With the rise in Indian solopreneurs, consultants, freelancers, and startup founders expanding operations globally—particularly in the United States—creating an overseas business entity like a Delaware C-Corp or LLC is a common route. However, if you are a resident in India as per FEMA (Foreign Exchange Management Act), any such investment or incorporation overseas must be done in compliance with the FEMA (Overseas Investment) Rules, 2022 and FEMA (Overseas Investment) Regulations, 2022, collectively referred to as FEMA OI Rules & Regulations.
Non-compliance can result in penalties, compounding proceedings, and complications with the Reserve Bank of India (RBI). This blog post explains the legal framework, key compliance requirements, and practical pointers for Indian residents planning to create a business presence in the United States.
1. FEMA Regulates Overseas Investments by Indian Residents
Under Section 6(3) of FEMA, 1999, read with the Foreign Exchange Management (Overseas Investment) Rules, 2022, no person resident in India shall make any financial commitment or transfer any capital account transaction outside India unless permitted by the regulations.
Therefore, incorporating a company abroad, acquiring equity, or investing in a foreign entity all qualify as ‘Overseas Direct Investment (ODI)’ and must follow the FEMA OI norms.
Key FEMA regulations on this matter are as follows –
- FEM (Overseas Investment) Rules 2022 – notified via GSR 646(E) dated 28/08/2022
- FEM (Overseas Investment) Regulations – Notification FEMA/400/2022-RB dated 28/08/2022
- Mater Direction on Foreign Exchange Management (Overseas Investment) Directions 2022
Prior to these regulations coming into place, the matter was governed by Foreign Exchange Management (Transfer or
Issue of Any Foreign Security) (Amendment) Regulations, 2004.- Notification No. FEMA 120/ RB-2004 dated July 7, 2004
My earlier (now dated) post on the pre-2022 framework – https://abhinavgulechha.com/fema-rules-on-overseas-direct-investment-by-indian-co-resident-individual/
Law firm Nishith Desai & Associates had done a very good analysis on the transition to the 2022 framework here and here
Common Mistakes done by Indian resident founders
Using Stripe Atlas, Firstbase, Deel, etc.
Many Indian founders incorporate a US company through popular services like Stripe Atlas, Firstbase, or Deel and make payments using personal credit/debit cards or foreign accounts. If you are a resident in India under FEMA, this is a violation, as the investment has not been routed through an Indian Authorised Dealer (AD) bank. Such transactions qualify as capital account transactions and must comply with the Overseas Investment (OI) Rules.
Assuming small or pass-through structures are exempt
Even if a US LLC is taxed as a disregarded entity for US federal tax, FEMA treats it as a separate legal entity. Thus, incorporating a single member LLC say in Wyoming still qualifies as an Overseas Direct Investment (ODI) and must comply with full FEMA requirements — including UIN application, ODI reporting, and routing through an AD bank.
Relying on foreign-earned or RFC funds without proper documentation
Section 6(4) of FEMA permits investments from funds earned during NRI years or held in RFC accounts, but founders often fail to preserve documentary evidence to prove the source. If the RBI queries the origin of the funds, lack of clarity can lead to compliance risks.
Ignoring documentation and UIN timelines
UIN (Unique Identification Number) from the RBI must be obtained before remitting funds or acquiring shares. Failure to apply for UIN and submit supporting documents (e.g., share or membership certificates) within the prescribed timelines may result in delayed compliance penalties.
Underestimating the compounding regime
Many assume that these technical violations are minor. In reality, RBI’s compounding framework requires even inadvertent violations to be regularized. While procedural penalties have been capped at ₹2 lakh for certain contraventions vide RBI Master Direction on Compounding issued in April 2025 which includes amongst other violations, “ODI reporting” (read here), substantive violations like non-routed investment through AD banks remain serious and may not fall within the penalty capping.
Misunderstanding RBI enforcement capability
FEMA enforcement has tightened in recent years. High-profile regulatory actions — including investigations into misuse of FDI routes and ED scrutiny of startups — show that even tech founders are not immune. If your US setup is not compliant with FEMA, it may attract scrutiny during tax or FEMA assessments.
