How RBI's August 2022 Circular Opened Doors for Indian Founders to Form US C-Corps
Aug 10, 2023
For years, Indian founders seeking to incorporate and raise capital in the United States faced complex legal obstacles and regulatory hurdles. One of the biggest challenges was finding a way to legally transfer funds to a US C-Corp without violating Indian laws designed to prevent tax evasion and money laundering.
Prior to the RBI circular from August 2022, Indian founders had to rely on complex workarounds like the "gifting method" to set up a US C-Corp. However, the RBI circular has brought much-needed clarity and standardization to the process of incorporating a US C-Corp as an Indian founder. Here's how the RBI circular has reduced friction and uncertainty for Indian founders seeking to incorporate and raise capital in the US.
What was the Gifting Method?
The gifting method was a workaround that Indian founders used to set up a US C-Corp before the RBI circular. Essentially, it involved setting up a company, issuing shares, having a friend or family member in the US own the shares, executing a stock purchase agreement, and finally having the shares gifted back to the Indian founder.
This method was necessary because it was previously illegal for Indians to send money to a foreign C-Corp in order to prevent Dutch sandwiches. A Dutch sandwich is when you invest money from a high-tax jurisdiction into a tax haven and then loan it back at 0%. To prevent this loophole, India has round-tripping laws.
How Did the RBI Circular Change Things?
The RBI circular from August 2022 has brought much-needed clarity and standardization to the process of incorporating a foreign C-Corp as an Indian founder. Indian founders can now purchase shares in a US C-Corp if they do so through an LLP. The cap table resides in the US (typically Delaware), and founder shares are purchased through the LLP.
The US C-Corp then fully owns a Private Limited subsidiary in India, which covers all domestic operating expenses. This structure allows Indian founders to comply with round tripping laws while also incorporating and raising capital in the US.
Commenda's Cross-Border Incorporation Expertise
While the new standard structure has simplified the process for Indian founders seeking to incorporate and raise capital in the US, there are still a number of challenges that must be navigated. Commenda is here to help. Our cross-border compliance experts can guide you through the entire process, from entity formation to ongoing compliance. We offer a free consultation to help you understand your options and make informed decisions about your cross-border business needs.
Conclusion
The RBI's Circular from August 2022 represents a major step forward for Indian founders seeking to form foreign C-Corps. By providing a standard structure, the RBI has reduced friction and uncertainty, making it easier than ever before for Indian founders to incorporate and raise capital in the US. With Commenda's cross-border incorporation expertise, Indian founders can be confident that they are in good hands every step of the way.
