The foreign nationals or foreign citizen or Non-Resident Indians residing abroad can be appointed as a Director on the Board of Indian companies. A foreign body corporate may have 100% subsidiary company in India, may nominate one or all its Directors on the Board of the subsidiary Indian company who are foreign nationals.
What are the Laws applicable to foreign Directors appointed in Indian companies?
The following Acts are applicable:
(1) COMPANIES ACT, 1956
(2) Service Tax under Finance Act
(3) FEMA 1999
(3) INCOME TAX ACT , 1961
(1) COMPANIES ACT, 1956
The foreign nationals or foreign citizen or Non-Resident Indians residing abroad can be appointed as a Director on the Board of Indian companies whether public listed or unlisted or private. A foreign body corporate having 100% subsidiary company in India may nominate all its Directors of the subsidiary Indian company who may be foreign nationals. A foreign director may be appointed as whole time director (executive director) or non whole time director (non – executive director). Procedures relating to appointment of foreign directors under Companies Act are given below.
Under Section 2(13) of the Companies Act, 1956, Director includes any person occupying the position of Director be whatever name called. In view of this, a foreign national can be appointed as Director in the companies registered in India as per Companies Act 1956.
1. To become a Foreign Director he is required to obtain Director Identification Number (DIN) . For applying DIN, Permanent Account Number (PAN) from the Indian Income Tax department is compulsory. Before appointment of director, the Director has to apply for DIN.
2. In the case of foreign nationals, the recent color photograph of the director, Pass-port and proof of residence and the affidavit ( format of affidavit is available in MCA web site under DIN 1 ) have to be notarized from the respective country and by applying in Form DIN 1, the Director Identification Number can be obtained on-line. In case of
Foreign Director, the supporting documents can also be attested by Company secretary in full time employment / CEO / Managing director of the Indian company in which he / she proposed to be a director.
3. Affidavit by the applicant to be executed on non judicial stamp paper and duly notarised. It is a mandatory attachment.
4. In case of foreign applicant, address proof should not be older than 1 year from the date of filing of the E form.
5. Passport number is mandatory for foreign nationals. Foreign nationals shall select the nationality as declared in the passport.
6. Father’s name proof is not required in the case of foreign nationals / NRIs.
7. In case of proofs which are in languages other than Hindi / English, the proofs should be translated in Hindi / English from professional translator carrying his details (name, signature, address) and seal. In the case of foreign nationals, translation done by the notary of home country is also acceptable.
All the forms required to be filed under the Companies Act are filed through MCA website through the digital signature. In view of this the Foreign director is required to have one digital signature with his PAN number encrypted so as to enable him to file the returns with Income tax authorities on behalf of the company.
The Private Limited Companies are required to have a minimum of 2 Directors and Public Limited Companies are required to have a minimum of 3 Directors under the Companies Act. It is quite possible that all the Directors of the company may be foreign nationals and they run the business through the persons of Indian nationals appointed by them in India. The Companies Act does not prohibit holding Board meetings abroad. Similarly, it is also having the provision for conducting Board meetings through video –conference subject to adherence to the circulars issued by the Ministry of Corporate Affairs in this regard from time to time. In view of this, it is obvious that a company can have all the Directors consisting of foreign nationals or foreign citizens and there is no prohibition that only Indian Directors should be on the Board of Indian companies.
In the case of companies incorporated in Singapore, at least one Director should the resident of Singapore. But, no such nationality restriction is applicable for the companies incorporated in India.
Further, a Director belonging to China or Thaiwan who may not be expert in English and hence a person may also become the Director of Indian company without knowing any Indian languages. What is required is business acumen and also help from others to understand business language in India.
The person proposed to be entered into as Director shall give his consent to act as a Director of the Indian company in writing. This is mandatory in case of a public limited company but now-a-days as a good corporate governance practice, the consent of the proposed appointee director is obtained for private limited companies also. As a measure of caution, this consent may also be notarized in the respective country along with the other documents for obtaining Director Identification Number. This becomes absolutely necessary especially when the Form 32 is required to be certified by a professional and he may have a level of comfort if notarized documents are attached to vouch for the documents belonging to the appointee as he may not be knowing the foreign national personally.
Appointment of Directors is a power which is exercised by the members but once DIN has been obtained the board of directors can pass a resolution for appointing the foreign director by way of an additional director to meet urgent business needs. In addition Form 32 has to be filed with Registrar of Companies with in 30 days for the appointment of director. . And once Form 32 is approved the director’s name will appear in the ‘view signatory details’ in MCA website. At the next Annual general meeting however, the person appointed as Additional director by the Board has to be re-appointed as a Director by the members.
