FEMA & Cross-Border Transactions
FDI compliance, ODI regulations, cross-border fund flows, transfer pricing, FEMA reporting, and repatriation frameworks.
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Overview
GCCs bridge parent and Indian operations through complex cross-border flows—equity (FDI for capitalization), debt (ECB, parent guarantees), service fees (cost-plus repatriations), dividends. FEMA 1999 regulates foreign exchange transactions. FDI automatic route permits 100% in IT/ITES sector without government approval. Service fee repatriations require transfer pricing compliance and withholding tax (10-15% on royalties, 40% on technical fees if no treaty). Form FC-GPR filing within 30 days of FDI. Downstream investment (GCC investing abroad) requires RBI approval if parent ownership <50%.
Key Considerations
FDI compliance: automatic vs approval route, Form FC-GPR within 30 days, fair value pricing
ECB regulations: all-in-cost caps (450 bps over benchmark), end-use restrictions, hedging
Service fee repatriation: transfer pricing documentation, withholding tax 10-40%, Form 15CA/15CB
Dividend repatriation: subject to DDT (nil post-2020), withholding tax 20% (10% under treaties)
FEMA reporting: FC-GPR (FDI), FC-TRS (property), LEC (downstream investment), timelines critical
ODI regulations: GCC investing abroad requires RBI approval, financial commitment <400% net worth
Regulatory Framework
FEMA 1999 & FDI Policy 2020
Foreign investment frameworks and exchange controls. Automatic route: 100% FDI in IT/ITES without government approval. Form FC-GPR filing within 30 days of funding to RBI via FIRMS portal. Pricing: fair value determined by DCF or comparable transaction methods per Valuation Rules. Repatriation: dividends, capital gains, liquidation proceeds subject to tax clearance (Form 10F from chartered accountant). Downstream investment: if GCC invests abroad, requires RBI approval if parent ownership <50% (deemed ODI). Sectoral caps: e-commerce marketplace 100%, B2C e-commerce 100% automatic but FDI-funded entity cannot sell own inventory directly.
External Commercial Borrowings Master Direction 2019
ECB framework for debt funding. Eligible borrowers: IT/ITES companies can raise ECB for working capital, capex, general corporate purposes. All-in-cost cap: 450 bps over 6-month LIBOR/SOFR for 3-5 year tenor (lower tenors higher spread permitted). Minimum maturity: 3 years for loans, 5 years for bonds. Mandatory hedging: 70% of exposure if unhedged exceeds USD 10M. Automatic route: up to USD 750M per financial year for IT sector. Reporting: Form ECB within 7 days of drawdown. End-use restrictions: cannot use for real estate, equity investments (except subsidiaries). Prepayment: permitted with RBI approval if within 6 months of drawdown (scrutiny for round-tripping).
TCL Framework Application
Technical Dimension
Structuring cap table for multi-round FDI. Valuation methodologies: DCF (discount rate WACC 12-18%, terminal growth 3-5%), comparable transactions (recent IT sector deals, revenue multiples 2-5x). Documentation: SHA (shareholder agreement with drag/tag rights, liquidation preferences), subscription agreement, board resolutions. Compliance tracking systems for FC-GPR deadlines, TDS payments, quarterly TP reviews.
Commercial Dimension
FDI pricing at fair value (DCF or comparables). Service fee pricing: cost-plus 8-15% per TP study benchmarking against comparable Indian/offshore service providers (Infosys, TCS, Accenture India disclosed margins). Withholding tax: 10% (US treaty) on royalties, 15% (EU treaties), 40% (no treaty FTS). ECB all-in-cost: 450 bps over 6-month LIBOR (currently 5.5%) = 10% effective rate, compare against domestic borrowing (bank loans 9-11%, trade credit 12-14%). Dividend repatriation: 20% withholding (10% under treaties), tax clearance certificate required.
Legal Dimension
Form FC-GPR within 30 days of FDI receipt (late filing compounding Rs 5-25L depending on delay and amount). Form 15CA/15CB for overseas payments: online filing, chartered accountant certificate required if payment >Rs 5L, TRC (tax residency certificate) from parent for treaty benefits. Transfer pricing documentation: Form 3CEAA with benchmarking study filed with return, contemporaneous (prepared before return due date), accountant audit report. Advance ruling: if uncertain characterization (FTS vs royalty, dividend vs capital gain), apply to AAR (Rs 10L fee, 6-12 month processing) for binding determination avoiding future disputes.
