In this era of globalization, a company tends to form foreign entities in order to gain better access to foreign market or raise funds from foreign VCs. With such access to foreign markets along with good business planning the business tends to generate profits. This profit so generated is repatriated by entrepreneurs to their own countries in order to further utilize it in its business. Thus, repatriation of funds back to the countries where entrepreneurs reside is a normal practice in global business ecosystem.
Let’s take India for example, in 2017-18 India made outward Foreign Direct Investment of US$ 11.33 billion and received as FDI USD 61.96 billion. All these transactions were made with various countries across the globe. With such huge transactions being involved, one has to have a definite idea and proper planning in regard to various ways available for repatriation of funds
However, repatriation is not cakewalk due to various inter connected International laws. Various rules and regulations are to be taken care of before remitting the funds from one country to another. Companies need to strategies to bring the overseas income back in their own country with proper planning and structure so as to avoid long term tax and regulatory complications.
Let us list out the different ways to repatriate funds-
A) REPATRIATION THROUGH DIVIDENDS
Dividend distribution is treated as income in the hands of the shareholders. Dividends are generally taxed in the country where dividends are being received. Thus different countries have different set of laws in regard to dividends.
While discussing dividend as a technique to repatriate funds to domestic country, one cannot ignore the existence of Double Taxation Agreements(DTAA) signed in between many countries. Say for example, India-Singapore DTAA says that dividend income is taxed in the recipient’s state of residence. Hence tax payable by the shareholders in both the countries for repatriation has been done away with and only one point of taxation is in effect.
India imposes restrictions on Indian shareholders who have received dividend from foreign company to repatriate within 60 days of receipt of dividend, or such further period as the Reserve Bank may permit.
B) REPATRIATION THROUGH SALARY OR REMUNERATION
Repatriating through director’s remuneration is another way to remit back foreign income earned back to domestic country. A common practice is that holding companies generally appoint a director residing in the domestic country to its foreign subsidiaries. Thus providing a medium for remitting funds back to the domestic country as remuneration of directors. Payments received for providing services by foreign directors in professional capacity is also a way to repatriate funds. Sometimes, shares are being allotted in lieu of remuneration to directors or services provided in professional capacity as part or full consideration. Proper reporting of such allotment of shares to the concerned authorities should also to be taken care of.
C) REPATRIATION THROUGH LOANS
Interest income has also become one of the most preferred way to repatriate funds. Companies these days prefer taking loans from their foreign holding or subsidiary entities to meet their operational expenses instead of knocking doors of financial institutions or third parties. Such loans are available in lesser interest rates. Hence, cost burden on the borrowing company is comparatively low. However, for transactions of these nature related party norms, transfer pricing norms should be adhered to for avoidance of any complications and unfavorable taxation dues.
D) REPATRIATION THROUGH INVOICING MANAGEMENT FEES
Management fees can be effective tool for repatriation of funds. A company for providing services to another foreign company is given management fees. Such given fees can be in nature of technical support fees, administrative fees and more subject to any charges and taxes as may be applicable. For example withholding tax in Singapore may apply for payments due to foreign entities that provide management services subject to regulatory compliance as may be applicable.
Also a fairly popular strategy of delegation of project work to foreign companies by the main (head) company is done by many entities. This new strategy facilitates companies to save excessive costs that the main (head) company might incur in case the project work is not delegated. While doing this one needs to be cautious about making the transaction at Arms Length Price.
E) REPATRIATION THROUGH ROYALTIES
Considering this widely used strategy, countries impose taxes on royalties payment like India imposes 25% rate of tax on royalty and fees for technical services for non-resident under the Income-tax Act. As per official data, these royalty payments in India amounted to Rs 27,000 crore (about $4 billion) in 2017-18, which was a significant increase from the Rs 22,728 crore in the previous financial year.
Royalty payments are payments that are made for use of Intellectual Properties such as trademarks, patents, copyrights, and proprietary technology is also a repatriation strategy. A common practice for a company is to provide its foreign affiliates intellectual property rights and enjoy fixed percentage as royalty payments.
Double taxation agreement with different countries also plays its role in decreasing the tax liability. China has strict laws on royalty payments which is subject to VAT and surcharges as well as withholding income tax. Singapore also imposes withholding tax on Royalty payments to non- residents.
F) REPATRIATION THROUGH BUYBACK OF SHARES
Companies these days utilize their certain portion of income to buyback their own shares . Investors also play a major role in pressurizing a company to buyback shares as a mode of returning capital. Shares buyback has again started gaining momentum in the market as Apple in May 2018 made an announcement of buyback of shares worth USD 100 billion globally, saving itself huge taxes due to rate cut in corporate taxes . This rate cut also factored for bringing back billions of cash Apple has stashed overseas. It is very important to understand regulations around capital gain taxes while planning repatriation of fund through this method.
Selection of these strategies is dependent upon number of factors such as company, country or countries of operation, number of subsidiaries, industry, and more. Hence, generally a blend of these methods are utilised to remit funds overseas in a way that best serve long-term business goals.
If you need our help in planning the repatriation process and choose the best possible model please feel to write to us at [email protected]