Termination Of Joint Venture Agreement In India

Insurance companies must be owned and controlled by Indian parties, in accordance with the rules established by India`s insurance regulator. As a result of this regulatory requirement, many international insurance companies have established joint ventures with Indian companies. In addition, Indian defence companies are encouraged to create joint ventures under the Indian government`s “Make in India” initiative with foreign companies with high technological know-how, whether in air, land or sea equipment. Any foreign party wishing to invest in a joint venture in India must comply with legal requirements for foreign direct investment in India, including the provisions of the Foreign Exchange Management Act 1999 (FEMA), which provides for India`s foreign exchange management system and governs the conditions applicable to foreign exchange and investments in and out of India. Currently, Indian foreign investment legislation allows people residing outside India to invest in Indian corporate securities, subject to sectoral caps imposed by the Indian government (if applicable). Foreign investments can be made under the “automatic route” (no prior authorisation is required by the government prior to the investment) or by “authorization” (prior government authorization is required). The joint venture can also distribute its profits by buying back shares, which would result in capital gains for shareholders. However, if the repurchased shares are not listed on the stock exchange, the joint venture would have to pay the 20% repurchase tax (plus increases and discounts) and the revenues collected by the shareholders (i.e. the partners in the joint venture) would be exempt from tax. In the case of dividends being distributed to shareholders by a company on a gross basis, a dividend distribution tax (DDT) is due for an amount of approximately 20.56 per cent. However, these dividends are then tax-exempt for non-resident shareholders (resident taxpayers subject to an additional 10% tax on dividends when these dividends exceed Rs 1 million). A joint venture may also opt for a capital reduction in which any distribution of the joint venture to its shareholders would be considered a dividend because of the reduction of its capital to the full profit and, therefore, the responsibility of DDT.

All other profits that are paid to shareholders as a result of the reduction in capital (after the reduction in the cost of acquisition and the amount already considered dividends) are taxable as capital gains. For non-resident joint ventures, the joint venture would be required to account for taxes on these capital gains.