Re-posted from Dezan Shira

As the largest world economies show a minor slowdown, they are still an attractive place for investment in trade and/or manufacturing. Understanding what entity to establish in either China or India becomes an essential part of the initial discussion. Below is a whitepaper discussion on the comparison of Chinese WOFE versus a Indian PLC’s.

Companies looking to invest in trade or manufacturing in China usually prefer to establish wholly foreign-owned enterprises (WFOEs). There are so many factors that make WFOEs popular in China, such as their broad business scope, 100% foreign ownership and control, the additional security guaranteed to technology and intellectual property rights, a self-developed internal structure, the capacity for insertion of existing company culture, the ability to sell to China’s domestic market, and the ability to repatriate profits.

India’s private limited companies (PLCs) have a similar structure although a number of factors distinguish them from the Chinese WFOE. China, for example, classes Sino-foreign joint ventures (JVs) as a separate form of legal entity, whereas both 100 percent foreign-owned Indian PLCs and Indo-foreign JVs are governed by the same regulations.

For the purposes of this analysis, we will concentrate on the 100% foreign-owned Indian PLC. The need for such a company to have either 100% foreign ownership or an additional Indian investor depends, similarly to China, upon the scope of the business—the company’s intended activities.

India needs to be studied first to assess the suitability of using a 100% foreign-owned model. For example, until earlier this year foreign companies investing in the single-brand retail sector were required to enter the market as part of an Indo-foreign JV in which Indian parties held at least 49 % of the company’s control.

A PLC set-up in India follows a specific path that differs substantially from a WFOE set-up in China. Foreign Investment in India is regulated under the Foreign Exchange Management Act and is allowed under two different routes: the automatic and the approval routes. The standard set-up process, which is a comparatively easy establishment process, is known as the “automatic route”.

Under this route, 100% investment is allowed in certain sectors, as per the notification issued by the Reserve Bank of India, which governs which industries may engage in FDI. For these sectors, no specific approval is required prior to setting up an entity, and the establishment process is consequently quite simple.

For other sectors, which fall under the approval route, sectoral caps are defined and investment requires government approval. In this case there is a separate set of procedures to be followed: amongst other things, the company must obtain approval for investment from the Foreign Investment Promotion Board of the Ministry of Finance. For example, sector specific guidelines in the media and entertainment industries have been issued by the Reserve Bank; for certain activities, government permission is required prior to investing.

Most business/commercial sectors now fall under the Automatic Route and very few cases require prior Foreign Investment Promotion Board approval.

Similar to China’s WFOE, establishment of an Indian PLC requires the fulfillment of certain key positions. Whereas WFOE set-up requires an executive director or board of directors, at least one supervisor and a general manager, the Indian PLC must have a minimum of two directors, and between two and fifty shareholders. Both directors and shareholders can be other legal entities. As in the case of China, the amount of paid-up capital required should be a financial exercise to determine the business’ start up and cash flow needs.

If we compare the two entities, the Indian PLC appears to be more efficient, especially in terms of tax, than China’s WFOE. As the table below shows, India does not charge a tax on profit repatriation whereas China levies a 10% tax on the value of repatriated funds.

Additionally, China’s labor welfare cost is higher. However, it is also important to note that domestic companies in India are liable to pay dividend distribution tax, levied at 15% of dividend payout, which is deducted from their reserve or surplus.

If you have questions about doing business in China and would like to discuss further, please contact Paul Oliveira, CPA or any member of the International Tax Services Group.

KLR is a premier provider of international tax services to middle market companies and works with both foreign-based companies moving to the U.S. market as well as domestic companies that do business around the world. The KLR International Tax group is available to assist clients with any tax issues pertaining to either inbound or outbound tax issues, both from a corporate perspective as well as for multinational families. Those issues may include the IRS’ Voluntary Disclosure Program, planning for intellectual property transfers, transfer pricing, export incentives, and global restructuring projects.

Sources:
Leading Edge Alliance – KLR is an active member of the Leading Edge Alliance, an international professional association of over a hundred independently-owned accounting and consulting firms. The Leading Edge Alliance enables KLR to access the resources of multibillion dollar global professional services organization, providing additional industry expertise, professional training and education, and peer-to-peer networking opportunities nationally and globally, around the corner and around the world.

Dezan Shira & Associates, Inc. is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in emerging Asia. Since its establishment in 1992, the firm has grown into one of Asia’s most versatile full-service consultancies with operational offices across China, Hong Kong, India, Singapore and Vietnam as well as liaison offices in Italy and the United States. To learn more about the firm, please visit their website at www.dezshira.com