Over the past12 months or so I have received many queries on overseas investment(s) by Indian residents, and fund managers. Below I address the issue for those of you who may be looking to set up an overseas investment fund for (A) tax efficiency and for the (B) ability to invest in stocks around the world.
2 things have to be kept in mind here:
[I] Remittance out of India – First, transfer of funds out of India for a boa-fide purpose (i.e. to fund the fund/ company). This can be achieved using one or both of the below specified schemes of the RBI:
Under the Liberalised Remittance Scheme, all resident individuals, including minors, are allowed to freely remit up to U.S. $ 250,000 per financial year for any permissible current or capital account transaction or a combination of both.
Under the overseas direct investment route, money is invested overseas either in the share capital of a company or in real estate or another financial instrument BUT after obtaining prior approval from the RBI and in accordance with certain other rules and regulations.
[II] Selection of Jurisdiction – Important considerations:
- Legal framework and tax incentives in the overseas jurisdiction
- Ease of introducing more capital/ investors over time
- Denomination of capital (i.e. INR/ USD etc)
Selection of jurisdiction will depend upon many factors including the exact nature of undertaking, market considerations and most importantly – personal preference with regard to the country. For setting up a fund with the purpose of creating tax efficiency and having the ability to invest in stocks around the world, Singapore remains the most desirable location for reasons mentioned below.
- Minimum tax in Singapore and avoidance of tax leakage in India – (Singapore approved resident fund scheme, 2006 – 8.5% tax up to $300,000 of income and 17% above that. The business will be eligible for various other exemptions and incentives bringing this rate to as low zero depending upon the exact nature of undertaking). This makes Singapore far more desirable than Europe and the United States, particularly for fund managers.
- No dividend or capital gains tax.
- Flexibility to invest/ trade in listed (and unlisted) securities in the United States, Europe and Asia.
- Ease of obtaining work/ residence visa.
- Open, transparent and most politically stable Government.
- Robust local economy which gives you the option of channelizing/ employing your funds in the domestic economy, unlike Dubai, Cayman Island or Mauritius.
How to Go About it – Setting up an Investment Fund/ Company in Singapore
To set up an investment fund or company in Singapore, one of the 2 routes mentioned in point [I] above can be utilized. However, for financial services firms, the Overseas Direct Investment Route is available only where the Singapore company is controlled by an Indian firm/company which has 3 year operational history in financial services sector.
You can use the Liberalised Remittance Scheme (LRS) to fund the Singapore company. To explain how much you can transfer/fund, via LSR, consider the example below:
Father, Son and Daughter each infuse U.S. $ 250,000 as capital to a newly incorporated Singapore company on 20 February 2016. On 4th May 2016, they introduce additional capital to the tune of U.S. $ 250,000 each to the company. The total amount of U.S. $ 1.5 Million is transferred legally and approved under the automatic route since it meets the threshold limit of U.S. $ 250,000 per person per financial year.
Naturally, no additional monies should have been issued against the passports of Father, Son and Daughter in either of the two financial years (i.e. the maximum amount that each person can avail in a single financial year is capped by the RBI at U.S. $ 250,000).
Setting-up a non finance company in Singapore
While you can use either of the 2 options in point [I] above to fund a non finance company in Singapore, your very selection of jurisdiction should ideally differ based on the business activity of the Company. The contents above are written specifically for setting up an investment fund.
Afterword: Choosing the United States or Europe over Singapore
Choosing United States or a country in Europe is in most cases not ideal for Indian nationals because of the tax structure, visa regime and the expense involved.
That said, I have dealt with start-ups looking for funding in the United States. At the same time, many Indian Start-ups are looking to access technology in the United States and would like to have presence there. A better way is to invest in U.S. businesses would be via the Singapore fund (ideal) or directly from India (not ideal). In the latter case however, investments will be restricted to U.S. $ 250,000 under LRS or will have to be approved by the RBI.