info Persons of Indian Origin An opportunity for foreigners to buy? Preparation is everything International Tax, Audit, Accounting and Legal News

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1 info International Tax, Audit, Accounting and Legal News ECOVIS info March 2013 Issue II Volume 2 Persons of Indian Origin An opportunity for foreigners to buy? Preparation is everything

2 Page 1 Persons of Indian Origin (PIO) -Author Deepa Rathi, Director, Ecovis RKCA What is PIO Card? Persons of Indian Origin Card (PIO Card) is a form of identification issued to a Person of Indian Origin who holds a passport in another country other than Afghanistan, Bangladesh, Bhutan, China, Nepal, Pakistan, Sri Lanka. What is the Eligibility for getting the PIO Card? Every person of Indian origin who is a citizen of another country, NOT being a citizen of any country that may be specified by the Government of India from time to time, will be eligible to apply for PIO Card if: (i) the person at any time held an Indian passport; or (ii) the person or either of his/ her parents or grandparents or great grand Parents was born in, and was permanently resident in India, provided further that Neither was at any time a citizen of any of the aforesaid excluded countries; or (iii) The person is the spouse of a citizen of India or a person of Indian origin covered under (i) or (ii) above. Presently, the specified countries in this regard are Pakistan, Bangladesh, Sri Lanka, Bhutan, Afghanistan, China and Nepal. Citizens of these countries are not eligible to get PIO cards. What are the benefits to a PIO Card- holder? The PIO cardholders is entitled to the following benefits: i.) A multiple entry, multi-purpose visa for visiting India. PIO Card itself is treated as a Visa; ii.)no separate Student/ Employment /Business visa will be required for admission in colleges/ institutions or taking up employ ment, business, etc in India; iii.)special counters for speedy immigration clearance at designated Immigration check posts; iv.)exemption from registration with local police authorities for continuous stay upto 180 days in India ; v.)parity with Non-resident Indians (NRIs) in economic, financial and educational fields except for acquisition of agricultural land or plantations; vi.)pio Card can be used as identity proof for applying for a (I) PAN card, (II) driving license and (III) opening of Bank account in India, if the PIO card holder resides in India. Note: i. In the event of continuous stay in India exceeding 180 days, the PIO Cardholder must get himself/herself registered, within 30 days of the expiry of 180 days, with the concerned jurisdictional FRRO/ FRO. What are the different types of accounts which can be maintained by PIO? If a person is PIO, she/he can, without the permission from the Reserve Bank, open, hold and maintain the different types of accounts given below with an Authorized Dealer in India, i.e. a bank authorized to deal in foreign exchange. NRO Savings accounts can also be maintained with the Post Offices in India. However, individuals/ entities of Bangladesh and Pakistan require prior approval of the Reserve Bank. Types of accounts which can be maintained by an NRI / PIO in India A. Non-Resident Ordinary Rupee Account (NRO Account) NRO account may be opened/ maintained in the form of current, saving, recurring or fixed deposit accounts. Savings Account - Normally maintained for crediting legitimate dues /earnings / income such as dividends, interest etc. Banks are free to determine the interest rates. Term Deposits - Banks are free to determine the interest rates. Interest rates offered by banks on NRO deposits cannot be higher than those offered by them on comparable domestic rupee deposits. Account should be denominated in Indian Rupees.

