Wednesday, 3 February 2016

Foreign Company Conundrum under the Companies Act, 2013


The Companies Act, 2013 (“Act”) received the President’s assent on August 29, 2013 and it was notified in the Official Gazette on 30 August 2013. The Central Government (through the Ministry of Corporate Affairs) has issued two commencement notifications dated September 12, 2013 and  March 26, 2014 by virtue of which a number of provisions of the Act have come into force.

A chapter of the Act is dedicated to the Foreign companies and how and when a company incorporated outside India may be deemed to have a place of business in India and compliances related to the same. The definition of ‘Foreign Company’ has been expanded to include such foreign companies which are doing business in India through electronic mode, through an agent or in any other manner. The term ‘electronic mode’, as per the Act read with the Companies (Registration of Foreign Companies) Rules, 2014, is far reaching to include the transactions carried vide, inter-alia,  e-mail, mobile devices, social media, cloud computing, document management, voice or data transmission or otherwise.

The implication of wide definition and coverage vis-à-vis other laws is a concern at present and the same has not been addressed so far. This becomes even more important in case of companies outside India who are into distribution of digital product and services into India or even if an organization provides its otherwise conventional services through electronic mode. The definition and the parameters of making a company subject to the provisions of the Act are so wide that even a foreign company undertaking electronic communication to someone in India will be deemed to have a place of business in India and hence required to register under the Act. Such provision exposes the organization to the rigours of other laws, specifically the exchange control laws and income tax laws.

Following is a brief analysis of the provisions and its implications under other laws.
 

Provisions
Issues/Comments

 What is a foreign company?
Following types of companies which are not incorporated in India are covered:

a.    those who have a formal place of business in India such as a branch office or a project/liaison office;

b.    companies having a place of business in India through an agent (Agent POB);


c.    companies having a place of business in India through electronic mode (Electronic POB);

AND

d.    conducts any business activity in India in any other manner (Business POB).

e.    companies incorporated outside India whose more than 50% of equity is held by citizen of India or company incorporated in India or both will be both a foreign company and will have to comply with certain provisions of the Act as if it is an Indian company (Sub POB).




Understandable and same as previous law.
           



Every foreign entity appointing an agent in India for whatever reason will end up having a Agent POB.


Detailed under Rules – analysed separately





Every foreign entity doing any business in India in any manner will end up having a Business POB.

Subsidiary of an Indian company based abroad or company outside India in which Indian citizens are majority shareholders will be both a foreign company and an Indian company (to the extent it is required to comply with provisions applicable to Indian companies). As a foreign company, such an entity will be treated to have a place of business in India also.

Further a Sub POB entity will be required to comply with Indian laws in addition to the laws of the country where it is situated.

What forms an Electronic POB


Carrying out business electronically, including:

·  whether main server is installed in India or not;



·  business to business and business to consumer transactions, data interchange and other digital supply transactions;


·  offering to accept deposits or inviting deposits or accepting deposits or subscriptions in securities, in India or from citizens of India;

· financial settlements, web based marketing, advisory and transactional services, database services and products, supply chain management;

·  online services such as telemarketing, telecommuting, telemedicine, education and information research; and

·  all related data communication services, whether conducted by e-mail, mobile devices, social media, cloud computing, document management, voice or data transmission or otherwise.




Web based businesses having servers outside India shall be deemed to be a foreign company;

Any online transaction of goods of services between a foreign entity and an Indian person will amount to creating an Electronic POB for the foreign entity;

Subscription based service companies covered.

Companies accepting funding from Indians as part of say crowd funding covered.








Any online transaction, communication, service or business will create an Electronic POB.








What is a foreign company expected to do?

a.    Register with Registrar within 30 days of establishment of the POB;

b.    File documents about the foreign company, their office details in India, details of office bearers in India and abroad etc.[1]

c.    File financial accounts in India in prescribed format;

d.    Financial disclosures and disclosure of related parties in India;

e.    Details of funds transferred/repatriated into or from India;

f.     Audit of Indian accounts by an Indian CA/CA Firm;

g.    Following provisions will apply to Foreign companies as they apply to Indian companies:

·         Issue of debentures;
·         Filing of annual return;
·         Keeping of books of accounts;
·         Filing of charges;
· Inspection, inquiry and investigation;
·         Issue of prospectus etc.


