What happens if you use crypto to fund a foreign company?
I’m a resident Indian and I want to incorporate a company in Dubai to provide fintech advisory services in UAE. The consultant there has told me that I can incorporate a company in free zone simply by transferring crypto-currency as share capital. What are the tax implications and risks of carrying out such a transaction?
Name withheld on request
Incorporating a company outside India, like in a UAE free zone, does not by itself lead to any direct tax implication in India. However, when the capital contribution is made using cryptocurrency, things change.
Under Indian tax law, cryptocurrencies are treated as virtual digital assets (VDAs). So, if you use crypto to subscribe to shares in a foreign company, it qualifies as a transfer of a VDA—which is a taxable event in India.
Such transfers attract a flat 30% tax (plus applicable surcharge and cess) on any gains made. Deductions are strictly limited—only the original cost of acquisition can be claimed. No other costs like exchange or transaction fees are allowed. Moreover, if the transaction results in a loss, that loss cannot be set off against other income, nor can it be carried forward. In effect, the loss becomes permanently disallowed for tax purposes.
These transactions must be reported under Schedule VDA of your Indian income tax return (ITR). Additionally, since you are acquiring shares in a foreign company, this investment must also be disclosed under Schedule FA (Foreign Assets) in your ITR.
FEMA roadblock
Beyond taxation, there are foreign exchange law implications. Under India’s FEMA (Foreign Exchange Management Act) rules, making capital contributions to a foreign company using crypto is not permitted. Even if UAE allows it, doing so from India could mean violating FEMA—potentially leading to penalties and enforcement actions.
In summary, while it may seem straightforward to invest in a Dubai company using cryptocurrency, Indian law imposes significant restrictions on such transactions.
Harshal Bhuta is partner at P. R. Bhuta & Co. CAs
