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Government Policy

Liberalization of the Indian economy began in mid-1991. Foreign investment is now encouraged and many foreign companies have established operations in the country. Under the New Industrial Policy, 1991 (amended from time to time and as consolidated into a bi-annual foreign direct investment policy), the Government of India ("GOI") has opened up many sectors for 100% foreign investment under the automatic route. In addition, sectoral caps have been prescribed by the GOI where 100% foreign investment is not permitted. Restricted sectors include insurance, the print media, banking, and telecommunications (among others). In such sectors, foreign companies can invest up to 26% or 49% or 74% (as designated) in the equity of an Indian joint venture company. Investments in restricted sectors require GOI approval; however, investments under the automatic route do not require the prior GOI approval. All that such an investor needs to do is to intimate the Reserve Bank of India, once the foreign investment is made.

Corporate Structuring

Under India's Companies Act, 1956, as amended, it is possible to incorporate private, public and non-profit companies. A private limited company (closely held corporation) requires a minimum of two directors and between two and fifty members. Additionally, its articles of association must impose restrictions on transfer of its shares. A private limited company cannot raise funds from the public through IPOs, etc., and this can be done only by a public limited company, which requires a minimum of three directors and seven members. The Limited Liability Partnership Act, 2008, permits incorporation of limited liability partnerships (LLPs). However, Indian law does not permit limited partnerships (LPs) and limited liability companies (LLCs).

To amend the main objects clause of the memorandum of association of an Indian company; to shift the registered office of a company from one state to another; and to amend the articles of association of an Indian company, a vote to that effect by holders of 75% or more of the voting stock of the company is required. However, day-to-day management control can be effected through ownership of 50%+1 share of the voting stock of the company. The foregoing percentages need to be kept in mind when negotiating joint ventures or other arrangements with Indian companies.

Corporate Tax

The current rate of income tax applicable to Indian companies is 30% plus a surcharge and education cess (effectively, a maximum rate of 32.45%). The current rate of income tax applicable to branch offices or permanent establishments of foreign companies in India is 40% plus a surcharge (effectively, a maximum rate of 42.02%). The current rate of income tax applicable to LLPs is 30.9%. Generally, these rates change annually with effect from April 1.

India has executed double taxation avoidance agreements with many countries, including the UK, the US, Cyprus, Mauritius, Singapore, etc. Favorable tax treatment is available under these treaties. It is fairly common for international companies to route their investment into India through beneficial intermediary jurisdictions in order to avail of reduced withholding taxes on payments of royalty, technical service fees, interest on loans, capital gains, etc. However, in the last few years, the Indian revenue authorities have questioned offshore structures and have sought to disregard them on ground of lack of substance (among others).