Foreign Subsidiary: Features, Advantages and Compliances
Global business expansion and hiring offer some of the most exciting business scopes. Opening a foreign subsidiary can greatly benefit businesses looking to enter the foreign market. A foreign subsidiary of an Indian company serves as a separate legal entity in the target country. It gives the parent company advantages, such as compliance risk mitigation and local tax incentives. Nevertheless, establishing a foreign subsidiary company requires heavy investment in terms of money and time. It may also expose businesses to compliance risks resulting in reputational damage, lawsuits and fines.
Here, we will go through the advantages of establishing a subsidiary of foreign company as part of a global business plan and other related information.
Features of a Foreign Subsidiary
A foreign subsidiary is a commercial establishment that operates in one country but is wholly or partially owned by a parent company in another country. Such companies are also called Daughter Companies and are separate legal entities that must meet the requirements for compliance for foreign subsidiaries in India. This entails complying with the local jurisdiction's employment and tax laws. The company that owns the foreign entity is the parent or holding company.
The features of the subsidiary company may vary between jurisdictions. However, they must all be a minimum % owned by their respective parent companies. Foreign subsidiaries work on a global expansion strategy where a company comes up with a legal entity in any foreign market for business operations in that country. The subsidiary gives the parent company growth opportunities while safeguarding it from litigation in the host country. Foreign subsidiaries can promote the parent company's products and services to the local population, hire local employees and import and export goods.
Establishing a Foreign Subsidiary in India
Establishing new foreign subsidiaries in India can give foreign companies complete control over their strategy and operations. Whether or not establishing a new foreign subsidiary in India is the right move for you is based on your business's present circumstances and future aspirations. These are a few situations where coming up with a foreign subsidiary can make complete sense:
When you have several remote workers in the same location
When your employees want the stability and advantages of working full-time instead of a contractors. Coming up with a foreign subsidiary will help you offer full-time employee status to your workers while also enjoying the peace of mind that comes with it. Giving full-time status to employees also simplifies taxes for them.
When you are looking to strengthen your business presence in a specific location, opening a foreign subsidiary can help you build relationships locally and work more efficiently than would be the case when running operations from abroad. Forming a subsidiary demonstrates your commitment to the area.
When you want to minimize financial risk, since foreign subsidiaries are separate entities from the parent companies, they come with fewer risks for the parent companies looking for global expansion.
When you want to reduce the burden of high tax rates. Establishing a foreign subsidiary can help your business reap tax advantages and incentives, including lower tax rates than your native country.
With these points in mind, you must also consider that establishing a foreign subsidiary is not for everyone. Always assess associated risks and research all possible expenses along with the amount of paperwork that you would have to indulge in when you want to open a foreign subsidiary.
Operational Accounting Options for a Foreign Subsidiary
Financial accounting for foreign subsidiaries that are more than 50% owned by the parent company entails consolidating their financial accounting results and records with the parent company. Financial accounting is unconsolidated for the affiliate companies that are less than 50% owned by the parent company. The financial records of such companies are separated. On that note, for a company to be a foreign subsidiary, the amount of equity participation should be above 50%. The foreign subsidiary capital structure generally describes the liabilities' side composition of the company's balance sheet.
Benefits of Establishing a Foreign Subsidiary
The following are the advantages of foreign subsidiaries:
Coming up with a foreign subsidiary helps a company establish a legal entity in another country, helping it market its products and services to the local people.
Several overseas markets have developed manufacturing facilities enabling foreign subsidiaries to lower the cost of materials and, thus, the cost of producing goods in bulk.
Professionals in foreign countries offer access to new ways of thinking about technical problems and advanced technology. Thus, foreign subsidiaries get easy access to technical skills.
A foreign subsidiary also helps a business make new relations with local partners and develop joint ventures that reap the benefits of localized knowledge.
In most situations, entering a foreign market increases revenue and boosts business growth, which is impossible in one's home country.
Several nations welcome foreign investments openly and make it very simple for businesses to develop foreign subsidiaries. There are even incentives available for foreign investments. These include free trade zones, tax incentives, faster incorporation procedures and special economic zones.
The Registration Procedure for Foreign Subsidiaries in India
The process of foreign subsidiary registration in India goes like this:
The incorporation procedure starts with two directors applying for DSC or Digital Signature Certificate and the remaining directors applying for DIN or Director Identification Number.
Applicant should apply for the company name in Form INC-1.
Logging in to the Ministry of Corporate Affairs and getting a new online form to fill in details like CIN or Corporate Identification Number, entity type and proposed company name.
Providing documents like trademark, NOC and apostille copies of the resolution of foreign companies.
On approval of the proposed company name, the applicant must file Form INC-7, Form DIR-12 and Form INC-22.
After filing incorporation papers, applicants must pay stamp duty and ROC fees.
The incorporation certificate is sent after ROC verifies the paperwork and fee payment.
Speaking of the taxation of foreign subsidiaries in India, the Indian government taxes the income of these companies at the rate of 40%. Audit of a foreign subsidiary is also essential from time to time to ensure the entity meets all the requirements in place for a foreign subsidiary of Indian company compliance.
What is the difference between a foreign company and a foreign subsidiary?
The main difference is that the foreign subsidiary has more rules and regulations than a foreign company. Companies with more than 50% of equity shared owned by distant companies come under the category of a foreign company.
Why should a company set up a foreign subsidiary?
It is beneficial for a company to develop a foreign subsidiary as it allows the company to establish a corporate standing in a specific overseas economy. This further generates tax advantages, boosts revenues and diversifies a company's assets for better risk management.
What are the objectives of a foreign subsidiary?
The main objective of a foreign subsidiary is to introduce the products and services of the parent company to all new and profitable markets across the world. Such companies also allow parent companies to hire full-time employees abroad without needing a middleman, like an employer of record.
How do you account for a foreign subsidiary?
If a company reports on a US GAAP basis with control of a foreign subsidiary, consolidating tit into the US parent for financial reporting is vital. In case the foreign subsidiary does not maintain its records in US dollars, it becomes crucial to converting the financial statements into US dollars.
Can a foreign subsidiary apply for start-ups in India?
No, foreign subsidiaries cannot apply for start-ups in India. However, companies with foreign directors and shareholders can apply under the start-up Indian scheme.
What is the difference between a joint venture and a foreign subsidiary?
While a joint venture is a partnership between two or more firms, usually domestic and foreign companies, a foreign subsidiary is a separate legal entity partially or wholly owned by a foreign company.
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