1. PwC LLP - Intricacies and Issues Pune Camp CPE Study Circle January 30, 2010

2. Presentation Outline Background Provisions and options Taxation of LLP Open house

3. Background

4. PricewaterhouseCoopers January 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.inwww.llp.gov.in

5. PricewaterhouseCoopers January 2010LLP 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

6. PricewaterhouseCoopers January 2010LLP 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

7. PricewaterhouseCoopers January 2010LLP LLP –Provisions and Options

8. PricewaterhouseCoopers January 2010LLP Slide 8 How to form a LLP Formation of LLP Deciding the partners and designated partners 1 Obtaining the DPIN & Digital Signature Certificate 2 3 4 5 Certificate of Incorporation 6 Checking the name availability Drafting of LLP Agreement Filing of Incorporation Document

9. PricewaterhouseCoopers January 2010LLP 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

10. PricewaterhouseCoopers January 2010LLP 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?

11. PricewaterhouseCoopers January 2010LLP 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

12. PricewaterhouseCoopers January 2010LLP 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

13. PricewaterhouseCoopers January 2010LLP 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

14. PricewaterhouseCoopers January 2010LLP 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?

15. PricewaterhouseCoopers January 2010LLP 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

16. PricewaterhouseCoopers January 2010LLP 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 Existing Model Possible Model Foreign Co LLP will undertake projects Lower tax cost with mitigation of Association of Persons exposure, subject to FDI policy Direct Indirect

17. PricewaterhouseCoopers January 2010LLP Slide 17 Scenario 3 – Indian promoters Indian promoter(s) Company / Partnership firm Existing Model Possible Model JV Partner Direct Joint Venture DirectJoint Venture Organisational flexibility including separation of economic and management rights LLP Indian Promoter(s)

18. PricewaterhouseCoopers January 2010LLP Slide 18 Scenario 4 – Listed companies with projects Listed Companies Existing ModelPossible Model More tax efficient repatriation without MAT outflow subject to commercial feasibility Project Co.1 LLP 1 LLP will undertake projects

19. PricewaterhouseCoopers January 2010LLP Taxation of LLP

20. PricewaterhouseCoopers January 2010LLP 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

21. PricewaterhouseCoopers January 2010LLP 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%

22. PricewaterhouseCoopers January 2010LLP 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

23. PricewaterhouseCoopers January 2010LLP 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

24. PricewaterhouseCoopers January 2010LLP 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

25. PricewaterhouseCoopers January 2010LLP Slide 25 …Thoughts and Posers Deemed dividend mitigation LLP - No WT? Partners Share – No WT? Same PAN means continuation ?

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