How to legally avoid FEMA compliance while incorporating in US
Due to the requirements of the law being so onerous, there can be a motivation to avoid this compliance. However, avoiding it through other than legal routes can be disastrous. Also even when using legal escape paths, proper care should be taken to not run foul of the Indian law. Here are some of the ways you can incorporate without coming in the net of FEMA ODI compliance.
#1: Using Section 6(4) FEMA Funds
There is a key exemption under Section 6(4) of FEMA for investments made using foreign assets or funds earned while being a non-resident, such as:
- Foreign currency held in bank accounts abroad from prior NRI days
- Funds lying in Resident Foreign Currency (RFC) accounts in India
Such funds are outside the purview of capital account restrictions under FEMA, and you may use them freely to invest or incorporate a business overseas without needing approval from the RBI or routing through AD bank.
#2: Getting a resident relative to own the shares and gift it to you
Under Schedule 3 Part 2(2) of FEMA (OI Rules) 2022 a resident can acquire foreign securities as a gift from a resident relative who is holding the securities in compliance with FEMA. So if you have a relative who is a resident and has some Section 6(4) funds lying in say US – you can explore your relative incorporating the entity (without needing ODI compliance) and later on gifting these shares to you.
#3: Leaving India
Another approach is to wait and setup the US entity after leaving India and ceasing to be a FEMA resident – basically when you leave for employment/business/any other purpose where you intend to stay out of India for an uncertain period, you qualify as a non-resident for FEMA purposes from the day of your move out of India. While this is a legitimate way to escape FEMA restrictions, it must be planned carefully and after a holistic review of your family situation and not only from a compliance standpoint.
This option is all the more advisable for someone into forex/ margin/crypto trading as these activities are expressly banned under OI regulations/legality not clear under Indian laws.
Key FEMA Compliances for Overseas Business Setup
Here’s a list of essential FEMA requirements to keep in mind when planning an overseas venture:
1. Route Investment via Authorised Dealer (AD) Bank
You must make the investment through an AD bank in India. This is mandatory under Rule 6 of FEMA OI Rules.
2. Purpose of Investment
Only bona fide business activities are allowed. Investment in real estate, gambling, or forex trading is prohibited under Schedule I of the OI Rules.
3. Investment Limit – Liberalised Remittance Scheme (LRS)
For individuals, investment is subject to the annual LRS limit of USD 250,000 per financial year, under RBI Master Direction on Liberalised Remittance Scheme.
4. Documentation – FC Form and A2 Form
Before remittance, you must submit:
- Form FC – application for making ODI
- Form A2 – request for outward remittance
as per Rule 5(1)(a) of FEMA OI Rules.
5. NOC Requirement for Defaulters
If you have any existing FEMA/default records, you may need to furnish an NOC from the RBI, ITD, or any investigating authority.
6. UIN Allotment
Before sending funds or acquiring shares, the RBI must allot a Unique Identification Number (UIN) for the foreign entity. This is handled through your AD bank via the FIRMS portal.
7. Pre-incorporation Expenses
You can remit up to USD 100,000 per entity towards pre-incorporation expenses. This amount will be counted within the LRS limit and can only be sent via AD bank.
8. No Other Mode of Investment Permitted
All investments must be in the nature of financial commitment (as defined) through equity, debt, or guarantees. Informal transfers are not permitted.
9. Repatriation on Disinvestment/Liquidation
In case of disinvestment, restructuring, or liquidation, proceeds must be repatriated to India within 90 days.
10. Submission of Evidence
Share or membership certificates must be submitted within 6 months as proof of investment.
Note: US LLCs issue membership certificates, not equity shares. While not explicitly clarified in OI Rules, on a combined reading of Rule 3(f) and Rule 4, such investments should be considered valid if structured appropriately.
Ongoing FEMA Compliances After Incorporation
Once the foreign entity is set up, you must comply with routine reporting obligations:
a. Annual Performance Report (APR)
Every ODI investor must file an APR by 31st December each year, certified by a CA.
