A limited liability partnership (LLP) is often considered by foreign investors for professional services, consulting and other businesses that do not need a share structure. FDI in an LLP is allowed, but the rules differ from those for a company, and several practical points are missed at the setting-up stage.
1. When can a foreign investor be a partner?
Under the FEMA (Non-Debt Instruments) Rules, 2019, an LLP can accept foreign investment under the automatic route only in sectors or activities where 100% FDI is permitted under the automatic route and there are no FDI-linked performance conditions. If the sector needs government approval or carries performance conditions, an LLP cannot be used on the automatic route. Check the sector before choosing the vehicle.
2. How does the foreign investor contribute?
An LLP has no shares. The investor makes a capital contribution and acquires a share in profits. The contribution must be received through banking channels, and the consideration for a transfer of a partner's holding must follow the pricing guidelines, which require fair value supported by a valuation report from a chartered accountant, a cost accountant or a merchant banker. An LLP with foreign investment can also make downstream investment, but only in sectors with 100% automatic route FDI and no performance conditions.
3. Designated partners and nominees
Every LLP needs at least two designated partners, who must be individuals, and at least one of them must be resident in India, meaning present in India for at least 120 days in the previous year. A company that is a partner cannot be a designated partner itself. It acts through an individual nominee, and the Act does not restrict a corporate partner to a single nominee. Each nominee needs a DPIN, must give prior consent, and should be authorised by a board resolution of the corporate partner. Changes are reported to the Registrar on Form 4 within 30 days.
4. Reporting under FEMA
Receipt of capital contribution and transfers between residents and non-residents are reportable. The reporting used to be through Forms LLP-I and LLP-II, and it now runs through the RBI's reporting portal. Watch the timelines (30 days from receipt of funds for the first report, and 60 days from a transfer for transfer reporting), because delays attract late submission fees.
5. Tax points
An LLP is taxed as a firm at a flat rate with surcharge and cess, and it is subject to alternate minimum tax in some cases. The partners' share of profit is not taxed again in their hands. There is no dividend distribution step, which makes profit repatriation simpler. Transfer pricing applies to transactions between the LLP and its foreign partners, and a foreign partner's presence can raise permanent establishment questions in its home country.
6. Points to settle in the LLP agreement
- Capital contribution, profit and loss sharing and any change in these on admission or exit of a foreign partner.
- Who the nominees are, how they are replaced, and how long they stay.
- Decision rights of foreign partners, including reserved matters.
- Exit mechanism and the price formula, consistent with FEMA pricing rules.
Conclusion
An LLP can work well for a service business with foreign partners, provided the sector qualifies and the paperwork is complete from day one. Confirm the sector rules, valuation, nominee appointments and the reporting calendar before the first remittance arrives.
This article is for general information and is not professional advice. Please verify the current FDI policy, FEMA rules and Registrar requirements before acting.
The author is a Partner at A2 Consultants, Hyderabad, which advises foreign companies on entering and operating in India.
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