Repatriation of Profits & Dividends from an Indian Subsidiary

One of the primary concerns for foreign parent companies establishing an Indian subsidiary is exit velocity: Once we make money in India, how difficult is it to get it back home?

India has heavily liberalized its Foreign Exchange Management Act (FEMA) regulations over the last decade. Repatriation of profits from an Indian Wholly Owned Subsidiary (WOS) is fully permitted, provided the company has paid its applicable corporate taxes and complies with Reserve Bank of India (RBI) procedures.

Here are the primary mechanisms for repatriating funds from an Indian subsidiary.

1. Dividends

This is the most common and straightforward method. Post-tax profits of the Indian subsidiary can be distributed to the foreign parent as a dividend.

The Process:

1. The subsidiary finalizes its audited financial statements and pays the 25.17% corporate income tax.
2. The Board of Directors declares a dividend out of the remaining post-tax profits.
3. Before wiring the money to the foreign parent, the subsidiary must deduct Withholding Tax (TDS) under Section 195.

The Tax Impact: Under the Income Tax Act, dividends paid to a non-resident are taxed at 20% (plus applicable surcharge and cess). However, the foreign parent can avail a lower rate (often 10% or 15%) if a Double Taxation Avoidance Agreement (DTAA) exists between India and their home country. To claim the DTAA benefit, the parent must provide a Tax Residency Certificate (TRC).

For more on how Section 195 works, read our guide on Section 195 TDS on Foreign Payments.

2. Royalties & Fees for Technical Services (FTS)

Instead of distributing post-tax profits, the foreign parent can charge the Indian subsidiary for intellectual property usage (Royalty) or strategic/managerial services (FTS).

The Process:

1. A formal agreement is executed between the parent and the subsidiary.
2. The parent invoices the subsidiary periodically.
3. The subsidiary deducts TDS under Section 195 (usually capped at 10% under most DTAAs) and wires the net amount.

The Tax Impact: Unlike dividends, royalties and FTS are tax-deductible expenses for the Indian subsidiary. This reduces the subsidiary’s corporate tax liability.

The Risks: Because this reduces Indian tax revenue, the Income Tax Department scrutinizes these payments heavily under Transfer Pricing regulations. The parent cannot arbitrarily charge an exorbitant royalty just to drain cash from the subsidiary; the price must be justifiable under the Arm’s Length Principle. Furthermore, importing services into India triggers an 18% GST liability under the Reverse Charge Mechanism (RCM), which the subsidiary must pay in cash (though they can usually claim it back as Input Tax Credit).

3. Share Buybacks

If the Indian subsidiary has accumulated massive cash reserves and wishes to return capital to the parent, it can buy back its own shares.

The Tax Impact (Pre-Oct 2024 vs Post-Oct 2024): Previously, buybacks were taxed at the company level (~23%) and were tax-free in the hands of the shareholder. However, the Finance Act 2024 drastically changed this. Effective October 1, 2024, the entire proceeds of a share buyback are treated exactly like a Dividend in the hands of the shareholder. The subsidiary must withhold tax under Section 195, and the foreign parent is taxed at their applicable slab/DTAA rate. The cost of acquiring those shares is treated as a capital loss for the parent.

The Remittance Procedure (Form 15CA and 15CB)

Regardless of whether the repatriation is a dividend, royalty, or buyback, sending money out of India requires banking compliance. The subsidiary’s Authorized Dealer (AD) Bank will require:

1. Form 15CB: A certificate from an Indian Chartered Accountant verifying the nature of the payment, the applicable DTAA, and certifying that the correct TDS rate has been applied.
2. Form 15CA: An online declaration filed by the remitter on the Income Tax portal, referencing the CA’s 15CB certificate.

At Batchwise, our vetted partner CAs handle the end-to-end 15CA/15CB certification and Form 27Q filings for cross-border transactions. See our Foreign Subsidiary Incorporation Service for comprehensive entity management.