Setting up a Dubai company from India: ODI rules, banking and visas

An Indian resident can own a Dubai company. The catch is on the Indian side: the money has to leave India as overseas direct investment (ODI) under the Foreign Exchange Management Act (FEMA), through your bank, with reporting that continues every year you hold the shares. Get that right first and the Dubai side, meaning the licence, bank account and visa, follows the usual process.

This guide is for founders who live in India and invest personally. If an Indian company is investing instead, the rules differ, and we cover that briefly below. This is general information, not legal, tax or investment advice. FEMA and tax positions depend on your facts, so check your plan with your chartered accountant and your bank before you remit anything.

The rules that apply to you as an individual

The current framework has three parts, all dated 22 August 2022: the Foreign Exchange Management (Overseas Investment) Rules, the Overseas Investment Regulations and RBI's Overseas Investment Directions. For a resident individual, the points that shape a Dubai setup are these:

• The money comes from your LRS limit. The Liberalised Remittance Scheme allows each resident individual to send up to USD 250,000 per financial year (April to March) for permitted purposes, and ODI is one of them. Your PAN is mandatory.
• The Dubai company must be an operating business. Individuals can make ODI only in an operating foreign entity.
• No financial services. Individuals cannot make ODI in a foreign entity engaged in financial services, meaning activity that would need registration with or regulation by a financial sector regulator if carried out in India. That rules out using personal ODI for a Dubai company in, say, lending, payments, insurance or investment advice.
• Limited liability only. RBI defines a foreign entity as one with limited liability. A free zone company or a mainland LLC works; a mainland sole establishment, where the owner's liability is not limited, does not fit.
• No subsidiaries under your control. If you hold control, which RBI treats as including 10% or more of the voting rights, the Dubai company should not set up subsidiaries of its own. A Dubai holding company with operating subsidiaries is the wrong structure for an individual investing from India.
• Equity, not loans. A resident individual cannot lend to the foreign company under the ODI rules. Fund it with share capital.

Unlisted shares are always ODI, whatever the percentage. Our guide to Dubai company legal structures explains the UAE forms that give you limited liability.

Step by step: from remittance to annual reporting

1. Choose your bank in India. You must designate one authorised dealer (AD) bank and route every transaction for this investment through it. RBI expects you to have held your account with that bank for at least a year before capital account remittances, or the bank will run extra checks.
2. Settle the Dubai structure. Pick the free zone or mainland setup, activities and share capital. Our step-by-step guide to starting a business in Dubai covers the UAE side in order.
3. File Form FC and get a UIN. You submit Form FC with supporting documents to your AD bank, which reports it to RBI and obtains a Unique Identification Number for the Dubai company. The bank will not send the first remittance until the UIN exists.
4. Remit the capital. Money must go through banking channels, from your account to the company's.
5. Submit evidence of investment within six months. This is the share certificate or the equivalent document under UAE law. Free zone share certificates and registers can take time, so chase them early.
6. File the Annual Performance Report every year by 31 December. The APR is filed through your bank for each foreign entity, and for an individual a chartered accountant certifies it. It must be based on the company's audited accounts. Only an investor without control can use unaudited accounts, and only where UAE law does not require an audit, so a founder who controls the company should budget for an annual audit.
7. Bring dues home on time. Dividends and other amounts due to you from the company must be realised and repatriated to India within 90 days of falling due. Selling or restructuring the investment is reported within 30 days.

Late filings can be regularised with a late submission fee within three years, but until you do, you cannot add money to the company or transfer the shares. In practice, the APR is the filing people forget.

Say you and your brother both live in Pune and set up a two-person IT consultancy in a Dubai free zone, 50:50. Each of you remits your share from your own LRS limit, and both of you route the investment through the same AD bank, the one designated for the company's UIN. Because each of you holds control, the company cannot set up a subsidiary in Saudi Arabia later without restructuring first. And because your holdings are equal, you can file the APR jointly.

If an Indian company is the investor

An Indian company or LLP invests under a different schedule of the rules, with a financial commitment limit linked to its net worth. It also files Form FC and APRs through its AD bank, and it must file the annual Foreign Liabilities and Assets return with RBI. A corporate investor can also lend to or guarantee the Dubai company in ways an individual cannot.

Tax: where most problems start

UAE corporate tax applies to the Dubai company itself, so it must register and file in the UAE. The bigger questions are on the Indian side.

• If you stay in India, so does your tax. A resident and ordinarily resident individual is taxed in India on worldwide income, which includes dividends and salary from the Dubai company.
• Where the company is run matters. A foreign company can be treated as resident in India if its place of effective management is in India, meaning the key management and commercial decisions are, in substance, made there. A Dubai company run day to day from a Pune office is exposed to this.
• Moving to Dubai is not a switch. India's residence rules look at days spent in India, with tighter tests for Indian citizens who have more than INR 15 lakh of Indian income. There is also a deemed residence rule for Indian citizens with that level of Indian income who are not liable to tax in any other country, which matters because the UAE has no personal income tax.

India and the UAE have a double tax treaty, and a UAE tax residency certificate is one of the documents used to rely on it. Our guide to the UAE tax residency certificate explains who qualifies. Plan the timing of a move with your chartered accountant before you go, because the order in which you do things matters.

Banking and visas once the company exists

UAE banks ask every new company who owns it and where the money came from. For an Indian resident, the ODI paper trail is part of the answer: the UIN, your Form FC acknowledgement and the bank's remittance advice show the capital arrived legally. Have copies ready when you apply. Our guide to opening a corporate bank account in the UAE covers the rest of the bank's checklist.

As a shareholder, you can usually sponsor your own residence visa through the company, subject to the visa allocation on your licence. Our guide to investor and partner visas explains how that works and what it costs to maintain.

Before you have that visa, you enter as a visitor. Most Indian passport holders arrange a UAE visit visa before travelling. If you hold a valid US, UK or EU visa or residence permit, or a residence permit from a few other countries, you can use a simpler entry route. The list of qualifying documents changes, so check it with ICP, GDRFA Dubai or your airline before you book.

Common mistakes

• Paying for the company from the wrong pocket. Setup fees paid by a friend abroad, or sent outside your designated AD bank, leave the investment undocumented on the Indian side.
• Parking shares with a relative abroad. It is a common shortcut. It breaks down at the bank, which asks who the real owner is and where the money came from.
• Lending money to the company. Individuals cannot fund the Dubai company with loans under ODI. Put in share capital instead.
• Choosing a sole establishment. It does not give you limited liability, so it does not fit the ODI rules.
• Forgetting the APR. It is due every year, even in a quiet year.

If you want the Dubai side handled while your chartered accountant manages the Indian filings, our business setup team can line up the licence, remittance and bank account so they happen in the right order.

Sources

• Reserve Bank of India: Foreign Exchange Management (Overseas Investment) Directions, 2022
• Reserve Bank of India: Foreign Exchange Management (Overseas Investment) Regulations, 2022
• Reserve Bank of India: Master Direction on the Liberalised Remittance Scheme
• Reserve Bank of India: FAQs on the Liberalised Remittance Scheme