Query on FEMA, Pre incorporation expenses

[sumit phadnis]

Dear Professionals,

 

Please give your views on the following asap:

1. Non-resident investor company incorporated in Germany has expended Rs. 10 LAkhs towards purchase of land in SEZ before subsidiary Indian Pvt Ltd was incorporated.
2. It is in the nature of a pre-incorporation expenses. Further, there is no definition of pre-incorporation expenses under FEMA which leads us to a common understanding of the term- all expenses incurred before subsidiary is formed. This can also be torwards purchase of land.
3. Also, since the subsidiary has been set up, in my view either the subsidiary can send this money back since reimbursement of pre-incorporation exp is a permitted current account transaction and general permission is given to AD to remit these monies. In other words, we don't even have to go to RBI.
4. Even if we take a call as a conservative approach to seek RBI approval for capitalising these pre-incorporation expenses or sending it back to foreign collaborator, I am sure RBI will not come back saying it is not possible. They may ask for certain clarifications and may permit the transaction. They may also initiate compounding for approaching them late.
5. Nowhere, I feel it will be treated as an ECB or even a motive by Non resident Company to circumvent law by acquiring immovable property because as on date the lease for land with SEZ is regd in the name of non resident Company and not subsidiary indian Company.

Thanks in advance.

 

Best Regards,

 

Sumit Phadnis

[chakri hegde]

Dear Sumit,

Re-imbursement of Pre-incorporation expenses incurred by the Non resident investor is coming under FEMA (Current Account Transactions) Rules, 2000 as rightly pointed out by you. These rules prescribe 3 schedules:

Schedule I – Total prohibition (unless otherwise exempted by RBI)

Schedule II – Prior approval of Central Govt needed

Schedule III – Prior permission of RBI

Drawal of Foreign Exchange for re-imbursement of pre-incorporation expenses falls under Schedule III. Here if the amt of remittance exceeds USD 100,000, prior permission of RBI is required for making such remittances. Here, you need to give declaration cum application in Form A2.

So, if the amt of remittance for this purpose is less than USD 100,000, then no need to take the approval of the RBI.

And further, FEMA (Current Account Transactions) Rules, 2000 are not applicable to this transaction, when payment is made out of funds held in the Resident Foreign Currency (RFC) Account  of the remitter.

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With Best Wishes
Chakri G Hegde
Nissin Foods India Ltd.
Bangalore