Setting up Subsidiary of Foreign Company in India

India is one of the fastest-growing economies in the world, making it a lucrative destination for foreign businesses looking to expand. Setting up a subsidiary company in India allows foreign companies to establish a legal presence, tap into a large consumer market, and benefit from various tax incentives. However, the process involves multiple legal and regulatory steps that must be carefully followed.

In this guide, we will walk you through everything you need to know about setting up a subsidiary company in India, including legal requirements, tax implications, and step-by-step registration procedures.

Understanding a Subsidiary Company

What is a Subsidiary Company?

A subsidiary company is a business entity controlled by a parent company, where the parent company holds more than 50% of the shareholding. The subsidiary operates as a separate legal entity but remains under the financial and operational influence of the parent company.

Difference Between a Subsidiary and a Branch Office

Many foreign businesses confuse a subsidiary with a branch office. A branch office is an extension of a foreign company, whereas a subsidiary is a legally independent entity with its own governance and compliance requirements.

Types of Subsidiary Companies in India

Foreign companies can set up different types of subsidiaries in India, depending on ownership and business goals:

• Wholly-Owned Subsidiary – The foreign parent company owns 100% of the shares, typically in sectors where full foreign ownership is allowed.
• Joint Venture Subsidiary – A foreign company partners with an Indian company, sharing ownership and control.
• Limited Liability Subsidiary – This structure limits the liability of shareholders, ensuring financial protection.

Eligibility Criteria for a Subsidiary in India
To set up a subsidiary in India, foreign companies must meet certain requirements:

• Minimum Shareholders: At least two shareholders are required.
• Minimum Directors: At least two directors, one of whom must be an Indian resident.
• Registered Office: A physical address in India for company registration.
• Capital Requirement: No mandatory minimum capital, but sector-specific capital requirements may apply.

Legal Framework for Subsidiary Companies in India
The establishment of a subsidiary in India is governed by various laws and regulations, including:

•  Companies Act, 2013 – Governs company incorporation and compliance.
• Foreign Exchange Management Act (FEMA), 1999 – Regulates foreign investments.
• Reserve Bank of India (RBI) Guidelines – Approval required for certain foreign investments.

Step-by-Step Process to Set Up a Subsidiary in India

Step 1: Choose the Business Structure
Decide whether the subsidiary will be a private limited company, public limited company, or LLP based on operational goals and investment plans.

Step 2: Register the Company Name with MCA
Choose a unique business name and register it with the Ministry of Corporate Affairs (MCA) using the RUN (Reserve Unique Name) service.

Step 3: Obtain Director Identification Number (DIN) & Digital Signature Certificate (DSC)

• The DIN is a mandatory identification number for company directors.
• The DSC is required for filing electronic documents with MCA.

Step 4: Draft Memorandum of Association (MoA) & Articles of Association (AoA)

• The MoA defines the company’s objectives and activities.
• The AoA outlines internal governance policies.

Step 5: File Incorporation Documents with MCA
Submit Form SPICe+ (Simplified Proforma for Incorporating Company Electronically) with all required documents.

Step 6: Obtain a Certificate of Incorporation
Once approved, the MCA issues a Certificate of Incorporation, officially recognizing the subsidiary as a legal entity.

Step 7: Register for Taxation (PAN, TAN, GST)

• Apply for a Permanent Account Number (PAN) and Tax Deduction and Collection Account Number (TAN).
• Register for Goods and Services Tax (GST) if applicable.

Step 8: Open a Bank Account in India
A corporate bank account is mandatory for financial transactions.

Compliance Requirements for a Subsidiary in India

Once a subsidiary company is incorporated, it must comply with several legal and financial regulations. The key compliance requirements include:

1. Financial Reporting and Audits

• • A subsidiary must maintain proper books of accounts under the Companies Act, 2013.
  • It must conduct annual audits by a certified Chartered Accountant.
  • Financial statements, including the balance sheet, profit and loss statement, and cash flow statement, must be filed annually with the Ministry of Corporate Affairs (MCA).

2. Annual Compliance Filings

• • Annual Returns (Form MGT-7): Must be filed with MCA every year.
  • Financial Statements (Form AOC-4): Submission of audited financial statements.
  • Director’s Report: Must include details about operations, financial performance, and future plans.