- If there is no control and host country does not require auditing, unaudited financials may be submitted (Rule 19).
b. Disinvestment Reporting
Must report within 30 days of receipt of proceeds.
c. Restructuring Reporting
Must report within 30 days of restructuring.
d. Late Filing Fee (LFF)
Delays in filing UIN, APR, or other forms may attract late filing fees as per RBI guidelines.
Some other restrictions for Resident Individuals
Resident individuals face some additional limitations:
- Cannot gift their overseas investments to persons resident outside India.
- Cannot acquire control in foreign entity if it subsequently sets up a subsidiary or step-down subsidiary abroad.
These restrictions are unique to resident individuals under Rule 15(1) and Rule 15(3) of FEMA OI Rules. A LLP structure in India can be explored to do away with some of the limitations – will cover the topic in a separate post.
How to regularise any non-compliance of FEMA ODI regulations
We need to first check whether there was any non-compliance for reporting obligations or non-reporting (e.g. routing the funds otherwise than via the AD bank).
Treatment of reporting violations is less severe with facility of Late Submission Fee (LSF) whereas for other violations (i.e. not related to delay in reporting), person has to for compounding – as mentioned above, compounding penalty for the violation will be restricted to INR 2 lacs.
For reporting violations, again we need to check whether the violation was prior to 2022 regulations or after 2022 regulations came into effect
Post 2022 delay– Facility to regularise violation through the Late Submission Fee route till 3 years of the violation post which the person will have to go for compounding process.
Pre-2022 delay – Final timeline to regularise all reporting delay related violations via LSF route (as per Reg 11 of FEMA OI Regulations) is 3 years from date of new FEMA OI regualtions coming into place i.e. August 25, 2025. This is the golden window that an Indian resident founder should not miss. After this timeline, person will have to opt for compounding route.
This particular topic has been well explained in a Taxguru article here
Some finer points/issues/questions
Merchant of record can be one solution for Indian resident founders who are evaluating a payments a cross border payments solution and not looking at a full fledged overseas presence that triggers the FEMA ODI compliances – read this article by Dodo Payments (not a recommendation for provider) here – https://dodopayments.com/features/tax-and-compliance
I am yet to research MoR as a concept and cross border tax issues that come with it, will post a separate detailed post soon.
There is this question – what happens if Indian resident founder sets up an overseas entity with funds routed via an AD bank and later becomes a non-resident – does FEMA continue to apply – there can be opinions on both sides – a conservative opinion can be yes – the regulations are more w.r.t. the fund flow and intent of law is to track overseas financial commitments – so a safe option may be that the person informs of the NR status to the bank and let bank guide him/her on the next steps with respect to the investment.
One confusion exists in minds of founders is that whether resident individual is allowed to invest overseas as an ODI or only a LLP can – in my view, after the 2022 regulations, there is an express permission for resident individuals to invest directly as ODI – in the pre-2022 regulations, it was not expressly mentioned so there was a considerable ambiguity – however incorporating via LLP route (setting up of LLP in India which in turn makes an ODI into a US entity) is also possible and has its share of pros and cons – a good incorporation adviser can guide on the structure basis the long term requirements of the setup.
An Indian resident incorporating outside India need to be careful in making proper disclosures for the interest in this entity under Schedule FA in Income Tax Return – note that this disclosure is required even if income in India is below the exemption limit.
Even if the person does not make an outward remittance of funds for the incorporation, but subscribes to the memorandum of association of the overseas entity, that too counts as ODI under FEMA OI Rules – [Ref. definition of ODI vide Rule 2(q)] and the ODI compliances will get triggered.
✅ FEMA Compliance Checklist for Indian Residents Planning Overseas Business Setup
This checklist applies to Individuals resident in India under FEMA intending to invest in or incorporate an overseas business (e.g., US LLC or C-Corp).
1. Before Making the Investment
☐ Determine Residential Status under FEMA
→ Confirm that you are a “resident in India” under Section 2(v) of FEMA. If you are a non-resident, FEMA OI rules don’t apply.
