We'll use an LLP for our India team: what NDI Rules 2019 actually require

Legal basis: FEMA (Non‑Debt Instruments) Rules, 2019 – Rule 6(b) read with Schedule VI; Limited Liability Partnership Act, 2008 – Section 7 — Notified: 17 October 2019 (S.O. 3732(E)). Source: https://rbi.org.in/Scripts/NotificationUser.aspx?Id=11776&Mode=0. Last updated: October 2026.

The moment the structure question becomes unavoidable

A US parent wants to place a sales manager in Mumbai. A Singapore SaaS founder needs to hire the first Indian software engineer. In both cases the first call is usually to an HR consultant; the FEMA analysis follows – often too late.

Before any foreign‑owned entity can employ anyone in India, it must choose a legal vehicle. That vehicle simultaneously determines:

• Whether the foreign investment complies with FEMA;
• Which post‑investment filings and deadlines apply; and
• Whether the parent acquires a taxable presence in India.

The three recognised vehicles are:

• Private limited company (wholly owned subsidiary or joint venture);
• Limited liability partnership (LLP); and
• Branch office.

Each sits under a distinct FEMA regime and yields a different tax outcome for the parent.

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Vehicle 1 – Private Limited Company (WOS or JV)

The private limited subsidiary is the default route for most foreign entrants.

• FEMA basis: NDI Rules 2019 (S.O. 3732(E)), Schedule I; reporting under the RBI's Mode of Payment and Reporting of Non‑Debt Instruments Regulations, 2019 (FEMA 395/2019‑RB). Most sectors enjoy the automatic route – no prior government approval, only post‑investment reporting.
• Capital entry: Equity shares, compulsorily convertible debentures (CCDs) or compulsorily convertible preference shares (CCPS).
• FEMA filing deadline: Form FC‑GPR must be filed on the FIRMS portal within 30 calendar days of the allotment (issue) date (not the receipt of funds).
• Late Submission Fee (LSF): Delays in reporting attract a Late Submission Fee under the RBI Master Direction on Reporting under FEMA (Part IV, "Delays in reporting"); check the current LSF computation and when it is available before relying on it. Other contraventions are dealt with under Sections 13 and 15 of FEMA, and a compounding application carries a fee of ₹10,000 plus GST (Compounding Rules 2024, rule 4(4)).
• Tax position: Domestic company tax – approximately 25.17 % effective (optional 22 % rate under Section 200 of the Income‑tax Act 2025, tax year 2026‑27) including surcharge and cess. No permanent establishment (PE) for the parent unless the subsidiary’s activities create one under the DTAA.
• Ongoing obligations: Annual FLA return by 15 July (if any FDI outstanding), statutory audit, and an accountant's transfer‑pricing report in Form No. 48 where international or specified domestic transactions are entered into (Section 172, Income‑tax Act 2025; rule 85, Income‑tax Rules 2026).
• Land‑border country check: If the investor is an entity or citizen of a country sharing a land border with India (or the beneficial owner is), investment in an Indian company is permitted only under the Government route, even for automatic‑route sectors (NDI Rules 2019, Rule 6(a), proviso (i); Press Note 3 2020). For LLPs, Rule 6(b) separately excludes citizens and entities of Bangladesh and Pakistan; check the position for other land‑border investors against the NDI Rules before using an LLP.

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Vehicle 2 – Limited Liability Partnership

An LLP often appears “simpler”, but the NDI Rules 2019 make it considerably more restrictive.

• FEMA basis: NDI Rules 2019, Rule 6(b) read with Schedule VI. A person resident outside India (other than a citizen or entity of Pakistan or Bangladesh), not being an FPI or FVCI, may contribute to the capital of an LLP only when:

1. The sector permits 100 % FDI via the automatic route, and 2. The sector carries no FDI‑linked performance conditions (no minimum capitalisation, lock‑in, or activity conditions under the Consolidated FDI Policy 2025). Schedule VI does not itself list excluded sectors, so check the sectoral entry route and conditions for your activity.

• Tax disadvantage: LLP income is taxed at a flat 30 % (plus surcharge and 4 % cess) regardless of profit size – higher than the 25 % effective rate for a private limited company.
• Equity flexibility: LLPs cannot issue shares, CCDs or CCPS. Venture‑style equity rounds, ESOPs and secondary transfers are unavailable.
• FEMA filings:

- Form FDI‑LLP(I) within 30 days from the date of receipt of the consideration for the foreign partner’s capital contribution or acquisition of profit shares; - Form FDI‑LLP(II) within 60 days from the date of receipt of funds for any disinvestment or transfer of capital contribution or profit share between a resident and a non‑resident (or vice versa); the resident transferor/transferee must report. Both are filed on FIRMS.

• Designated Partner requirement: Every LLP – not only a foreign‑invested one – must have at least two Designated Partners who are individuals, at least one of whom is resident in India, i.e. has stayed in India for at least 120 days during the financial year (LLP Act 2008, Section 7(1) and Explanation; Schedule VI(c) of the NDI Rules requires compliance with the LLP Act). For a foreign parent without an Indian co‑founder, this creates an immediate structural dependency.
• Conclusion: Except for narrow professional‑services partnerships, the LLP’s eligibility test, resident‑partner mandate, higher tax rate and lack of equity instruments make it a less attractive vehicle than a private limited subsidiary.

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Vehicle 3 – Branch Office

A branch office is the parent company itself operating in India; no separate Indian legal entity is created.

