ODI Rules for an Indian Company Opening a UAE Subsidiary: A Founder's Overview

When Indian founders plan a UAE entity, most of the energy goes into the UAE side: free zone or mainland, licence, visas, banking. The Indian side is often treated as a formality. In my view, that is a mistake. India's rules on overseas investment determine how money can leave India, who can own the UAE entity, and what must be reported every year. Getting them wrong can create problems that are expensive to fix later.

This is an overview of the framework, so that you can have a better conversation with your chartered accountant or lawyer. It is not legal advice.

The framework in one paragraph

Overseas investment by Indian residents is governed by the Foreign Exchange Management Act (FEMA), the Foreign Exchange Management (Overseas Investment) Rules and Regulations, 2022, and the RBI's Master Direction on Overseas Investment. The 2022 framework replaced older rules and simplified many approvals, but it also introduced clearer definitions and reporting obligations. Transactions are carried out through your authorised dealer (AD) bank.

Two main routes

1. The Indian company invests (ODI by an Indian entity)

This is the typical route when the UAE entity is a subsidiary of your Indian company.

• Under the automatic route, the Indian entity's total financial commitment to foreign entities, including equity, loans and certain guarantees, is generally capped at 400% of its net worth as per its last audited balance sheet, according to the RBI framework as summarised by practitioners such as Legal 500.
• The foreign entity should generally be engaged in a bona fide business activity.
• Certain sectors and structures are restricted or need approval.

Advantages: a clean group structure, consolidated reporting, and a clear link between the Indian business and the UAE operation.

2. The founder invests personally (ODI by a resident individual)

Resident individuals can make overseas investments within the Liberalised Remittance Scheme (LRS) limit of USD 250,000 per financial year. But the rules for individuals are stricter:

• individuals face restrictions on investing in foreign entities engaged in financial services
• there are restrictions on individuals acquiring control of a foreign entity that has its own subsidiaries or step-down subsidiaries
• LRS remittance is a payment channel, not a substitute for ODI compliance

Advantages: simplicity for a small founder-led entity. Risks: limits, restrictions on structure and potential complications if the business grows.

Reporting obligations

ODI is not a one-time event. Expect:

• Reporting the investment through your AD bank in the prescribed form, with a unique identification number issued for the overseas entity.
• Annual reporting on the overseas entity, including a performance report.
• Reporting of later events, such as further investment, disinvestment, or restructuring.

Missed or late reporting can attract late submission fees and complicate future transactions. Build a compliance calendar from the start.

Questions to settle before money moves

1. Who should own the UAE entity? The Indian company, the founders, or a mix?
2. How will it be funded? Equity, loans, or both? How does that fit the limits?
3. How will value flow back? Dividends, service fees, royalties or cost recharges each have different tax and regulatory treatment in both countries.
4. How will related-party transactions be priced? Transfer pricing must work in both India and the UAE. See UAE corporate tax basics for Indian founders.
5. What happens if you raise capital later? Investors may want a particular holding structure. See raising capital from Gulf investors.

Common mistakes

• Incorporating first and asking later. Some founders set up a UAE company, fund it informally, and only then discover reporting gaps.
• Using LRS for a structure it does not suit. Especially when the UAE entity is expected to own subsidiaries.
• Ignoring tax residence. Relocating founders should understand how their Indian tax residence and the India–UAE tax treaty apply.
• Undocumented intercompany flows. Paying UAE expenses from India, or vice versa, without agreements.

A note on "flips"

Some Indian startups have historically moved their holding company abroad to attract foreign capital. More recently, many have done the reverse and moved back to India, helped by policy changes such as the abolition of the "angel tax" on startup investment from 1 April 2025 and a faster merger route for certain foreign holding companies. Structure decisions should be made with your long-term capital plan in mind, not only today's convenience.

My view

The UAE side of a cross-border structure gets the attention, but the Indian side often determines whether the structure is clean, investable and sustainable. A few hours with a qualified adviser at the start can save months of remediation later.

For the UAE side of the decision, see setting up a business in Dubai as an Indian founder. More about my work is on the About page.

This article reflects my personal views and is general information, not legal, tax or regulatory advice. FEMA rules are detailed and change; always take advice from a qualified Indian professional and your AD bank.