pwc llp - intricacies and issues pune camp cpe study circle january 30, 2010

PwC

LLP - Intricacies and IssuesPune Camp CPE Study CircleJanuary 30, 2010

Presentation Outline

• Background

• Provisions and options

• Taxation of LLP

• Open house

Background

PricewaterhouseCoopersJanuary 2010LLP

Slide 4

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 Bill, 2006 introduced in the Rajya Sabha on Dec 2006

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

LLP Bill, 2008 gets presidents

assents on Jan 9, 2009

LLP Act, 2008 notified on March 31, 2009.

Separate & official website for LLPs - www.llp.gov.in

http://www.llp.gov.in/


Slide 5

Need for LLPs in India

Limitations of Partnership firm

• Restriction on the number of members to 20 (10 for banking industry)

• Unlimited liability of the partners

• No perpetual succession

Unlimited liability / Restriction of members / Tax inefficiency – a hurdle for growth

Limitations of Company

• Public disclosures and filing

• May not be a tax efficient structure – DDT, MAT etc.

• Need for professional and independent directors

• Extensive secretarial compliances with Company law

• Restrictions on internal control and management


Slide 6

USP of LLPs

USP of Partnership firm

• Flexible form of internal

organisation structure

• Right to participate in Mgt

• No Public disclosure

USP of Limited Company

• Limited Liability

• Perpetual succession

• Separate legal status

• Unlimited members

A hybrid entity which combines the USPs of Partnership and Limited Company is a LLP

Overview


LLP –Provisions and Options


Slide 8

How to form a LLP

Formation of LLP

Deciding the partners and designated partners

1Obtaining the DPIN & Digital SignatureCertificate2

3

45

Certificate of Incorporation

6 Checking the name availability

Drafting of LLP Agreement

Filing of Incorporation Document


Slide 9

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


Slide 10

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?


Slide 11

• 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?

How is the capital contributed?

Value of contribution in kind to be determined by valuer*

*Chartered Accountants, Cost accountants or approved valuers

Important Provisions


Slide 12

• 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

What are the financial disclosures?

Important Provisions


Slide 13

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


Slide 14

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?


Slide 15

Scenario 1 – Foreign Company forming an LLP

Outside India

Company

Foreign Co

India

Outside India

India

Existing Model Possible Model

More tax efficient subject to amendment in FDI policy

LLP

Foreign Co


Slide 16

Scenario 2 – Consortiums / Joint ventures

Outside India

Company / Unincorporated

JV

Joint Venture

(JV) Partner

India

Direct

Joint Venture

Outside India

Indian Hold Co*

JV Partner

India

*Approval for setting up the Indian Holding Company


Foreign Co Foreign Co

LLP will undertake projects

Lower tax cost with mitigation of Association of Persons exposure, subject to FDI policy

Direct

Indirect


Slide 17

Scenario 3 – Indian promoters

Indian promoter(s)

Company / Partnership

firm


JV Partner

JV Partner

Direct Joint Venture

Direct Joint Venture

Organisational flexibility including separation of economic and management rights

LLP

Indian Promoter(s)


Slide 18

Scenario 4 – Listed companies with projects

Listed Companies

Listed Companies


More tax efficient repatriation without MAT outflow subject to commercial feasibility

Project Co.1 Project Co.1 Project Co.1 LLP 1 LLP 1 LLP 1

LLP will undertake projects


Taxation of LLP


Slide 20

Taxation of LLP - Basics

• Sec 10(23) substituted w.e.f 1-4-10- Consequently, all provisions applicable to LLP

• Residential Status

- 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


Slide 21

Taxability of LLP under proposed DTC

• Under DTC ‘Firm’, ‘Partner’ and ‘Partnership’ to include LLP & its partners respectively

• 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

Companies @ 25%


Slide 22

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


Slide 23

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


Slide 24

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


Slide 25

…Thoughts and Posers

• Deemed dividend mitigation

• LLP - No WT?

• Partners Share – No WT?

• Same PAN means continuation ?

© 2009 PricewaterhouseCoopers. All rights reserved. “PricewaterhouseCoopers”, a registered trademark, refers to 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.

PwC

Thank You

pwc llp - intricacies and issues pune camp cpe study circle january 30, 2010

Documents

llp slide

llp llp provisions

llp formation of llp

llp overview slide

llp compliances

evolution of llp

llp act

management slide