Foreign directors can be paid sitting fees for attending the board meetings even if they are attending the meetings by video conference. In addition to this directors in public limited companies may be also paid commission permitted under sec 309 of the Companies Act. If they are not in the whole time employment of the company they may be paid commission 1 % of the net profits of the company if the company has a managing director or a whole time director or a manager; 3 % of the net profits of the company in any other case. Sec 309 is not applicable to private limited companies and directors of the private limited companies may be paid commission on the net profits of the company without any restriction.
(2) SERVICE TAX AND NON- WHOLE TIME DIRECTORS
The payment of service tax for the services rendered by the Director is of new orgin. No service tax is payable if the director is employee of the company say MD/WTD/ED. In other cases directors remuneration is liable to service tax under reverse tax. Basic exemption of Rs.10Lakhs is not available when reverse tax mechanism is applicable.
Service tax will be payable on sitting fees paid to directors for attending meetings of Board and Committees of Board, traveling expenses and incidental expenses for attending meetings of Board and their committees., commission or other remuneration paid, if any..
The Ministry of Corporate Affairs has clarified vide General Circular No. 24/2012 dated August 9, 2012 that any increase in remuneration of Non-Whole Time Director(s) of a company solely on account of payment of service tax on commission payable to them by the company shall not require approval of Central Government under section 309 and 310 of the Companies Act even if it exceeds the limit 1% or 3% of the profit of the company, as the case may be, in the financial year 2012-13.This means such approval will be required after 1-4-2013.
(3) FOREIGN EXCHANGE MANAGEMENT ACT, 1999
Person resident in India means, the person should have resided in India in the preceding financial year for more than 182 days. Citizenship is not the criteria for determining whether or not a person is resident in India.
Reserve Bank of India has clarified under the Foreign Exchange Management Act, 1999 appointment of foreign national as a Director on the Board of Indian companies does not require the Reserve Bank’s approval.
Payment of sitting fees, remuneration, commission, travel expenses to the Non-whole-time Directors who is resident outside India is permitted under general permission. But, foreign nationals cannot purchase property in India.
Foreign nationals intending to enter India are required to be in possession of a valid pass-port issued in their country along with valid India visa. Foreign passengers must ensure that they are in possession of Indian visa before embarking their journey and there is not clause for visa on arrival in India.
Normally visa is given for a period of five years for employment purpose which may be extended further.
As per FEMA guidelines, a citizen of a foreign state resident in India, being an employee of a foreign company and on deputation to the office/ branch/ subsidiary/ joint venture in India of such foreign company or being an employee of a company incorporated in India, may open, hold and maintain a foreign currency account with a bank outside India and receive/ remit the whole salary payable to him for the services rendered, by credit to such account, provided that income tax chargeable under the Income Tax Act, 1961 is paid on the entire salary as accrued in India.
Nationals of Bhutan and Nepal are not required to apply for Indian visa and also nationals of Maldivies can stay in India up to 90 days without having Indian visa.
Employment visa is required to be granted to foreign nationals employed in an Indian company. The employment visa is valid up to 1 year which may be extended upto 5 years.
Remittance to abroad – if the non-resident whole-time director wants to remit funds to his personal account in abroad he can do so by sending the amount under general permission of Reserve Bank of India.
(4) INCOME TAX ACT
DEFINITION OF NON RESIDENT:
Non Resident is defined in the Income Tax Act as follows;
1. A person who have not stayed in India for 182 days in the previous year will be a Non Resident Indian
2(i). A person who have not stayed in India for 365 days or more in the 4 preceding previous year
2(ii). A person who have not stayed in India for atleast 60 days in the previous year
PAN for Non Residents
Foreign nationals / citizens can apply for PAN online. Form 49AA is the relevant application form for allotment of PAN number for Non Residents. If there is no pan number available at the time of deduction of income tax, twenty percent tds has to be deducted.
Remuneration to Non Residents
Foreign Directors are liable to pay applicable income tax when they receive income. Foreign Directors can provide technical services for the Indian Companies in which they are Directors.
Any payment of remuneration to foreign directors is subject to Income Tax. If the foreign national is employed in India, the required TDS has to be deducted from the remuneration payable to him in accordance with Sec 192 of the Income Tax Act. In case any payment to non resident other than remuneration in accordance with section 195, TDS of 10% has to be deducted. Section 115A(1)(b) of the Income Tax Act 1961 is relating to income tax provisions for royalty or technical services received by a non resident.
In case the foreign nationals are Non-whole-time Directors and any commission or any remuneration is paid to them, it can be paid subject to deduction of applicable tax.