Salary, Royalty and Management Fees: How Foreign Founders Structure Repatriation from Indian Subsidiaries

Dividend is not the only way to move money from an Indian subsidiary to its foreign parent or founder. Many companies that complete their India incorporation with a foreign ownership structure rely on a combination of salary, royalty payments, and management service fees to repatriate value efficiently.

Each route has distinct tax treatment, transfer pricing obligations, and FEMA compliance requirements. Understanding the differences helps foreign-invested Indian companies structure their profit extraction in a way that is both tax-efficient and fully compliant.

This article is relevant whether you used foreign company incorporation services to set up a wholly owned subsidiary, completed private limited company registration in India as part of a joint venture structure, or are simply reviewing your existing repatriation arrangements.

Salary Repatriation: When It Works and When It Does Not

Salary repatriation makes sense when the foreign founder or parent company employee is genuinely performing services for the Indian entity — not just as a shareholder drawing profits.

Indian tax treatment:

Salary paid to a non-resident for services rendered in India is subject to Indian income tax at 30% flat rate (plus surcharge and cess) under the Income Tax Act. TDS must be deducted under Section 195 before payment.

If the foreign founder is a tax resident in a country with which India has a DTAA, the salary may only be taxable in India if the founder has spent more than 183 days in India (the threshold varies by treaty). This makes salary an attractive route for founders who spend limited time in India.

Salary for resident directors:

Every Indian private limited company must have at least one resident director under Section 149(3) of the Companies Act. Many foreign-incorporated Indian companies appoint a professional resident director for compliance purposes. If the resident director is also an employee providing genuine services, a salary arrangement is appropriate and fully deductible for the Indian company.

Transfer pricing risk:

Salary paid to a person who is also a shareholder or related to a shareholder of the Indian company is a related party transaction. The salary must be benchmarked at arm's length — meaning it should be comparable to what the company would pay an unrelated person for the same role. Excessive salary to a founder-director is a common audit trigger.

Royalty Payments: The IP-Driven Repatriation Route

For technology companies, consumer brands, and businesses built around proprietary processes or software, royalty payment from the Indian subsidiary to the foreign IP-holding entity is a powerful repatriation mechanism.

How it works:

The foreign parent company (or a holding entity in an IP-friendly jurisdiction) owns the intellectual property — software, trademark, patent, know-how, or brand. The Indian subsidiary pays royalty for the right to use this IP in its Indian operations. This royalty is a deductible expense for the Indian company, reducing taxable profit in India, while the income arrives in the hands of the foreign IP owner.

Withholding tax:

India deducts TDS on royalty payments to non-residents. The domestic rate is 10% under Section 115A for royalties covered by Section 9(1)(vi). Treaty rates are often lower:

India-Netherlands: 10% India-Singapore: 10% India-UK: 10–15% depending on the type of royalty India-USA: 10–15%

To claim the treaty rate, the foreign recipient must provide a Tax Residency Certificate and Form 10F.

Form 15CA/15CB required: Same as dividend — your CA must certify the nature of the payment and applicable TDS treatment before remittance.

OECD BEPS and Indian transfer pricing:

Royalty arrangements between related parties are among the highest-scrutiny areas in international tax. India has adopted OECD BEPS Action 8-10 guidance on profit attribution, which means the royalty rate must reflect the genuine economic value contributed by the IP, not simply a rate that minimises Indian tax.

A transfer pricing study, benchmarking the royalty rate against comparable uncontrolled transactions, is mandatory for royalty payments exceeding ₹1 crore. This study must be prepared before filing the Indian company's income tax return and is submitted as part of Form 3CEB.

Practical requirement before implementing a royalty structure:

The IP must genuinely be owned by the foreign entity — not just nominally. If the Indian subsidiary developed the IP itself or contributed significantly to its development, Indian tax authorities may challenge the royalty arrangement under substance-over-form principles.

Management Fees and Shared Services

Management fees represent payment from the Indian subsidiary to its foreign parent or group entity for identifiable management, administrative, or technical services.

What qualifies:

Strategic planning and governance support, financial management and reporting, HR and recruitment support, IT infrastructure and systems, procurement and supply chain management, and group legal and compliance support. The key requirement is that services are genuinely rendered and benefit the Indian company.

What does not qualify:

Vague "management support" with no documented deliverables, services that the Indian company could not reasonably use, and fees that appear designed primarily to reduce Indian taxable profit without corresponding substance.

Documentation requirements:

A detailed service agreement specifying the nature of services, pricing methodology (cost-plus or comparable uncontrolled price), and allocation basis. Service delivery evidence — email chains, reports, meeting records — is essential for surviving a transfer pricing audit. An intercompany service agreement drafted specifically for Indian transfer pricing purposes is far stronger than a generic group services agreement.

TDS and FEMA:

Management fees to non-residents attract TDS under Section 195, typically at 10% for fees for technical services under most DTAA provisions. Form 15CA/15CB is required before remittance. FEMA permits current account payments for genuine services without RBI approval.

Combining Routes: The Optimal Repatriation Mix

No single repatriation route suits every company. The optimal structure depends on:

The nature of your business — IP-heavy businesses suit royalty structures; service businesses suit management fee arrangements.

The tax treaties applicable — your home country's treaty with India determines the withholding rates for each payment type.

Your founder's involvement in India — active founders who spend significant time in India may prefer a salary; passive investors prefer a dividend.

Transfer pricing capacity — royalty and management fee structures require transfer pricing documentation that adds compliance cost. For smaller companies, dividends may be simpler.

A structured repatriation plan, designed alongside your online company registration process, ensures you are not paying more Indian tax than necessary and that your fund flows are fully documented and FEMA-compliant.

Conclusion

Salary, royalty, and management fee arrangements are legitimate, well-used repatriation tools for foreign-invested Indian companies. Each requires proper documentation, transfer pricing compliance, TDS deduction, and Form 15CA/15CB filing before remittance.

Companies that plan these structures as part of their how to open a company in India process — rather than retrofitting them after incorporation — have a cleaner compliance record and significantly lower tax exposure.

Looking to register a company in India? Visit our India Incorporation Services page for expert guidance.