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The expat employee

K. Ramesh on the law governing the hiring of foreign nationals

DESPITE the recent liberalisation through the Foreign Exchange Management Act (FEMA), the legal framework for the appointment and remuneration of foreign nationals remains complex. The heterogeneous legal positions in different laws have to be lo oked into before engaging the services of a foreign national, to facilitate necessary repatriation and effective tax planning.

The appointment of foreign nationals becomes necessary in many joint ventures and fully owned Indian subsidiaries of parent foreign entities. Such appointments could be driven by factors such as protecting closely-guarded technology/trade secrets, absenc e of specific skills in the initial years of project or business development, and so on.

The compensation for such foreign nationals is often on a par with what they get abroad, which, for the Indian employer, is quite a high sum. Also, while employing foreigners, careful thought must be given to the different legislation, which, at first gl ance, may seem attractive and simple.

Employment of foreign nationals

This is not restricted by FEMA. The term `employment' is broader than `working'. Employment could be as technicians, non-executive directors or full-time directors (whole-time director or managing director). Technicians could be on a short-term contract. The exchange control law does not restrict the duration of such employment so long as the employee holds a valid employment visa.

As for non-executive directors, the relevant procedures prescribed under the Companies Act, 1956 alone need to be followed. These include filing relevant forms for such appointment consequent to approval by the board of directors or the shareholders in a general meeting. If the appointment is in a public limited company, the consent to act as director is to be obtained from the foreign national.

A private limited company is not subject to any restriction under the Companies Act on appointing foreigners in key managerial positions. Whereas such appointment, as whole-time director or managing director, in a public limited company is subject to the provisions of Section 269 of the Companies Act read with Schedule XIII, which defines qualification for appointment and ceiling on remuneration.

A foreign national could have different residential status under the Companies Act, FEMA and income-tax law. The varied residential status in these statues has different legal effect on employment, repatriation and taxation.

`Resident' for the purposes of Part I of Schedule XIII (Companies Act) includes a person who has been staying in India for a continuous period of not less than 12 months preceding the date of appointment as a managerial person and who has come to India f or: i) taking up employment, or ii) carrying on a business or vocation. Appointment of any person who is not a resident in India requires prior approval of the Central Government. Often, the appointment of a foreign national as managerial person may requ ire Central Government approval either because he is not a resident or his remuneration exceeds the limits prescribed under Schedule XIII.

Generally, a foreign national is understood to be a non-resident. In terms of Section 2(v) of FEMA, a person will be a resident only if he resides in India for more than 182 days during the course of the preceding financial year. However, exception to th is general rule is made for any person who comes to India for employment, business or other reasons and indicates his intention to stay for an uncertain period. Such persons become resident immediately under FEMA even if they have not stayed in India for 182 days. Thus, a foreign national seeking employment in India becomes a resident under the exchange control law.

The foreign nationals thus resident could be `persons not permanently resident' in India -- yet another category defined under FEMA. `Person not permanently resident' means one who is resident in India for employment for a specified duration or for a spe cific job/assignment, the duration of which does not exceed three years. The significance of this category of persons is that they are not subject to restriction on remittance of exchange facilities for their relatives abroad.

It is usual practice to employ a whole-time director or managing director by limited companies for a term of five years. To get the benefit of `persons not permanently residing in India', the contract of employment/resolution of the company shall express ly state the following: i) duration of service not exceeding three years, and ii) the specific job or assignment.

Repatriation facilities

Foreign nationals employed in India would like to repatriate to their families residing abroad a major part of their incomes. Salaries earned by them, being a current account transaction, are regulated by the Foreign Exchange Management (Current Account Transactions) Rules, 2000. Rule 5 of the regulation imposes a ceiling of $5,000 per year, per recipient (under item No. 7 in Schedule III to Rule 5) for remittance to close relatives abroad for maintenance.

Till recently, it was not clear why a foreign national should be subject to unnecessary restriction for remittance of his salary to his family abroad, more so, when FERA allowed remittance of 75 per cent of net salary of such persons. However, the Govern ment of India, by a Notification issued on March 30, 2001, clarified that foreign nationals who are resident but not permanently resident in India can remit their entire net salary. Net salary is computed after deduction of taxes, contribution to provide nt fund and other deductions.

A national of a foreign state could continue to be an employee of a foreign company and posted in Indian operations on deputation to the joint venture or branch in India. In such cases, he/she is not an employee of the Indian company and is allowed to op en, hold and maintain foreign currency account with any bank outside India.

However, in terms of FEMA regulations (notifications 34 of January 22, 2001), only 75 per cent of the salary accrued to such person can be credited by the foreign company in a foreign currency account, and the remaining salary shall be paid in rupees in India. Such foreign nationals shall also be subject to income-tax on salary accruing to them in India.

Tax travails

Incidence of income-tax on any person depends on the residential status of such person. Thus, the residential status of the foreign national shall be ascertained in accordance with Section 6 of the I-T Act. Initially, he/she will be a non-resident.

Section 9(1)(ii) of the I-T law, by a legal fiction, assumes salaries earned in India by a non-resident foreign national as accruing in India and is subject to tax. However, this tax liability is subject to the following exemptions offered under the Act.

* Section 10(5B): Income-tax on income earned by foreign technicians for 48 months commencing from the date of their arrival may be paid by employers without getting taxed in the hands of the foreign technicians. These technicians shall be employed in ap proved institutions and are not resident in India in the four financial years preceding the financial year in which such technicians arrived in India.

* Section 10(6)(vi): Remuneration received by a foreign citizen, as an employee of a foreign enterprise for services rendered during his/her stay in India, are exempt subject to the following conditions: i) the foreign employer is not engaged in any trad e or business in India; and ii) his stay in India does not exceed in the aggregate a period of 90 days in such previous year.

It is quite common for the Indian employer to provide separate housing and home office for a foreign national occupying key position in the Indian company, commensurate with his status abroad. As per the amendments in the I-T law on perquisites, these ma y work out to be quite stiff and a substantial portion of the salary earned by the managerial person will be foregone as income-tax.

Factually, a substantial portion of office expenses in the residence of the managerial person could be treated as business expenditure owing to reasons such as: i) the very nature of the office occupied by such key person; ii) the international trade dem anding working/communication beyond office hours, because of time difference between India and other countries. In such cases, it could be argued that part of business expenses attributable to business needs cannot be included in the salary of the manage rial person as perquisites.