The remittance of funds during the winding-up process of a company refers to the repatriation of the assets or proceeds (such as liquidation amounts) to the shareholders, creditors, or other stakeholders, including non-resident shareholders or investors. The process of winding up a company can involve various steps, including the sale of assets, repayment of debts, and distribution of remaining funds to shareholders or stakeholders.

When a company is wound up, non-resident shareholders or creditors are allowed to repatriate their portion of the liquidation proceeds abroad, but there are several conditions and regulations they must adhere to under FEMA (Foreign Exchange Management Act), RBI guidelines, and Indian tax laws.

Key Considerations for Remittance on Winding Up of Companies

1. Nature of Winding Up (Voluntary or Compulsory):
   • Voluntary winding up occurs when a company voluntarily decides to close its business operations and liquidate its assets.
   • Compulsory winding up is initiated by a court order, often due to the company’s inability to pay its debts or fulfill other statutory obligations.
2. Eligible Parties for Remittance:
   • Non-resident shareholders or investors who hold shares in an Indian company being liquidated.
   • Non-resident creditors or lenders who are owed money by the company and are entitled to repayment.

Regulations Governing Remittance on Winding Up of Companies

The remittance of assets during the winding-up of a company is primarily governed by FEMA, RBI regulations, and Income Tax Act provisions. Below are the key guidelines for the remittance process:

1. Remittance of Liquidation Proceeds by Non-Resident Shareholders:

Non-resident shareholders of an Indian company are entitled to repatriate the proceeds from the liquidation of the company. The remittance is subject to compliance with the following:

• Source of Funds: The funds being remitted must be sourced from the proceeds of the liquidation process. If the assets were originally acquired through foreign direct investment (FDI) or repatriable funds, the remittance is typically allowed.
• Tax Liabilities: Non-residents must ensure that capital gains tax has been paid on the liquidation proceeds, especially if the shares or assets of the company are being sold or liquidated for a profit. The applicable tax on capital gains will depend on the type of asset and the holding period.
• Approval from RBI: Generally, remittance of funds by non-residents during the winding-up process can be made under the automatic route (no prior approval needed) if it complies with the FEMA regulations. However, in specific cases (such as where the winding-up process involves a transfer of assets not originally held as per FEMA rules), RBI approval may be required.
• Authorized Dealer Bank: The remittance must be processed through an Authorized Dealer (AD) bank in India. The AD bank will ensure that the transaction adheres to FEMA and RBI guidelines, and the appropriate tax clearance is provided.
• Documentation Requirements:
  • Board resolution or liquidator’s certificate confirming the liquidation of the company and the amount due to the non-resident shareholder.
  • Tax clearance certificate confirming that the required taxes (such as capital gains tax) have been paid to the Indian tax authorities.
  • Form 15CA and 15CB (if applicable), as a declaration to the tax authorities that the tax due has been paid.

2. Remittance of Liquidation Proceeds by Non-Resident Creditors:

In cases where the company has creditors who are non-residents, the creditors are entitled to receive their share of the liquidation proceeds based on the company’s debts.

• Repatriation of Funds: Non-resident creditors can remit the liquidation proceeds abroad, subject to payment of any outstanding dues or tax liabilities.
• Tax Deduction at Source (TDS): If the liquidation proceeds represent income or interest, applicable TDS must be deducted before remittance. For instance, any interest payable on loans or debts that are settled during winding-up may attract TDS.
• Authorized Dealer Bank: The payment or remittance must be made through an authorized dealer bank with the relevant documentation to ensure compliance with FEMA and tax laws.

3. Taxation of Winding-Up Proceeds:

• Capital Gains Tax: If the liquidation proceeds involve the sale of shares or assets that were held by the non-resident, capital gains tax will be applicable. The rate of tax depends on the holding period (long-term vs. short-term) and whether the asset is sold for a profit.
  • Long-term Capital Gains (LTCG): If the shares or assets were held for more than 24 months, they are considered long-term assets, and the capital gains tax rate is typically 10% (with indexation benefit) or 20% (without indexation).
  • Short-term Capital Gains (STCG): If the shares or assets were held for less than 24 months, the gains are taxed at a rate of 15%.
• TDS on Remittance: Tax will be deducted at source on liquidation proceeds that are considered income (such as interest or income from the sale of assets). The applicable rate of TDS will depend on the type of asset and the tax residency status of the non-resident.
• Double Taxation Avoidance Agreement (DTAA): Non-residents may be able to benefit from DTAAs between India and their country of residence, allowing them to avoid being taxed twice. This could involve claiming credit for taxes paid in India against taxes due in their home country.

4. Other Considerations:

• Mode of Remittance: The liquidation proceeds are generally transferred via bank transfer through an Authorized Dealer bank. The transaction must comply with both FEMA guidelines and the Income Tax Act.
• Timeframe for Remittance: The timeline for the remittance of liquidation proceeds depends on the completion of the winding-up process, including settlement of dues, tax clearance, and other legal formalities.

Conclusion

The remittance of assets during the winding-up of an Indian company by non-residents involves a series of compliance steps under FEMA, RBI guidelines, and Indian tax laws. Non-resident shareholders and creditors are allowed to repatriate their share of the liquidation proceeds, provided the assets were originally acquired through permitted means (such as FDI), taxes have been paid on the proceeds, and necessary approvals from the RBI or tax authorities are obtained. It’s essential to ensure that all regulatory requirements are met to facilitate smooth repatriation, including filing the appropriate forms (Form 15CA, 15CB) and obtaining tax clearance.