LLP - Intricacies and Issues
Pune Camp CPE Study Circle
January 30, 2010
PwC
Presentation Outline
• Background
• Provisions and options
• Taxation of LLP
• Open house
Background
Evolution of LLP
Based on recommendations of
expert committees – Naresh
Chandra (2003) & J. J. Irani
(2005); Concept paper was
developed by MCA in 2006
LLP Act, 2008 notified
on March 31, 2009.
LLP Bill, 2006 introduced
in the Rajya Sabha on Dec
2006
LLP Bill, 2008 gets
presidents
assents on Jan 9, 2009
Revised Bill, introduced
in the Rajya Sabha on
Oct 08 & passed in the
same month
LLP Bill, 2008 passed
by Lok Sabha
on December 12, 2008
Separate & official website for LLPs - www.llp.gov.in
LLP
PricewaterhouseCoopers
January 2010
Slide 4
Need for LLPs in India
Limitations of Partnership firm
Limitations of Company
•
Restriction on the number of
members to 20 (10 for banking
industry)
•
Public disclosures and filing
•
May not be a tax efficient structure
– DDT, MAT etc.
•
Unlimited liability of the partners
•
•
No perpetual succession
Need for professional and
independent directors
•
Extensive secretarial compliances
with Company law
•
Restrictions on internal control and
management
Unlimited liability / Restriction of members / Tax inefficiency
– a hurdle for growth
LLP
PricewaterhouseCoopers
January 2010
Slide 5
Overview
USP of LLPs
USP of Partnership firm
USP of Limited Company
•
Flexible form of internal
organisation structure
•
Limited Liability
•
Perpetual succession
•
Right to participate in Mgt
•
Separate legal status
•
No Public disclosure
•
Unlimited members
A hybrid entity which combines the USPs of
Partnership and Limited Company is a LLP
LLP
PricewaterhouseCoopers
January 2010
Slide 6
LLP –Provisions and Options
LLP
PricewaterhouseCoopers
January 2010
How to form a LLP
1
Deciding the
partners and
designated partners
Obtaining the
DPIN
& Digital
Signature
Certificate
2
6
Certificate of
Incorporation
5
LLP
PricewaterhouseCoopers
Checking
the name
availability
Formation of LLP
3
Filing of
Incorporation
Document
4
Drafting of LLP
Agreement
January 2010
Slide 8
LLP…Legal framework
•
LLP Agreement - first step
•
ROC a nodal agency
•
Incorporation certificate – conclusive evidence of incorporation /
registration
•
Partners can be – Individuals and company
•
Minimum two partners – No restriction on maximum partners
•
At least 2 Designated Partners mandatory
DP entrusted with LLP compliances
LLP
PricewaterhouseCoopers
January 2010
Slide 9
Whether partnership rights can be transferred?
•
•
•
Economic rights:
- includes rights of the partner to
• share in the profits and losses of a LLP, and,
• receive distributions in accordance with the LLP Agreement
- freely transferable
Non-economic rights
- it includes the right to participate in management, etc.
- not transferable unless specified by the Agreement
Transfer of economic rights does not cause dissolution or winding up
What is the tax implication when only economic interest is
transferred and not the management interest?
LLP
PricewaterhouseCoopers
January 2010
Slide 10
Important Provisions
How is the capital contributed?
•
Contribution in cash or in kind, including
- tangible
- intangible
- service contracts, etc.
•
Monetary value recognized in books
•
No requirement of minimum capital contribution – determined as per
agreement
•
Tax implications of capital contribution?
Value of contribution in kind to be determined by valuer*
*Chartered Accountants, Cost accountants or approved valuers
LLP
PricewaterhouseCoopers
January 2010
Slide 11
Important Provisions
What are the financial disclosures?
•
Accounts
-
cash or accrual system of accounting can be followed
-
statutory audit of LLP if,
•
turnover exceeds Rs. 40 lakhs
•
contribution exceeds Rs. 25 lakhs
•
Solvency statement signed by DP
•
Annual return to be filed with RoC
-
shall be certified by Company Secretary
LLP
PricewaterhouseCoopers
January 2010
Slide 12
Conversion to LLP
•
Conversion possible by:
-
partnership firm
-
private company
-
unlisted public company
•
All partners / shareholders to become LLP partners
•
All assets, interests, rights, privileges, liabilities, obligations vests
with LLP
•
In case of companies, no ‘security interest’ in assets should
subsist
•
Compliance formalities to be completed with RoC
Pre-conversion liability subsists
LLP
PricewaterhouseCoopers
January 2010
Slide 13
Conversion Issues
•
Meaning of ‘security interest’ unclear
•
Whether capital gains tax payable on conversion to LLP?
•
by partnership firm / private company / unlisted company
•
by shareholders of the company
•
Whether stamp duty is payable on conversion to LLP?
