FEMA Structuring Advisory

FEMA structuring refers to the design of cross-border transactions — including FDI inflows, ODI outflows, inter-company loans, intellectual property licensing arrangements, and share transfers involving non-residents — in a manner that is both commercially optimal and fully compliant with the Foreign Exchange Management Act 1999 and subordinate regulations. Structuring decisions have cascading implications under the Foreign Exchange Management (Non-Debt Instruments) Rules 2019, the Foreign Exchange Management (Overseas Investment) Rules 2022, and Transfer Pricing provisions under Section 92B of the Income Tax Act 1961. An incorrectly structured transaction — for example, characterising equity as debt or vice versa — can constitute a contravention under Section 13 of FEMA 1999 and simultaneously create a transfer pricing adjustment under Section 92C. CA-led structuring advice ensures the chosen structure has regulatory clearance, appropriate documentation, and is defensible in a future tax or FEMA audit.

A loan from an Indian company to its overseas subsidiary is classified as Overseas Direct Investment under the Foreign Exchange Management (Overseas Investment) Rules 2022 and the OI Regulations 2022, and counts toward the 400% of net worth ODI limit under the automatic route. The loan must carry an interest rate that is at least the equivalent of the RBI reference rate for the relevant currency, and the interest must be repatriated to India annually. Form OI must be filed on the RBI FIRMS portal before disbursement, and an Annual Performance Report (APR) must be filed by December 31 each year for the life of the loan. From a transfer pricing perspective, the interest rate on the loan must be documented as arm's length under Section 92C of the Income Tax Act 1961 and reported in Form 3CEB under Sec 92E, IT Act 1961 (≡ §172, IT Act 2025).

Royalty receipts from a foreign entity for licensing of intellectual property — including trademarks, patents, software, and know-how — are current account transactions permissible under Section 5 of FEMA 1999 and do not require prior RBI approval. However, the arrangement must be structured as an arm's length commercial agreement with documented valuation of the IP, and the royalty rate and payment terms must be at market rates to avoid transfer pricing adjustments under Section 92C of the Income Tax Act 1961. Inward royalty remittances are subject to TDS in the foreign jurisdiction, and the Indian company may claim relief under the applicable Double Taxation Avoidance Agreement (DTAA) under Section 90 of the Income Tax Act 1961. Tax Residency Certificates and Form 10F must be maintained under Rule 21AB of the Income Tax Rules 1962 to support DTAA claims. The royalty income must be repatriated to India within nine months of arising, in accordance with the RBI Master Direction on Export of Goods and Services.

A foreign parent providing a guarantee to an Indian bank on behalf of its Indian subsidiary constitutes an 'other capital account transaction' under FEMA 1999. Under the Foreign Exchange Management (Guarantees) Regulations 2000, a guarantee by a non-resident in favour of a resident's borrowing from an Indian bank is permissible under the automatic route, subject to the condition that no remittance outside India takes place without prior RBI approval if the guarantee is invoked. The Indian subsidiary receiving the benefit of such a guarantee must report it to its AD bank as a non-fund-based facility backed by a foreign guarantee. If the guarantee is invoked and the foreign parent pays the Indian bank directly, the resulting liability of the Indian subsidiary to the parent becomes an External Commercial Borrowing (ECB) subject to the Foreign Exchange Management (Borrowing and Lending) Regulations 2018 and RBI's ECB Master Direction.

A transfer of shares in an Indian company from a resident to a non-resident must comply with Regulation 10 of the Foreign Exchange Management (Non-Debt Instruments) Rules 2019, which requires the transfer price to not be less than the fair value certified by a SEBI-registered Merchant Banker or a Chartered Accountant using an internationally accepted pricing methodology. Form FC-TRS (Foreign Currency — Transfer of Shares) must be filed on the RBI FIRMS portal within 60 days of receipt of consideration, and the AD bank is responsible for submitting the form on behalf of the transferor or transferee. The consideration must be received through normal banking channels (wire transfer to an Indian bank account), not through cash or adjustment of pre-existing liabilities without RBI approval. From a capital gains perspective, the resident transferor is subject to capital gains tax under Section 45 of the Income Tax Act 1961, and the non-resident purchaser is responsible for TDS under Section 195 if the gain is taxable in India, though this is rare in secondary FDI transactions where the non-resident is the buyer.