Practical Guidance
File Form FC-GPR within 30-day deadline for all FDI tranches via FIRMS portal
Maintain transfer pricing documentation with annual benchmarking (update comparables yearly)
Obtain tax residency certificate from parent for treaty withholding rates (10% vs 20-40%)
Structure payments to optimize tax: characterize as FTS (10%) vs royalty (10%) vs fees (40%)
Consider bilateral APA with tax authorities for 5-year pricing certainty (Rs 10-15L cost)
Hedge ECB exposure if unhedged >USD 10M (70% mandatory), use options/forwards to manage currency risk
Common Pitfalls
Late FC-GPR filing—30-day deadline missed, RBI compounding fees Rs 5-25L, repeated delays invite enforcement action
Inadequate TP documentation—tax authorities propose downward adjustments (cost-plus 15% reduced to 8%), penalties 100-300% of tax shortfall, interest 1% monthly
Missing TRC for treaty benefits—withhold at 30% vs 10% under treaty, excess difficult to recover (refund claims 12-24 months)
Form 15CA/15CB non-compliance—overseas payment without filing, GCC assessee-in-default, liable for tax + interest + penalty
ECB end-use violation—proceeds used for real estate acquisition (restricted), RBI inspection identifies, demand recall of full ECB amount, penalties
Dividend repatriation without tax clearance—bank blocks remittance, GCC obtains Form 10F from CA certifying tax paid, delays 2-4 weeks
Frequently Asked Questions
FDI compliance requirements for GCC setup?
Automatic route: 100% FDI in IT/ITES permitted without government approval. Parent subscribes to equity in Indian subsidiary. File Form FC-GPR with RBI within 30 days via FIRMS portal (late filing compounding Rs 5-25L). Pricing: fair value per DCF/comparable transaction methods (Valuation Rules), typically 2-5x revenue multiples for IT sector. Issue shares within 180 days of funding receipt. Downstream investment: if GCC invests abroad, requires RBI approval if parent ownership <50% (deemed ODI). Repatriation: dividends, capital gains, liquidation proceeds subject to 20% withholding (10% under treaties) and tax clearance (Form 10F from chartered accountant certifying taxes paid).
Service fee repatriation compliance for GCC?
Transfer pricing: GCC provides IT/ITES services on cost-plus basis (8-15% markup typical), prepare benchmarking study comparing to Indian/offshore providers (Infosys, TCS, Wipro, Accenture India disclosed margins), file Form 3CEAA with return, obtain accountant audit report. Withholding tax: 10% (US treaty) if characterized as FTS (fees for technical services), deduct TDS and deposit by 7th of following month. Form 15CA/15CB: file online for each payment, CA certificate required if >Rs 5L, TRC from parent for treaty benefits. Timing: accrue revenue monthly, invoice parent quarterly, repatriate within 90 days of invoice date. Consider bilateral APA with tax authorities for 5-year pricing certainty (Rs 10-15L professional fees, 18-24 month processing, but eliminates audit adjustments and penalties).
ECB funding advantages and compliance for GCC?
Advantages: lower cost vs domestic borrowing (ECB 10% all-in vs bank loans 11-12%), larger ticket sizes (automatic route up to USD 750M), flexible terms (bullet repayment, grace periods). Compliance: eligible end-use (working capital, capex, general corporate, but not real estate or equity except subsidiaries), minimum maturity 3 years for loans/5 years bonds, all-in-cost cap 450 bps over 6-month LIBOR/SOFR for 3-5 year tenor, mandatory hedging 70% if unhedged >USD 10M. Form ECB filing within 7 days of each drawdown. Prepayment requires RBI approval if within 6 months (scrutiny for round-tripping). Sectoral caps: IT sector automatic up to USD 750M per FY. Risk: currency depreciation (rupee 2-5% annual, hedge via options/forwards), interest rate volatility (SOFR fluctuates, consider interest rate swaps).
Withholding tax rates for cross-border payments from GCC?
Royalties: 10% (US, UK, Singapore, Netherlands treaties), 15% (Germany, France), 30% (no treaty). FTS (fees for technical services): 10% (US, UK under Protocol interpretation), 15% (some EU treaties), 30% (no treaty). Interest: 10-15% under most treaties, 20% domestic rate. Dividends: 10% (most treaties), 20% domestic rate. Treaty benefits: obtain TRC (tax residency certificate) from parent jurisdiction, file with payment. Form 15CA/15CB: file online for each payment, CA certificate if >Rs 5L. Timing: deduct TDS on accrual or payment whichever earlier, deposit by 7th of following month, file quarterly TDS return. Penalties: failure to deduct—GCC assessee-in-default, liable for tax + interest 1% monthly + penalty up to tax amount. Advance ruling: if characterization uncertain (FTS vs royalty, software license vs sale), apply to AAR for binding determination (Rs 10L fee, 6-12 months).
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