•
Whether any restrictions imposed on LLP for assets and liabilities
transferred on conversion to LLP?
LLP
PricewaterhouseCoopers
January 2010
Slide 14
Scenario 1 – Foreign Company forming an LLP
Existing Model
Possible Model
Foreign Co
Foreign Co
Outside
India
Outside
India
India
India
Company
LLP
More tax efficient subject to amendment in FDI policy
LLP
PricewaterhouseCoopers
January 2010
Slide 15
Scenario 2 – Consortiums / Joint ventures
Existing Model
Possible Model
Foreign Co
Foreign Co
Outside
India
Outside
India
Direct
Direct
India
India
Joint
Venture
Joint
Venture (JV)
Partner
Company /
Unincorporated
JV
Indian
Hold Co*
JV
Partner
Indirect
LLP will
undertake
projects
Lower tax cost with mitigation of Association of Persons
exposure, subject to FDI policy
*Approval for setting up the Indian Holding Company
LLP
PricewaterhouseCoopers
January 2010
Slide 16
Scenario 3 – Indian promoters
Existing Model
Indian
Promoter(s)
Direct
Possible Model
JV
Partner
Joint
Venture
Company /
Partnership firm
Indian
promoter(s)
Direct
JV
Partner
Joint
Venture
LLP
Organisational flexibility including separation of
economic and management rights
LLP
PricewaterhouseCoopers
January 2010
Slide 17
Scenario 4 – Listed companies with projects
Existing Model
Possible Model
Listed
Companies
Listed
Companies
Project Co.1
Project Co.1
Project Co.1
LLP 1
LLP 1
LLP 1
LLP will
undertake
projects
More tax efficient repatriation without MAT outflow
subject to commercial feasibility
LLP
PricewaterhouseCoopers
January 2010
Slide 18
Taxation of LLP
LLP
PricewaterhouseCoopers
January 2010
Taxation of LLP - Basics
•
Sec 10(23) substituted w.e.f 1-4-10
-
•
Residential Status
-
•
Consequently, all provisions applicable to LLP
LLP is a resident of India except where control and management
situated wholly outside India
Treated as an opaque entity
-
Rate similar to that of partnership firm @ 30.90%
•
No Minimum Alternate Tax payable
•
No Dividend Distribution Tax payable
LLP
PricewaterhouseCoopers
January 2010
Slide 20
Taxability of LLP under proposed DTC
•
•
Under DTC ‘Firm’, ‘Partner’ and ‘Partnership’ to include LLP & its
partners respectively
Companies @ 25%
Treated as opaque entity
-
Income taxable @ 30% (un-incorporated body)
•
Profits exempt in the hands of partners
•
No Minimum Alternate Tax payable
•
No DDT payable
LLP
PricewaterhouseCoopers
January 2010
Slide 21
Whether LLP suitable for all business models?
•
LLPs cannot be listed on stock exchange
•
Certain legislations / policies specifically require company structure
•
•
SEBI – Asset management companies
•
NHAI – Road projects
Following tax deduction available only to companies:
- Sec 36(1)(ix), 80GGB, 80IA, 80IB, 80JJA
LLP regulations is at a nascent stage and
consequent changes in other legislations required
LLP
PricewaterhouseCoopers
January 2010
Slide 22
Can a foreign company invest / form an LLP?
•
LLP Act permits a foreign company / foreign LLP to form an LLP in
India
FDI Policy
•
Investment by non-resident in Indian firms
-
Non-resident India / Person of Indian Origin allowed on non-repatriation
basis
•
-
•
approval required to make investment with repatriation basis
other non-resident - prior approval of Reserve Bank of India required
Presently unincorporated entity not allowed to invest under FDI
scheme
LLP
PricewaterhouseCoopers
January 2010
Slide 23
Thoughts and Posers
• Conversion to LLP
-
Whether tax holidays available to firm / company continue post
conversion to LLP?
-
What will be status of MAT credit, tax losses available to partnership firm
/ company on conversion?
-
Whether stamp duty is payable on conversion into LLP?
-
Revaluation – no issue except capital to stock in trade
• FDI in LLP
-
LLP Act permits a foreign company / foreign LLP to form an LLP in India
FDI regulation does not allow foreign investment in unincorporated entity
Clarity on FDI in LLP awaited
• Partners Liability in LLP
-
Retirement – no issue
Sale of economic interest – assigning better?
Taxes of LLP – Sec 167C vs. 188A
LLP
PricewaterhouseCoopers
January 2010
Slide 24
…Thoughts and Posers
• Deemed dividend mitigation
• LLP - No WT?
• Partners Share – No WT?
• Same PAN means continuation ?
LLP
PricewaterhouseCoopers
January 2010
Slide 25
Thank You
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PricewaterhouseCoopers Private Limited (a limited company in India) or, as the context requires, other member
firms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.
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