3. Statutory Tax Requirements

• • Corporate Income Tax: As per the Income Tax Act, 1961, subsidiaries must pay corporate taxes on their earnings.
  • Goods and Services Tax (GST): If applicable, a subsidiary must file monthly, quarterly, and annual GST returns.
  • Tax Deducted at Source (TDS) Returns: A subsidiary must deduct taxes at source and file TDS returns quarterly.

Taxation Policies for Foreign Subsidiaries in India

Understanding taxation is crucial for foreign subsidiaries operating in India. The key tax considerations are:

1. Corporate Tax Structure

• • Domestic companies are taxed at 25% (for turnover up to ₹400 crores) or 30% (for turnover above ₹400 crores).
  • If opting for the new tax regime, subsidiaries can avail of a 22% tax rate without deductions.

2. Withholding Tax on Foreign Transactions

• • Dividends, royalties, and technical service fees paid to the parent company may attract withholding tax ranging from 10% to 40% based on Double Taxation Avoidance Agreements (DTAA).

3. Transfer Pricing Regulations

• • Transfer pricing laws ensure that transactions between the subsidiary and its foreign parent are conducted at arm’s length pricing.
  • Annual transfer pricing documentation must be maintained to avoid tax disputes.

Banking and Financial Considerations

1.Opening a Corporate Bank Account
To operate in India, a subsidiary must open a business bank account with an Indian bank. Required documents include:

• Certificate of Incorporation
• MoA & AoA
• PAN and TAN
• KYC details of directors

2.Repatriation of Profits

• Foreign companies can repatriate profits after paying applicable taxes.
• RBI approval may be required in some cases.

3.Foreign Investment Restrictions

• Automatic Route: No prior approval is required for foreign investment in most sectors.
• Government Route: Requires government approval in restricted sectors like defense, telecom, and media.

Benefits of Setting Up a Subsidiary in India
Establishing a subsidiary in India offers multiple advantages, including:

• Access to a Large Market: India has a population of over 1.4 billion, offering vast business opportunities.
• Lower Operational Costs: Labor and production costs in India are lower compared to developed countries.
• Limited Liability Protection: The parent company’s liability is limited to its investment in the subsidiary.
• Tax Benefits and Incentives: Various tax incentives and exemptions are available, especially under schemes like Make in India.

Challenges in Setting Up a Subsidiary in India
Despite the benefits, foreign businesses may face certain challenges:

• Regulatory Complexities: Navigating Indian laws can be time-consuming and challenging.
• Compliance Burden: Multiple tax and legal compliance requirements add to operational costs.
• Cultural and Operational Differences: Businesses must adapt to India’s unique market dynamics and consumer behavior.

Government Incentives for Foreign Subsidiaries
To attract foreign investment, the Indian government offers several incentives:
1.Special Economic Zones (SEZ) Benefits

• 100% Income Tax exemption on export income for the first five years.
• Duty-free import of goods for manufacturing in SEZs.

2.Make in India Initiative

• Encourages foreign investment in manufacturing.
• Provides tax benefits and ease of doing business.

3.Startup India Benefits

• Subsidiaries in the technology sector may qualify for startup tax exemptions.
• Access to funding and incubation support.

Conclusion
Setting up a subsidiary company in India is a strategic move for foreign businesses looking to expand. While the process involves legal and financial complexities, careful planning and compliance with Indian regulations can make the process seamless. With a growing economy, government incentives, and a vast consumer base, India offers immense opportunities for foreign subsidiaries.

FAQs

1.How long does it take to set up a subsidiary in India?
The incorporation process typically takes 3-4 weeks, depending on approvals and documentation.

2.What is the minimum investment required?
There is no mandatory minimum capital, but sector-specific investments may be required.

3.Can a foreign company own 100% of an Indian subsidiary?
Yes, in most sectors, foreign companies can own 100% of a subsidiary under the automatic route.

4.Do I need a local director to set up a subsidiary in India?
Yes, at least one director must be an Indian resident as per Indian company law.

5.What are the compliance requirements after incorporation?
Subsidiaries must file annual returns, tax filings, and financial statements while complying with audit and regulatory requirements.