Fema

This query is : Resolved

Querist : Anonymous

Querist : Anonymous (Querist)

21 September 2011 Hi all,

Can a company(subsidiary of foreign co.) borrow money on one year advance against services provided to foreign clients.

is it allowed under FEMA and Income tax. what all rules and regulations, circulars??

VISHRUT

VISHRUT (Expert)
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21 September 2011 Yes it is allowed under FEMA and income tax with compliance of withholding Tax and Service Tax if any applicable.

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Querist : Anonymous

Querist : Anonymous (Querist)

22 September 2011 Hi ,

Thanks Vishrut!

can anyboby tell me relevant notifications or circular?

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Querist : Anonymous

Querist : Anonymous (Querist)

29 September 2011 Hi all,

Can a company(subsidiary of foreign co.) borrow money on one year advance against services provided to foreign clients.

is it allowed under FEMA and Income tax. what all rules and regulations, circulars??

Asha Kanta Sharma

Asha Kanta Sharma

(Expert)
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24 July 2024 Under FEMA (Foreign Exchange Management Act) and Income Tax regulations in India, borrowing money on an advance against services provided to foreign clients by an Indian subsidiary of a foreign company involves specific considerations:

### FEMA Regulations:

1. **Borrowing from Foreign Sources:**
- Indian companies, including subsidiaries of foreign companies, can borrow funds from foreign sources subject to certain conditions under FEMA.
- The borrowing must comply with the External Commercial Borrowings (ECB) guidelines issued by the Reserve Bank of India (RBI).
- ECB can be availed for various purposes including import of capital goods, payment of fees for technical services or royalties, and for working capital requirements, among others.

2. **Conditions for ECB:**
- ECB can be availed in recognized foreign currencies or Indian Rupees.
- The borrowing must comply with the pricing guidelines, all-in-cost ceilings, and other terms specified by RBI.
- Approval from RBI or authorized AD (Authorized Dealer bank) may be required depending on the amount and purpose of borrowing.

3. **Advance Against Services:**
- If the borrowing is structured as an advance against services to be provided to foreign clients, it must meet the ECB guidelines.
- The purpose and use of funds should be clearly stated, and the terms of repayment should align with RBI’s ECB norms.

4. **Reporting Requirements:**
- The Indian subsidiary must comply with reporting requirements to RBI through designated AD banks.
- Various forms and declarations may need to be filed with RBI before and after availing the ECB, such as Form ECB, Form ODI (Overseas Direct Investment), etc.

### Income Tax Implications:

1. **Interest Deductibility:**
- Interest paid on ECBs is generally deductible as a business expense under Indian Income Tax laws, subject to certain conditions.

2. **Transfer Pricing Regulations:**
- The transaction between the Indian subsidiary and its foreign parent (or client) must comply with transfer pricing regulations to ensure that the terms and pricing are at arm's length.

### Compliance and Documentation:

1. **Legal Documentation:**
- Proper loan agreements or documentation must be in place between the Indian subsidiary and the lender (foreign parent or other lender).
- Terms of repayment, interest rates, and other conditions should be clearly defined to avoid any regulatory issues.

2. **Circulars and Notifications:**
- Specific circulars, notifications, and guidelines issued by RBI and CBDT (Central Board of Direct Taxes) should be referred to while structuring the borrowing transaction.

### Conclusion:

To ensure compliance with both FEMA and Income Tax regulations:
- Consult with a qualified chartered accountant or legal advisor who specializes in international transactions and foreign exchange regulations.
- Obtain necessary approvals or notifications from RBI and ensure all reporting requirements are fulfilled.
- Maintain proper documentation and adhere to transfer pricing norms to mitigate any potential tax or regulatory risks associated with borrowing against advances for services provided to foreign clients.