Foreign Subsidiary: Features, Advantages, and Compliance Requirements

12 Apr,2023

 

Introduction

Global expansion offers businesses exciting opportunities, and establishing a foreign subsidiary is one of the most effective ways to enter international markets. A foreign subsidiary is a distinct legal entity operating in another country, owned partially or wholly by a parent company. While this structure offers various benefits like local tax incentives and risk mitigation, it also involves navigating compliance requirements and significant investments.

This blog delves into the procedure for foreign subsidiary company registration in India, compliance mandates, and the advantages of foreign subsidiaries, offering insights for businesses considering this route.


What is the Procedure for Foreign Subsidiary Company Registration in India?

Setting up a foreign subsidiary company in India requires adherence to specific legal and procedural steps:

  1. Digital Signature Certificate (DSC) and Director Identification Number (DIN):

    • At least two directors must apply for DSC. The remaining directors must secure DIN.

  2. Company Name Approval:

    • Apply for a unique company name through Form INC-1 on the Ministry of Corporate Affairs (MCA) portal.

  3. Document Submission:

    • Provide supporting documents such as the resolution of the foreign company, NOC, trademark (if applicable), and apostille copies.

  4. Filing Incorporation Forms:

    • Submit Forms INC-7, DIR-12, and INC-22 for incorporation, fees, and stamp duties.

  5. Verification and Certification:

    • The incorporation certificate is issued upon approval and verification by the Registrar of Companies (ROC).

  6. Post-Incorporation Steps:

For businesses seeking assistance, professionals at ADCA can guide you through the foreign subsidiary company registration in India, ensuring seamless compliance.


What Are the Compliances for Subsidiaries of Foreign Companies in India?

Operating a foreign subsidiary in India requires adherence to several compliance requirements:

  1. Taxation Compliance:

    • Foreign subsidiaries are taxed at 40% of their income in India.

  2. Statutory Audits:

    • Regular audits must ensure compliance with the Companies Act 2013.

  3. FEMA Regulations:

    • Adhere to the Foreign Exchange Management Act (FEMA) for foreign investments and remittances.

  4. Annual Filings:

    • File annual returns and financial statements with the ROC.

  5. Transfer Pricing Compliance:

    • Transactions with the parent company must follow Indian transfer pricing regulations.

  6. Labor Laws:

    • Comply with local labor laws for employee benefits and workplace standards.

By following these guidelines, businesses can avoid penalties and ensure smooth operations for their foreign subsidiary in India.


What Are the Advantages of Foreign Subsidiaries?

Establishing a foreign subsidiary offers numerous benefits:

  1. Market Expansion:

    • Enables businesses to enter new markets and cater to local consumers effectively.

  2. Reduced Tax Liability:

    • Many countries offer tax incentives and lower rates for foreign investments.

  3. Risk Mitigation:

    • A subsidiary operates as a separate legal entity, limiting liability exposure for the parent company.

  4. Access to Local Resources:

    • Employing local talent and resources improves operational efficiency and compliance.

  5. Increased Revenue Potential:

    • Expanding to foreign markets can lead to revenue growth and diversification.

  6. Government Incentives:

    • Several countries offer free trade zones, fast-track incorporation, and economic incentives for foreign subsidiaries.

The advantages of foreign subsidiaries make them attractive for global businesses aiming to scale effectively.


How do you incorporate a subsidiary of a foreign company in India?

The incorporation of a subsidiary of a foreign company in India requires meticulous planning and execution:

  1. Legal Structuring:

    • Decide on the structure (wholly-owned or partially-owned) based on business needs.

  2. Documentation:

    • Collect required documents, including Articles of Association (AOA), Memorandum of Association (MOA), and board resolutions.

  3. Regulatory Approvals:

    • Obtain necessary approvals from the MCA and comply with FEMA regulations.

  4. Local Representation:

    • Appoint Indian resident directors as required under the Companies Act 2013.

  5. Tax Registrations:

  6. Bank Account:

    • Open a corporate bank account in India for transactions.

For businesses unsure about the incorporation process, consulting experts like ADCA ensure efficient execution and compliance.


FAQs

What is the difference between a foreign company and a foreign subsidiary?

A foreign subsidiary is a distinct legal entity with compliance obligations in the host country, whereas a foreign company operates as a branch or liaison office.

What are the objectives of a foreign subsidiary?

The primary objective is to expand the parent company's market reach, generate revenue, and reduce operational risks through local operations.

Can a foreign subsidiary apply for start-up benefits in India?

No, foreign subsidiaries are not eligible for start-up benefits under the Start-Up India scheme.

What are the tax rates for foreign subsidiaries in India?

Foreign subsidiaries in India are taxed at a rate of 40%.


Conclusion

Expanding globally through a foreign subsidiary offers significant growth opportunities, risk reduction, and access to local markets. However, understanding the foreign subsidiary company registration in India and ensuring compliance is critical for success.

At ADCA, we specialize in providing tailored services for incorporating and managing foreign subsidiaries in India. From legal structuring to compliance management, our experts ensure your business expansion is smooth and efficient.

Contact ADCA today for expert guidance on establishing and managing foreign subsidiaries in India!

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