☐ Check Source of Funds
→ Are you using:
- Foreign earnings during NRI years lying abroad?
- Funds in RFC account?
→ If yes, Section 6(4) exemption applies — FEMA ODI rules do not apply.
☐ Ensure Bona Fide Business Purpose
→ Investment must be for permitted business activity (not real estate, gambling, forex trading, etc.)
☐ Select an Authorised Dealer (AD) Bank
→ Choose a bank branch authorized by RBI to handle overseas investments and ask for a ODI checklist
☐ Apply for UIN (Unique Identification Number)
→ Submit Form FC + Form A2 through your AD bank
→ UIN must be allotted before remittance or acquisition of shares
☐ Prepare for Pre-Incorporation Remittance (if any)
→ Max USD 100,000 permitted towards pre-incorporation expenses – needs to be remitted via AD bank only – cannot be remitted via credit card etc.
→ Counts within annual LRS limit of USD 250,000
2. After Investment / Incorporation
☐ Submit Proof of Investment
→ Share/membership certificate or other valid documents must be submitted to AD bank within 6 months
☐ Maintain FEMA-Compliant Financial Commitment
→ No informal capital transfers allowed
→ Follow RBI definition of financial commitment (equity, debt, guarantees)
☐ Avoid Gifting of ODI
→ FEMA prohibits gifting overseas co. shares/membership interest to any non-resident
☐ Avoid Acquiring Control in Foreign Entity’s SDS (Subsidiary/Step-Down Subsidiary)
→ Especially if you didn’t originally have control in the parent entity
3. Ongoing Annual and Event-Based Compliances
☐ File Annual Performance Report (APR)
→ Due by 31st December each year
→ Use audited financials (or unaudited if you don’t have control and host country allows it)
☐ Report Disinvestment/Restructuring Events
→ Within 30 days of such event (e.g., sale of shares, closure, merger)
☐ Repatriate Disinvestment Proceeds
→ To India within 90 days of receipt
☐ Pay Late Submission Fee (LSF), if applicable within 3 years of violation
→ For any delayed compliance (e.g., late APR, late UIN submission)
☐ Track Annual LRS Limit (USD 250,000)
→ Total remittance for investment + other purposes (education, travel, gifts, etc.) must stay within limit
Pro Tips:
✔ Keep a copy of all forms (FC, A2, UIN approval, APRs) securely for future reference and audits
✔ Ensure that your US legal team understands FEMA’s implications on the ownership structure
✔ Regularly consult with your AD bank or FEMA expert before further investments or structuring changes
Other Resources
My Youtube video on this issue – https://www.youtube.com/watch?v=oQB60mV9viQ
Stripe’s India Founder Guide – https://docs.stripe.com/atlas/indian-founder-guide and FAQs – https://support.stripe.com/questions/faq-for-indian-founders-using-stripe-atlas#:~:text=Yes.,US%20C%20Corp%20using%20Atlas.
Sandeep Srinivasa tweet – https://x.com/sandeepssrin/status/1834108496125853949?lang=en
Article by Hari Ullody from Zuna – https://zuna.notion.site/FAQs-on-US-Incorporation-for-Indian-Founders-185c2af1c1e880808f56c6cfc6327e10
Inkle/Inventus Law webinar on the subject – https://www.inkle.io/events/us-incorporation-for-india-based-founders
Conclusion
If you’re a resident Indian planning to expand your business footprint into the United States, make sure to first comply with FEMA’s Overseas Investment Regulations.
Failure to do so may result in:
- Violations under Section 13 of FEMA
- Compounding proceedings with RBI
- Monetary penalties up to thrice the amount involved
- Issues in getting VC funding at a later date
To navigate this smoothly, it is advisable to:
- Consult your AD bank early
- Maintain proper records
- Comply with both initial and ongoing FEMA obligations
Copyright © CA Abhinav Gulechha. All Rights Reserved. No part of this post can be reproduced without prior written permission of CA Abhinav Gulechha. The content of the post is for general information purposes only & does not constitute professional advice.