Insights · India-UAE Corridor
ODI vs LRS: How to Fund a UAE Company from India Without Breaching FEMA
The two routes an Indian resident can use to capitalise a Dubai company, their limits and reporting, and the first-month mistakes that end in compounding.
An Indian resident can fund a UAE company in two ways: personally, as overseas direct investment made within the Liberalised Remittance Scheme limit of USD 250,000 a year, or through an Indian company, as overseas direct investment of up to 400% of that company’s net worth. Both are overseas direct investment under FEMA and both need Form FC and a Unique Identification Number before the first remittance. The choice decides how much you can invest, whether you can lend to the UAE company, and what you report every year.
Key figures
- Resident individual: USD 250,000 per financial year across all LRS purposes, equity only
- Indian company: financial commitment up to 400% of net worth as per the last audited balance sheet, including loans and guarantees
- Form FC and a UIN before the first remittance; Annual Performance Report by 31 December every year
- TCS at 20% on LRS investment remittances above Rs 10 lakh in a year, creditable against income tax
- No overseas direct investment in real estate activity, gambling or, for individuals, most financial services
The terms, straightened out
People speak of the LRS route and the ODI route as alternatives. Under the Overseas Investment Rules, Regulations and Directions of 2022, any investment in an unlisted foreign entity is overseas direct investment, whoever makes it. A Dubai free-zone or mainland company is unlisted, so taking even one share in it is ODI. LRS is only the limit and the remittance channel an individual uses to make that investment.
Side by side
| Individual under LRS | Indian company under ODI | |
|---|---|---|
| Limit | USD 250,000 per person per financial year, shared with all other LRS use | 400% of net worth, all overseas commitments combined |
| Instruments | Equity capital only | Equity, and loans or guarantees where the Indian company has equity and control |
| Step-down subsidiaries | Not permitted where the individual has control of the foreign entity | Permitted within the layering limits |
| TCS on remittance | 20% above Rs 10 lakh a year | Not applicable to a company’s ODI remittance |
| Who owns the UAE shares | The individual | The Indian company |
| Profit back to India | Dividend taxed in the individual’s hands at slab rates | Dividend taxed in the company, with possible onward distribution relief |
| Annual reporting | APR by 31 December | APR by 31 December, plus foreign assets and liabilities return |
The individual route
It suits a founder who wants to hold the UAE company personally and needs limited capital. Family members can each use their own limit, but each must then be a genuine shareholder funded from their own account. The main constraints are practical ones:
- You cannot lend to the UAE company or guarantee its borrowings. Working capital has to come from equity or from the UAE business itself.
- You cannot hold a UAE company that you control and that has its own subsidiaries.
- The limit covers everything you send abroad in the year, including travel, education and portfolio investments.
The company route
It suits an existing Indian business expanding into the Gulf. The Indian company must be making the investment for a bona fide business activity, price it at arm’s length, and route it through its authorised dealer bank. A no-objection certificate is required if the company has an account classified as non-performing, is a wilful defaulter or is under investigation by an enforcement agency. Loans and guarantees count towards the 400% limit. The UAE subsidiary’s dealings with the Indian parent fall under Indian transfer pricing, and the structure must be managed to avoid the UAE company becoming Indian tax resident, which we explain in POEM risk for a Dubai company owned by Indian residents.
The sequence that keeps you compliant
- Reserve the name and obtain the initial approval or draft incorporation documents from the free zone or mainland authority.
- File Form FC with your authorised dealer bank, with the board resolution or individual declaration and the valuation where required.
- Obtain the UIN from the Reserve Bank through the bank.
- Remit the share capital under the correct purpose code.
- Submit evidence of investment, such as the share certificate, within six months.
- File the Annual Performance Report by 31 December each year, based on the UAE company’s audited or certified accounts.
- Report any disinvestment, restructuring or further funding as it happens.
Mistakes that lead to compounding
Most FEMA contraventions in UAE structures are made in the first month.
- Paying the licence or incorporation fee by international credit card or as a travel or business-services remittance, before Form FC is filed. The shares are then acquired without a reported investment.
- Having a friend or relative abroad fund the capital, to be settled later. Shares received this way are not acquired through a permitted route.
- Funding the capital in cryptocurrency or in kind. Overseas investment has to move through banking channels or another route the rules expressly allow.
- Missing the Annual Performance Report because the UAE company has no audit requirement. The report is still due.
- Using the UAE company to invest back into India through more than two layers of subsidiaries.
Delayed reporting can be regularised by paying a Late Submission Fee if it is done within three years. Substantive contraventions have to be compounded with the Reserve Bank. Both are manageable, but banks will usually block further remittances until the earlier default is fixed.
Tax points to settle at the same time
- TCS at 20% applies to LRS remittances for investment above Rs 10 lakh in a financial year. It is not a cost: it is credited against your income tax or refunded, but it affects cash flow.
- Shares in the UAE company and its bank accounts must be reported in the foreign assets schedule of your Indian return. Non-disclosure carries a penalty of Rs 10 lakh under the Black Money Act.
- Dividends from the UAE company are taxable in India. UAE corporate tax of 9% paid by the company is not a creditable tax on the dividend in the shareholder’s hands.
Our FEMA and RBI team handles Form FC, UIN and annual reporting, and works with our UAE company setup team so that the Indian filings and the UAE incorporation move in the right order.