3 Page 2 credits to such NRO account? Permissible credits to NRO account are : a) Transfers from rupee accounts of non-resident banks, b) Remittances received in permitted currency from outside India through normal banking channels, c) permitted currency tendered by account holder during his temporary visit to India, d) legitimate dues in India of the account holder like current income e.g. rent, dividend, pension, interest, etc., sale proceeds of assets including immovable property acquired out of rupee/ foreign currency funds or by way of legacy/ inheritance. debits allowed to such NRO account? a) Eligible debits allowed to such NRO account are all local payments in rupees including payments for investments as specified by the Reserve Bank and remittance outside India of current income like rent, dividend, pension, interest, etc., net of applicable taxes, of the account holder. b) PIO may remit from the balances held in NRO account an amount not exceeding USD one million per financial year, subject to payment of applicable taxes. The limit of USD 1 million per financial year includes sale proceeds of immovable properties held by NRIs/PIOs. Other important points: a) The accounts may be held jointly with residents and / or with non- resident Indian. b) The NRO account holder may opt for nomination facility. c) Loans to non-resident account holders and to third parties may be granted in Rupees by Authorized Dealer / bank against the security of fixed deposits subject to certain terms and conditions. B. Non-Resident (External) Rupee Account (NRE Account) NRE account may be in the form of savings, current, recurring or fixed deposit accounts. Such accounts can be opened only by the non-resident himself and not through the holder of the power of attorney. PIO may be permitted to open NRE account with their resident close relatives (relative as defined in Section 6 of the Companies Act, 1956) on former or survivor basis. The resident close relative shall be eligible to operate the account as a Power of Attorney holder in accordance with the extant instructions during the life time of the PIO account holder. Account will be maintained in Indian Rupees. Balances held in the NRE ac count are freely repatriable. Accrued interest income and balances held in NRE accounts are exempt from Income tax and Wealth tax, respectively. Authorized dealers/authorized banks may at their discretion/ commercial judgment allow for a period of not more than two weeks, overdrawing in NRE savings bank accounts, up to a limit of Rs.50,000 subject to the condition that such over drawings together with the interest payable thereon are cleared/repaid within a period of two weeks, out of inward remittances through normal banking channels or by transfer of funds from other NRE/ FCNR accounts. Savings - Banks are free to determine the interest rates. Term deposits Banks are free to determine the interest rates of term deposits of maturity of one year and above. Interest rates offered by banks on NRE deposits cannot be higher than those offered by them on comparable domestic rupee deposits. credits to such NRE account? Permissible credits to NRE account are inward remittance to India in permitted currency, proceeds of account payee cheques, demand drafts / bankers' cheques, issued against encashment of foreign currency, where the instruments issued to the NRE account holder are supported by encashment certificate issued by AD Category-I / Category-II, transfers from other NRE / FCNR accounts, sale proceeds of FDI investments, interest accruing on the funds held in such accounts, interest on Government securities/ dividends on units of mutual funds purchased by debit to the NRE/FCNR(B) account of the holder, certain types of refunds, etc.

4 Page 3 debits to such NRE account? a) Eligible debits are local disbursements, transfer to other NRE / FCNR accounts of person eligible to open such accounts, remittance outside India, investments in shares / securities/commercial paper of an Indian company, etc. b) Loans up to Rs.100 lakhs can be extended against security of funds held in NRE Account either to the depositors or third parties. c) Such accounts can be operated through power of attorney in favor of residents for the limited purpose of withdrawal of local payments or remittances through normal banking channels to the account holder himself. credits to such FCNR account? All credits permissible in respect of NRE accounts, including credit of sale proceeds of FDI investments, are permissible in FCNR (B) accounts also. C. Foreign Currency Non Resident (Bank) Account FCNR (B) Account FCNR (B) accounts are only in the form of term deposits of 1 to 5 years Account can be in any freely con vertible currency. debits to such FCNR account? a) All debits permissible in respect of NRE accounts, including credit of sale proceeds of FDI investments, are permissible in FCNR (B) accounts also. b) Loans up to Rs.100 lakh can be extended against security of funds held in FCNR (B) deposit either to the depositors or third parties. Other important points: a) The interest rates are stipulated by the Department of Banking Operations and Development, Reserve Bank of India. In respect of FCNR (B) deposits of all maturities contracted effective from the close of business in India as on November 23, 2011, interest shall be paid within the ceiling rate of LIBOR/SWAP rates plus 125 basis points for the respective currency/corresponding maturities (as against LIBOR/SWAP rates plus 100 basis points effective from close of business on November 15, 2008). On floating rate deposits, interest shall be paid within the ceiling of SWAP rates for the respective currency/maturity plus 125 basis points. For floating rate deposits, the interest reset period shall be six months. b) When an account holder be comes a person resident in India, deposits may be allowed to continue till maturity at the contracted rate of interest, if so desired by him. c) Terms and conditions as applicable to NRE accounts in respect of joint accounts, repatriation of funds, opening account during temporary visit, operation by power of attorney, loans/overdrafts against security of funds held in accounts, shall apply mutatis mutandis to FCNR. Also PIO can open joint account with a resident close relative (relative as defined in Section 6 of the Companies Act, 1956) on former or survivor basis. The resident close relative will be eligi Ble to operate the account as a Power of Attorney holder in accor dance with extant instructions dur ing the life time of the PIO account holder. Is the permission of the Reserve Bank required for opening the various accounts, mentioned above, by Bangladesh / Pakistan individuals/entities? Opening of accounts by individuals/entities of Bangladesh / Pakistan nationality requires prior approval of the Reserve Bank. All such requests may be referred to the Chief General Manager-in- Charge, Foreign Exchange Department, Foreign Investment Division, Reserve Bank of India, Central Office, Mumbai Can an individual resident Indian borrow money from his close relatives outside India? Yes, an individual resident Indian can borrow sum not exceeding USD 250,000 or its equivalent from his close relatives staying outside India, subject to the conditions that: i. the minimum maturity period ii of the loan is one year; The loan is free of interest; And iii The amount of loan is received by inward remittance in free foreign exchange through nor mal banking channels or by debit to the NRE/FCNR(B) ac count of the PIO.

