What Indian Founders Get Wrong: ODI, FEMA, UAE Company

Every week as Indian Founders establish their companies in the UAE, they are guided by the belief that "Once my company is going to be outside India (i.e., a foreign company), it will not subject to Indian Rules."With that assumption as the basis of operations, this creates a number of major complications for founders when they operate across borders — such as when they have to wait for remittances to clear and be frozen and also have to respond to compliance notices, figure out how to continue to pay taxes here in India, and millions of dollars later have to incur the expenses associated with cleaning up these issues.

 While forming a UAE company is relatively simple, it is not as simple for an Indian founder to understand how that company will relate back to India’s Overseas Direct Investment (ODI) guidelines and the Foreign Exchange Management Act (FEMA) framework.

Let’s look at what is going on that is not right.

Your UAE Company is Not Outside the Jurisdiction of Indian Law

When you form a UAE company as an Indian resident, that company is still viewed under Indian law as an overseas investment. Therefore, all of the following apply to your UAE company:   

You must comply with FEMA to invest abroad

You must comply with ODI in order to report and maintain your overseas investment

The entity formed in the UAE can be registered as an Offshore Company, but any ownership, control, and funding will ultimately be monitored from India.  

 Not taking these issues seriously will not get you into trouble right away but will build up over time and cause greater problems later down the road.

Remittance Approval Mistakes By Founders for Compliance Purposes

The most common misunderstanding among founders is: "My bank let me send the money, so I'm good to go."

A bank usually checks:

Know Your Customer (KYC)

Where is the source of funds

What is the purpose code of the remittance   

A bank doesn't check:

Foreign Entity (OE) reporting, is complete?

Is my yearly filing kept current?

Have I continued to comply with (FEMA) over the years?  

 This gap between compliance and remittance based on the above facts gives the founder a false sense of security at first, but once the system catches up 2-3 years later, they will find their transaction is not compliant.

ODI is treated as a paper record and not an obligation to file.

Many founders will file ODI only once and/or have their CA file an ODI and then forget about them. This is a mistake; ODI is not a one-time report. Here is what you should know about ODI :

Initial reporting is required when funding the UAE entity.

Annual reporting will be based on your entity's financials.

You must report any changes in shareholding, capital structure.

If you do not complete these annual reports, you will lose your right to send money out of the UAE.  

Most founders use their personal funds to pay UAE expenses -

Most receive UAE income in their Indian bank account;

Most founders send money back and forth between India and the UAE without a proper record of their transactions;  

From a regulatory view, it creates:

Hurdles in the way of Information Traceability

Unexplained sources of foreign income exposure

Potential regulatory red flags during remittance review.

There is no option for founders to establish a clear and complete separation of their personal funds and their business funds.  

UAE compliance gets all the attention, India gets ignored  

 While many are diligent when it comes to compliance with UAE's regulatory framework, they tend to overlook compliance with India's regulatory framework. UAE founders focus heavily on:

- Licence renewals

- Visas

- VAT & Corporate Tax  

However, they typically overlook:

- FEMA (Foreign Exchange Management Act) Reporting

- Annual filings for ODI (Overseas Direct Investment)

- Foreign income disclosure in Indian taxation returns

Furthermore, U.A.E compliance does not automatically grant compliance in India. The U.A.E and India operate in parallel and ignoring either of them creates an imbalance.  

U.A.E structures are often chosen for their speed in setting them up rather than their intention.  

Companies in the U.A.E are often set up in a hurry without considering the following:

Is my business trading or service driven?

Should I own my company as an individual or have the company owned by an Indian company?

How will I repatriate profit later on?

An expedited U.A.E structure may work for a short time, however it will result in:  

Complications with ODI's Inefficiencies in taxation

Challenges in exiting, or restructuring the U.A.E company.

Although fixing your structure after the fact may be more contentious, it will always be less painful than getting it right up front.  

What do founders need to change their mindsets about?  

 A U.A.E Company does NOT provide an avenue for a founder to escape compliance with the Indian regulatory framework but rather is an extension of their business across borders. The correct way to view it is as follows:  

U.A.E regulations govern the manner in which U.A.E. companies operate

Indian regulations govern ownership of Indian companies and the methods of compliance, by reporting.

Both regulatory frameworks must remain aligned at all times.  

Founders who understand this will have fewer surprises. Founders who don't will find out the hard way.

Conclusion

 Global expansion is not a matter of geography but discipline. As the founder of an Indian company, the provisions of the ODI and FEMA are not barriers, but simply the cost of doing business on a global scale.

You will save much time, effort, and expense if you take the time to get things right the first time than if you wait until later to fix them.