Banks question transfer of funds by NRIs via LLP route

The use of limited liability partnership (LLP) vehicles by NRIs to repatriate funds overseas has come under the scrutiny of large domestic banks where these individuals have their non-resident ordinary (NRO) account. NRIs manage their deposits and receive dividend, rent and interest earned in India in NRO accounts.

In recent months, at least three large private sector banks have blocked the transfer of funds by NRIs received as share of profit from LLPs where they were partners, two senior tax professionals familiar with the development told ET.

LLPs, a hybrid corporate structure, offers the benefit of a limited liability of a company and the flexibility of a partnership. While an LLP pays tax on earnings, the profit distributed is not taxed in the hands of the partners. Also, LLPs have comparatively fewer legal and procedural requirements. Many NRIs became partners in LLPs in what now appears to be a strategy to overcome limits on fund repatriation.

According to the exchange control rules, while current account receipts like dividend and rent can be freely transferred abroad without any limit, there is a cap of $1 million a year on the repatriation of capital receipts like proceeds from sale of stocks and properties.

A partnership in an LLP came handy as an NRI’s share of profits distributed by the entity was considered current income and could therefore be repatriated irrespective of the quantum of funds. However, many banks are now insisting that such profit shares received by an NRI partner from LLPs should be considered as capital account and are blocking repatriation beyond $1 million.

“While the $1 million limit doesn’t apply to current income, banks are now looking beyond the declarations provided by the NRIs to ascertain that the current income is of a bona fide nature,” said Moin Ladha, partner at Khaitan & Co.

Many Indians who have settled abroad or are planning to move out of India try to plan ways to transfer the funds obtained from selling their assets in the country. “One of the ways was to bring these assets under an LLP, sell them, distribute the profits to partners who in turn repatriate the funds. That’s difficult now. An authorised dealer bank may also object to NRIs using an LLP to carry out real estate business or sidestep the FEMA restrictions applicable for NRIs,” said another person.

“Because repatriation of profit shares from LLP are exempted from taxation and do not qualify as remittance of assets under Foreign Exchange Management (Remittance of Assets) Regulations, 2016, such transfers can be orchestrated to repatriate funds exceeding the $1 million cap imposed by the Reserve

,” said advocate Mahip Singh Sikarwar.

RBI MAY LOWER LRS LIMIT

It’s unclear whether banks have received feelers from RBI and scrutiny on outflows are in any way linked to the recent pressure on the currency, said a banker. “In the past, whenever the rupee came under pressure, the limit under Liberalised Remittance Scheme (LRS) was reduced. It’s possible that RBI may consider lowering the LRS limit from $250,000 for some time or keep proposed liberalisation of overseas direct investment in abeyance till the forex market remains volatile,” said the person. RBI officials did not comment on the subject.