5 Page 4 Can an individual resident lend money to his close relative who is PIO? Yes, an individual resident can lend money by way of crossed cheque / electronic transfer within the overall limit of USD 200,000 per financial year under the Liberalised Remittance Scheme, to meet the borrower s personal or business requirements in India, subject to conditions. The loan should be interest free and have a maturity of minimum one year and cannot be remitted outside India. Can an individual resident repay loans of close relative who is PIO to banks in India? Yes, where an authorised dealer in India has granted loan to a Person of Indian Origin than such loans may also be repaid by resident close relative (relative as defined in Section 6 of the Companies Act, 1956), of the Person of Indian Origin by crediting the borrower's loan account through the bank account of such relative. What are the other facilities available to PIO? A. Investment facilities for PIO They may, without limit, purchase on repatriation basis: Government dated securities / Treasury bills Units of domestic mutual funds; Bonds issued by a public sector undertaking (PSU) in India. Non-convertible debentures of a company incorporated in India. Perpetual debt instruments and debt capital instruments issued by banks in India. Shares in Public Sector Enter prises being dis-invested by the Government of India, provided the purchase is in accordance with the terms and conditions stipulated in the notice inviting bids. Shares and convertible debentures of Indian companies under the FDI scheme (including automatic route & FIPB), subject to the terms and conditions specified in Schedule 1 to the FEMA Notification No. 20/2000- RB dated May 3, 2000, as amended from time to time. Shares and convertible debentures of Indian companies through stock exchange under Portfolio Investment Scheme, subject to the terms and conditions specified in Schedule 3 to the FEMA Notification No. 20/2000- RB dated May 3, 2000, as amended from time to time. PIO may, without limit, purchase on nonrepatriation basis : Government dated securities / Treasury bills Units of domestic mutual funds Units of Money Market Mutual Funds National Plan/Savings Certificates Non-convertible debentures of a company incorporated in India Shares and convertible debentures of Indian companies through stock exchange under Portfolio Invest ment Scheme, subject to the terms and conditions specified in Sched ules 3 and 4 to the FEMA Notifi cation No. 20/2000- RB dated May 3, 2000, as amended from time to time. Exchange traded derivative cont racts approved by the SEBI, from time to time, out of INR funds held in India on non- repatriable basis, subject to the limits prescribed by the SEBI. Note: PIO are not permitted to invest in small savings or Public Provident Fund (PPF). B. Investment in Immovable Property PIO other than citizen of Paki stan, Bangladesh, Sri Lanka, Afghanistan, China, Iran, Nepal and Bhutan may acquire im movable property in India other than agricultural land/ planta tion property or a farm house out of repatriable and / or nonrepatriable funds. The payment of purchase price, if any, should be made out of (i) funds received in India through normal banking channels by way of inward remittance from any place outside India or (ii) funds held in any non-resident account maintained in accor dance with the provisions of the Act and the regulations made by the Reserve Bank. Note : No payment of purchase price for acquisition of immovable property shall be made either by traveller s cheque or by foreign currency notes or by other mode other than those specifically permitted as above.

