LLP — Intricacies and Issues Pune Camp CPE

LLP - Intricacies and Issues Pune Camp CPE Study Circle January 30, 2010 Pw. C

Presentation Outline • Background • Provisions and options • Taxation of LLP • Open house

Background

Evolution of LLP Based on recommendations of expert committees – Naresh Chandra (2003) & J. J. Irani (2005); Concept paper was developed by MCA in 2006 LLP Act, 2008 notified on March 31, 2009. LLP Bill, 2006 introduced in the Rajya Sabha on Dec 2006 LLP Bill, 2008 gets presidents assents on Jan 9, 2009 Revised Bill, introduced in the Rajya Sabha on Oct 08 & passed in the same month LLP Bill, 2008 passed by Lok Sabha on December 12, 2008 Separate & official website for LLPs - www. llp. gov. in LLP Pricewaterhouse. Coopers January 2010 Slide 4

Need for LLPs in India Limitations of Partnership firm Limitations of Company • • Public disclosures and filing • May not be a tax efficient structure – DDT, MAT etc. • Need for professional and independent directors • Extensive secretarial compliances with Company law • Restrictions on internal control and management Restriction on the number of members to 20 (10 for banking industry) • Unlimited liability of the partners • No perpetual succession Unlimited liability / Restriction of members / Tax inefficiency – a hurdle for growth LLP Pricewaterhouse. Coopers January 2010 Slide 5

Overview USP of LLPs USP of Partnership firm • Flexible form of internal organisation structure USP of Limited Company • Limited Liability • Perpetual succession • Right to participate in Mgt • Separate legal status • No Public disclosure • Unlimited members A hybrid entity which combines the USPs of Partnership and Limited Company is a LLP Pricewaterhouse. Coopers January 2010 Slide 6

LLP –Provisions and Options LLP Pricewaterhouse. Coopers January 2010

How to form a LLP 1 Deciding the partners and designated partners Obtaining the DPIN & Digital Signature Certificate 2 6 Certificate of Incorporation 5 LLP Pricewaterhouse. Coopers Formation of LLP Filing of Incorporation Document 4 Checking the name availability 3 Drafting of LLP Agreement January 2010 Slide 8

LLP…Legal framework • LLP Agreement - first step • ROC a nodal agency • Incorporation certificate – conclusive evidence of incorporation / registration • Partners can be – Individuals and company • Minimum two partners – No restriction on maximum partners • At least 2 Designated Partners mandatory DP entrusted with LLP compliances LLP Pricewaterhouse. Coopers January 2010 Slide 9

Whether partnership rights can be transferred? • Economic rights: - includes rights of the partner to share in the profits and losses of a LLP, and, • receive distributions in accordance with the LLP Agreement - freely transferable Non-economic rights - it includes the right to participate in management, etc. - not transferable unless specified by the Agreement • • • Transfer of economic rights does not cause dissolution or winding up What is the tax implication when only economic interest is transferred and not the management interest? LLP Pricewaterhouse. Coopers January 2010 Slide 10

Important Provisions How is the capital contributed? • Contribution in cash or in kind, including - tangible - intangible service contracts, etc. • Monetary value recognized in books • No requirement of minimum capital contribution – determined as per agreement • Tax implications of capital contribution? Value of contribution in kind to be determined by valuer* *Chartered Accountants, Cost accountants or approved valuers LLP Pricewaterhouse. Coopers January 2010 Slide 11

Important Provisions What are the financial disclosures? • Accounts - cash or accrual system of accounting can be followed - statutory audit of LLP if, • turnover exceeds Rs. 40 lakhs • contribution exceeds Rs. 25 lakhs • Solvency statement signed by DP • Annual return to be filed with Ro. C - shall be certified by Company Secretary LLP Pricewaterhouse. Coopers January 2010 Slide 12

Conversion to LLP • Conversion possible by: - partnership firm - private company - unlisted public company • All partners / shareholders to become LLP partners • All assets, interests, rights, privileges, liabilities, obligations vests with LLP • In case of companies, no ‘security interest’ in assets should subsist • Compliance formalities to be completed with Ro. C Pre-conversion liability subsists LLP Pricewaterhouse. Coopers January 2010 Slide 13

