Structuring Inbound Investment into India: Entity Selection

For most foreign investors, a private limited subsidiary under the automatic route is the default India entry structure, offering the widest activity scope, the cleanest exit, and the most established treatment. Branch, project and liaison offices suit narrower purposes and carry heavier permanent establishment exposure.

Start from the exit, not the entry

The most common structuring error is optimising for entry simplicity and discovering the cost at exit. Entity form, jurisdiction of the investing entity and instrument choice all determine what an eventual sale or repatriation looks like — and by then the structure is expensive to change.

Three questions should be settled before the entity is chosen: how profits will be repatriated during the holding period, how the investor will exit, and what happens if the business needs restructuring or partial divestment.

The options

Private limited subsidiary. The default. Full activity scope subject to sectoral policy, limited liability, clear treatment, and the most straightforward path to raising further capital and exiting by share sale.

Limited liability partnership. Permitted for foreign investment in sectors under the automatic route without performance-linked conditions. Attractive for tax transparency in some structures, but sectoral restrictions apply and the form is less familiar to acquirers and lenders, which can affect exit.

Branch office. Permits specified activities, is treated as a permanent establishment, and is taxed at rates applicable to foreign companies. Suits businesses genuinely operating directly in India, and requires approval.

Project office. For executing a specific contract, limited in duration and scope.

Liaison office. Representative activity only — market research, liaison, promotion — with no commercial activity and no income. The constraint is genuinely tight, and a liaison office that negotiates or concludes contracts creates permanent establishment exposure with retrospective effect. This is a recurring and expensive error.

The jurisdiction question

Where the investing entity sits determines treaty access, and treaty access determines withholding on dividends, interest and royalties, and treatment of capital gains on exit.

Treaty benefit is not automatic. Beneficial ownership, substance in the treaty jurisdiction, and anti-abuse provisions including the principal purpose test all have to be satisfied. A holding company with no substance beyond a registered address is increasingly unlikely to secure treaty benefit, and structures built on that assumption a decade ago are the ones now generating disputes.

[INSERT: an anonymised Solique example of a holding structure reviewed for substance before an exit, and what the review changed.]

Capital structure

The debt-equity mix affects repatriation flexibility and the tax profile. Interest on shareholder debt may be deductible subject to thin capitalisation limits on related party interest, and to the ECB framework where the lender is offshore.

Instrument choice matters. Compulsorily convertible instruments are treated as equity for FEMA purposes, while optionally convertible instruments generally are not, which changes the applicable framework entirely.

Related reading

• FEMA compliance for inbound FDI — FEMA Compliance Checklist for FDI in India
• permanent establishment exposure — Permanent Establishment Risk for Foreign Companies in India
• planning the exit — Exit Structuring for PE-Backed Indian Companies