6 Page 5 PIO may acquire any immovable prop erty in India other than agricultural land / farm house plantation property, by way of gift from a person resident in India or from a person resident outside India who is a citizen of India or from a person of Indian origin resident outside India. PIO may acquire any immovable prop erty in India other than agricultural land / farm house plantation property,by way of inheritance from a person resi dent outside India who had acquired such property in accordance with the provisions of the foreign exchange law in force at the time of acquisition by him or the provisions of these Regula tions or from a person resident in India A PIO may transfer any immovable property in India to a person resident in India. A PIO may transfer any immovable property other than agricultural or plan tation property or farm house to a per son resident outside India who is a citi zen of India or to a person of Indian origin resident outside India. In respect of such investments, PIO s are eligible to repatriate: The sale proceeds of immovable prop erty in India if the property was ac quired out of foreign exchange sources i.e. remitted through normal banking channels / by debit to NRE / FCNR (B) account. The amount to be repatriated should not exceed the amount paid for the property in foreign exchange received through normal banking channel or by debit to NRE account (foreign currency equiva lent, as on the date of payment) or debit to FCNR (B) account. In the event of sale of immovable prop erty, other than agricultural land / farm house / plantation property in India, by a person resident outside India who is a citizen of India / PIO, the repatriation of sale proceeds is restricted to not more than two residential properties subject to certain conditions. If the property was acquired out of Rupee sources, PIO may remit an amount up to USD one million per financial year out of the balances held in the NRO account (inclusive of sale proceeds of assets acquired by way of inheritance or settle ment), for all the bonafide purposes to the satisfaction of the Authorized Dealer bank and subject to tax compliance. Refund of (a) application / earnest money / purchase consideration made by house-building agencies/ seller on account of non-allotment of flats / plots and (b) cancellation of booking/deals for purchase of residential/commercial properties, together with interest, net of taxes, provided original payment is made out of NRE/FCNR (B) account/ inward remittances. Repayment of Housing Loan of PIOs by close relatives of the borrower in India Housing Loan in rupees availed of by NRIs/ PIOs from ADs / Housing Financial Institutions in India can be repaid by the close relatives in India of the borrower. C. Facilities to returning PIOs Returning NRIs/PIOs may continue to hold, own, transfer or invest in foreign currency, foreign security or any immovable property situated outside India, if such currency, security or property was acquired, held or owned when resident outside India The income and sale proceeds of assets held abroad need not be repatriated. Resident Foreign Currency Account Returning PIOs may open, hold and maintain with an authorised dealer in India a Resident For eign Currency (RFC) Account to transfer balances held in NRE/FCNR(B) accounts. Proceeds of assets held outside India at the time of return can be credited to RFC account. The funds in RFC accounts are free from all restrictions re garding utilisation of foreign currency balances including any restriction on investment in any form outside India.

7 Page 5 RFC accounts can be main tained in the form of current or savings or term deposit ac counts, where the account holder is an individual and in the form of current or term de posits in all other cases. RFC accounts are permitted to be held jointly with the resident close relative(s) as defined in the Companies Act, 1956 as joint holder (s) in their RFC bank account on former or survivor basis. However, such resident Indian close relative, now being made eligible to become joint account holder shall not be eligible to operate the account during the life time of the resident account holder. You can contact the author Ms Deepa Rathi for any doubts at the id deepa.rathi@ecovis.com / deepa@rkabra.net Disclaimer notice: The above laws are not limited or restricted to FEMA, RBI and other applicable laws in India. The above article does not constitute an offer or acceptance of an offer, nor shall it form any part of a legally binding contract. It is recommended that professional advice be taken based on specific facts and circumstances. No representation or warranty is made as to the accuracy of completeness of the information and no liability can be accepted for any loss arising from its use. Fun at work

8 Page 8 Author Joerg Hörauf, ECOVIS Barcelona, Spain, joerg.hoerauf@ecovis.com Co-Author Larsen Lüngen, ECOVIS Köln/Krefeld/Düsseldorf, Germany, larsen.luengen@ecovis.com An opportunity for foreigners to buy? Taxation and other costs have to be kept in mind when deciding on purchasing property. Due to the real estate and economic crisis in Spain, real estate prices have fallen, even in prime locations. As a result, Germans now have what appear to be favorable opportunities to buy properties in Spain. Should one take a chance now, or wait to see how things develop? That is the question many prospective buyers are asking themselves now. Many foreign and resident investors are still hesitating, because real estate prices are expected to fall even further. Once the economy starts picking up, one could consider reacting swiftly and purchasing property in preferred locations. In any case, private buyers would be well advised to weigh the pros and cons carefully before coming to a final decision. Anyone buying a vacation home in Spain just to use it once to four times a year should be doing so for pleasure and not purely as an investment.spanish tax authorities impose considerable taxes on any property purchases in the form of the TIP (real-estate transfer tax) at a rate of at least 7% to 8% of the purchase price. If a company handles the purchase of a building site, as much as 21% in value added tax plus stamp duty of 1.5% to 2.5% can be added (see table). The real-estate transfer tax is charged to the customer, as is the value added tax. Of less importance, relatively speaking, is the municipal capital gains tax, usually only a few hundred or a thousand euros. Notary fees are money well spent. A notarized bill of sale and an entry made in the land register are not necessary to validate the purchase of real estate in Spain. However, it is highly recommended if you want to save yourself some nasty surprises. There have been cases of real estate having been sold several times over. Trying to get your money back is a long ordeal. When the services of a notary are employed to have the real estate recorded in the land register, the transaction can be regarded as watertight. Private individuals who own real estate in Spain are responsible for filing their own income tax returns. Not only rental income earned is taxable (at a rate of 24.75% of the gross rental revenue), but also personal use, at a rate of 24.75% on 1.1% - 2% of the cadastral value. Spanish municipalities also impose property tax, at rates of 0.6% to 1.3% of the cadastral values. The Spanish inheritance tax law and the gift tax may be time bombs waiting to go off for foreign owners of Spanish estate if they are not familiar with the Spanish tax system. Therefore expert advice is essential.