Conversion Issues • Meaning of ‘security interest’ unclear • Whether capital gains tax payable on conversion to LLP? • by partnership firm / private company / unlisted company • by shareholders of the company • Whether stamp duty is payable on conversion to LLP? • Whether any restrictions imposed on LLP for assets and liabilities transferred on conversion to LLP? LLP Pricewaterhouse. Coopers January 2010 Slide 14

Scenario 1 – Foreign Company forming an LLP Existing Model Possible Model Foreign Co Outside India Company LLP More tax efficient subject to amendment in FDI policy LLP Pricewaterhouse. Coopers January 2010 Slide 15

Scenario 2 – Consortiums / Joint ventures Existing Model Possible Model Foreign Co Outside India Direct India Joint Venture (JV) Partner Company / Unincorporated JV Indian Hold Co* JV Partner Indirect LLP will undertake projects Lower tax cost with mitigation of Association of Persons exposure, subject to FDI policy *Approval for setting up the Indian Holding Company LLP Pricewaterhouse. Coopers January 2010 Slide 16

Scenario 3 – Indian promoters Existing Model Indian Promoter(s) Direct Possible Model JV Partner Joint Venture Company / Partnership firm Indian promoter(s) Direct JV Partner Joint Venture LLP Organisational flexibility including separation of economic and management rights LLP Pricewaterhouse. Coopers January 2010 Slide 17

Scenario 4 – Listed companies with projects Existing Model Possible Model Listed Companies Project Co. 1 LLP 1 LLP will undertake projects More tax efficient repatriation without MAT outflow subject to commercial feasibility LLP Pricewaterhouse. Coopers January 2010 Slide 18

Taxation of LLP Pricewaterhouse. Coopers January 2010

Taxation of LLP - Basics • Sec 10(23) substituted w. e. f 1 -4 -10 - • Residential Status - • Consequently, all provisions applicable to LLP is a resident of India except where control and management situated wholly outside India Treated as an opaque entity - Rate similar to that of partnership firm @ 30. 90% • No Minimum Alternate Tax payable • No Dividend Distribution Tax payable LLP Pricewaterhouse. Coopers January 2010 Slide 20

Taxability of LLP under proposed DTC • • Under DTC ‘Firm’, ‘Partner’ and ‘Partnership’ to include LLP & its partners respectively Treated as opaque entity - Companies @ 25% Income taxable @ 30% (un-incorporated body) • Profits exempt in the hands of partners • No Minimum Alternate Tax payable • No DDT payable LLP Pricewaterhouse. Coopers January 2010 Slide 21

Whether LLP suitable for all business models? • LLPs cannot be listed on stock exchange • Certain legislations / policies specifically require company structure • • • SEBI – Asset management companies NHAI – Road projects Following tax deduction available only to companies: - Sec 36(1)(ix), 80 GGB, 80 IA, 80 IB, 80 JJA LLP regulations is at a nascent stage and consequent changes in other legislations required LLP Pricewaterhouse. Coopers January 2010 Slide 22

Can a foreign company invest / form an LLP? • LLP Act permits a foreign company / foreign LLP to form an LLP in India FDI Policy • Investment by non-resident in Indian firms - Non-resident India / Person of Indian Origin allowed on non-repatriation basis • - • approval required to make investment with repatriation basis other non-resident - prior approval of Reserve Bank of India required Presently unincorporated entity not allowed to invest under FDI scheme LLP Pricewaterhouse. Coopers January 2010 Slide 23

Thoughts and Posers • Conversion to LLP - Whether tax holidays available to firm / company continue post conversion to LLP? - What will be status of MAT credit, tax losses available to partnership firm / company on conversion? - Whether stamp duty is payable on conversion into LLP? - Revaluation – no issue except capital to stock in trade • FDI in LLP - LLP Act permits a foreign company / foreign LLP to form an LLP in India FDI regulation does not allow foreign investment in unincorporated entity Clarity on FDI in LLP awaited • Partners Liability in LLP - Retirement – no issue Sale of economic interest – assigning better? Taxes of LLP – Sec 167 C vs. 188 A LLP Pricewaterhouse. Coopers January 2010 Slide 24

…Thoughts and Posers • Deemed dividend mitigation • LLP - No WT? • Partners Share – No WT? • Same PAN means continuation ? LLP Pricewaterhouse. Coopers January 2010 Slide 25

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