• FEMA basis: FEMA 22(R)/2016‑RB (dated 31 March 2016) governing branch and liaison offices.
• Establishment: Submit Form FNC to an Authorised Dealer (Category‑I bank). Prior RBI approval is required for entities from Bangladesh, Pakistan, Sri Lanka, Afghanistan, Iran, China, Hong Kong, Macau, NGOs and foreign government bodies.
• Permitted activities: Commercial activities identical to the parent’s home‑country business, as specified in the FNC approval. A branch can hire Indian staff and pay salaries in rupees – a key difference from a liaison office.
• Permanent establishment (PE): A branch is a fixed place of business; under DTAA Article 5(1) it is automatically a PE. Consequences:

- Income attributable to the Indian PE is taxed under Section 9 of the Income‑tax Act 2025 (income deemed to accrue or arise in India) at 35 % (Finance Act 2026, First Schedule, Paragraph E.II). - Transfer‑pricing provisions (Sections 161‑173 of the Income‑tax Act 2025) apply to intra‑group transactions.

• Annual Activity Certificate (AAC): Certified by a Chartered Accountant and submitted to the AD bank by 30 September each year. Failure for three consecutive years triggers automatic closure.
• When a branch makes sense: When contracts must remain in the parent’s name (IP licensing, proprietary processes), when the India presence is project‑specific, or when the sector disallows FDI into an Indian company.

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Practical implications of choosing the wrong structure

Key point: Under NDI Rules 2019 (Rule 6(b) read with Schedule VI), an LLP can receive FDI only in sectors that allow 100 % automatic route without any performance conditions, making it a less flexible vehicle than a private limited subsidiary.

Step‑by‑step: from structure decision to first hire

• Sector check first. Run the sector through the Consolidated FDI Policy 2025 and the makeitlegit FDI checker. Identify the entry route and any performance conditions.
• Automatic‑route activity: Incorporate a private limited subsidiary via SPICe+ on the MCA portal (7–12 working days). Obtain the PAN, TAN and bank account.
• FC‑GPR filing. Count 30 calendar days from the share allotment date and file Form FC‑GPR on FIRMS with the FIRC, KYC of the foreign investor, valuation report and Company Secretary certificate.
• LLP consideration. Apply the two‑part test in Schedule VI (Rule 6(b)). If satisfied, confirm at least two individual Designated Partners with at least one resident in India (LLP Act s.7(1)), model the 30 % tax versus the 25 % company rate, and file Form FDI‑LLP(I) (and Form FDI‑LLP(II) on any resident/non‑resident transfer) on FIRMS.
• Branch requirement. Submit Form FNC detailing the exact commercial activities the Indian staff will perform. Build the 35 % tax exposure and transfer‑pricing implications into the parent’s provision from day one.
• Annual compliance cycle. – Private limited / LLP with FDI: FLA by 15 July. – Branch office: AAC by 30 September. – Transfer‑pricing report in Form No. 48 (where international or specified domestic transactions exist) at least one month before the return due date under Section 263(1)(c) (rule 85, Income‑tax Rules 2026).

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FAQ

• Can a foreign company use an LLP to hire Indian employees?

Yes, but only if the activity falls in a sector that permits 100 % automatic‑route FDI and carries no performance conditions under the Consolidated FDI Policy 2025, and the investor is not a citizen or entity of Pakistan or Bangladesh, or an FPI/FVCI. This is the test in NDI Rules 2019, Rule 6(b) read with Schedule VI. If either condition fails, the LLP would breach FEMA and attract compounding penalties.

• What is the filing deadline for Form FC‑GPR after issuing shares to a foreign shareholder?

The deadline is 30 calendar days from the date of allotment (issue) of shares (not the date funds are received). The filing is done on the FIRMS portal under the RBI reporting framework (FEMA 395/2019‑RB and the RBI Master Direction on Reporting).

• Does a branch office automatically create a permanent establishment for the foreign parent?

Yes. Under DTAA Article 5(1) a branch is a fixed place of business through which the business is carried on, making it a PE. Income attributable to the PE is taxed in India at 35 % (Finance Act 2026, First Schedule, Paragraph E.II) under Section 9 of the Income‑tax Act 2025.

• Is a resident Designated Partner mandatory for an LLP?

Yes – but the requirement comes from the LLP Act 2008, not the NDI Rules, and applies to every LLP. Section 7(1) requires at least two Designated Partners who are individuals, at least one of whom is resident in India, meaning a person who has stayed in India for at least 120 days during the financial year. Schedule VI(c) of the NDI Rules makes LLP Act compliance a condition of foreign investment.

• How is the Late Submission Fee for a delayed FC‑GPR calculated?

The LSF for reporting delays is levied under the RBI Master Direction on Reporting under FEMA (Part IV, "Delays in reporting"); check the current computation and availability window there before relying on any formula. Contraventions other than reporting delays are dealt with under Sections 13 and 15 of FEMA, and a compounding application carries a fee of ₹10,000 plus GST (Compounding Rules 2024, rule 4(4)).

• What tax rate applies to an LLP compared with a private limited subsidiary?

An LLP is taxed at a flat 30 % (plus surcharge and 4 % cess). A private limited subsidiary can opt for the lower 22 % rate under Section 200 of the Income‑tax Act 2025, resulting in an effective ≈ 25.17 % tax for tax year 2026‑27.

• When is a liaison office appropriate instead of a branch or subsidiary?

A liaison office (also under FEMA 22(R)/2016‑RB) may conduct market research and promotional activities but cannot earn revenue or sign commercial contracts. If the first India hire will generate or support Indian revenue, a liaison office is unsuitable; a branch or subsidiary is required.

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I’m CA Harun Raaj. If you’re structuring India operations and this affects your setup, reach out.

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See Also

• Is an LLP Agreement a Public Document?
• DSC for Company Registration — What the Companies Act Requires
• How to Convert a Partnership Firm into an LLP in India