9 Page 9 Anyone buying a vacation home in Spain just to use it once to four times a year should be doing so for pleasure and not purely as an investment. Costs, assuming normal purchase transaction

10 Page 10 Compliance with tax regulations isn t just a burden, it s a great chance to optimize your structure, save money and implement control mechanisms. Richard Hoffmann, Partner Ecovis Beijing, China, richard.hoffmann@ecovis.com Preparation is everything Due to new laws and regulations, 2012 was a year of change for foreign companies in China. During the annual compliance process, the Chiyou are in compliance, with the requirements of your tax entity. But don t look at it as just another burden on your company. Rather, it is a great chance to optimize your structure Overview of annual compliance work save money and implement control mechanisms to avoid fraud. This article points out the main issues to consider for your annual compliance process in China. 1st level: Annual Audit Local Chinese GAAP The first round in annual compliance is the annual audit. All foreign- invested enterprises (representative office, WFOE, joint venture or FICE) are required to prepare annual statements including balance sheets, income statements and cash flow statements for the annual audit, based on Chinese GAAP. The annual financial statements and the relevant accounting records need to be audited by a Chineselicensed CPA firm. Many problems occur due to incomplete monthly bookkeeping and accounting. Try to adjust your accounting before the audit. International GAAP International companies need consolidated financial statements for group consolidation. Therefore, the local Chinese entity should facilitate a special purpose audit of the financial statements in line with the International Standards on Auditing (ISA) by December 31, It should be prepared according to the internal accounting principles of headquarters (IFRS, US GAAP or HK GAAP). The results of this audit are reported in standard format or in a reporting package as defined by headquarters.

11 Page 11 2nd level: Annual foreign currency audit and inspection Every foreign enterprise in China needs to go through a Foreign Currency Inspection (FCI) for the period ending on December 31, This inspection is facilitated by an authorized CPA firm, and the findings are summarized in a report. This report is required for the annual inspection of the State Administration for Foreign Exchange (SAFE). Each company is responsible for preparing the Statement of Foreign Investors Equity of Foreign Invested Enterprise, according to the regulations of the State Administration of Foreign Exchange. 3rd level: Annual tax audit and clearances According to the requirements of the tax authorities, each foreign entity must participate in an annual tax clearance. Its main component is the annual Corporate Income Tax clearance. The costs and profits are listed to evaluate taxable profit or loss. Outstanding tax liabilities must be cleared. 4th level: Annual combinative inspection Each foreign entity must facilitate an annual combined audit from various authorities. These are the same authorities who approve the registration of the company (e.g. AIC, MOFCOM, Financial Bureau, Customs, Tax Authorities, etc.). Each of these authorities must confirm that the foreign company is in compliance. Upon relevant approvals, the foreign entity can proceed with its business in China. Disclaimer This material and the information contained herein prepared by ECOVIS RKCA is intended to provide general information on a particular subject or subjects and is not an exhaustive treatment of such subject (s). None of ECOVIS RKCA members, its member firms, or their related entities is, by means of this material, rendering professional advice or services. The information is not intended to be relied upon as the sole basis for any decision which may affect you or your business. Before making any decision or taking any action that might affect your personal finances or business since each business differs you should consult your professional advisor individually. We shall not be responsible for any loss whatsoever sustained by any person who relies on this material.