Keeping in mind the application of the provisions to almost all virtual or electronic presence of foreign companies or businesses in India, the compliance of these provisions seems to be impractical. Also considering that even a single online transaction, communication message or services can kick off the provisions, it is not clear as to how the foreign companies are supposed to comply with such comprehensive compliances.

IMPLICATIONS UNDER OTHER LAWS

Registration of Place of Business with Reserve Bank of India

Where a foreign entity or association of individuals desire to or establish or have a place of business in India, they need to first seek permission from Reserve Bank of India (RBI) for establishment of such place of business under Foreign Exchange Management (Establishment in India of Branch or Office or other Place of Business) Regulations, 2000 ('POB Regulations'). The POB Regulations provide for detailed procedure and conditions subject to which such permissions are available. In the event, as a result of application of the provisions under the Act related to foreign companies, a company ends up having a place of business in India without registration of such place of business with RBI under the POB Regulations, it shall be in violation of the POB Regulations and inter alia the exchange control laws of India.

Keeping in mind the stringent exchange control laws and requirement of prior permission under the POB Regulations, it is not clear as to what will be the fate of the companies who fall fowl of the provisions of Act related to foreign companies under the POB Regulations.

Permanent Establishment

Whether or not a foreign entity has a place of business in India becomes extremely relevant for income tax purposes. In the event a foreign entity is deemed to have a permanent establishment in India, it becomes subject to Indian taxes in as much as the profits of an enterprise of one Contracting State are taxable in the other state, only if the enterprise maintains a PE in the later state and only to the extent that profits are attributable to the PE.

The governing principles of whether or not a foreign entity has a permanent establishment in India are contained in the Double Taxation Avoidance Agreements executed by the Government of India with various countries. In general, the term permanent establishment includes the following:

·         a place of management; a branch; an office; a factory; a workshop; a sales outlet; a warehouse in relation to a person providing storage facilities for others; a farm, plantation or other place where agricultural, forestry, plantation or related activities are carried on; and a mine, an oil or gas well, a quarry or any other place of exploration or extraction of natural resources.
·         A building site or construction, installation or assembly project or supervisory activities - if such site, project or activities last more than 270 days.
·         Where a person is acting on behalf of a the foreign enterprise, that foreign enterprise shall be deemed to have a permanent establishment in India in respect of any activities which that person undertakes for the enterprise, if such a person signs contracts or stocks goods or secures orders on its behalf.
·         A broker or agent acting in the ordinary course of their business shall not form a permanent establishment unless the agent works almost exclusively for such foreign entity.
·         Control of an entity or a permanent establishment merely does not make a permanent establishment for a foreign entity.

As it can be clearly seen, the factum whether or not a foreign entity may be considered to have a permanent establishment in India is based on sound principles and the bar of determining a permanent establishment is quite high. However, in the light of the provisions of the Act if a foreign entity is deemed to have a place of business in India because it may have fulfilled the Agent POB, Electronic POB, Business POB or Sub POB conditions, it exposes the foreign entity to taxation in India which may be a grave concern. There is however less clarity at the moment as to what will be the view of the authorities.






 


[1] The filing requirement is extremely comprehensive and requires detailed information on all counts. For example, the details required to be provided of office bearers include the following:
(a)                  personal name and surname in full;
(b)                 any former name or names and surname or surnames in full;
(c)                  father’s name or mother’s name and spouse’s name;
(d)                 date of birth;
(e)                  residential address;
(f)                  nationality;
(g)                  if the present nationality is not the nationality of origin, his nationality of origin; 4
(h)                 passport Number, date of issue and country of issue; (if a person holds more than one passport then details of all passports to be given)
(i)                   income-tax permanent account number (PAN) , if applicable;
(j)                   occupation, if any ;
(k)                 whether directorship in any other Indian company, (Director Identification Number (DIN), Name and Corporate Identity Number (CIN) of the company in case of holding directorship);
(l)                   other directorship or directorships held by him;
(m)                Membership Number (for Secretary only); and
(n)                 e-mail ID.

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