accountants for personalized assistance at enquire@kdpaccountants.com.
At KDP Accountants, we provide tailored tax planning strategies for NRIs. We offer comprehensive guidance on managing international assets, tax efficiency, and compliance with Indian tax regulations.
