Subsidiary Company Taxation: A Complete Guide

A subsidiary company is a business entity controlled by a parent company, which holds a majority stake in it. Many multinational corporations establish subsidiaries to expand their business into new markets while maintaining separate legal identities for taxation and compliance purposes. The taxation of a subsidiary company is crucial for ensuring regulatory compliance, optimizing tax benefits, and managing financial risks effectively.

This guide provides a complete overview of subsidiary company taxation, covering corporate tax rates, GST registration, dividend taxation, transfer pricing, AD code registration, and compliance requirements.

What is a Subsidiary Company?

A subsidiary company is a business entity in which another company (the parent company) owns more than 50% of the shares, giving it control over decision-making.

Types of Subsidiary Companies

1. Wholly-Owned Subsidiary – The parent company owns 100% of the shares.

2. Partially-Owned Subsidiary – The parent company owns more than 50% but less than 100% of the shares.

Subsidiary Company Registration

A subsidiary company can be registered as a Private Limited Company (Pvt Ltd) in India under the Companies Act, 2013. The Company Registration Process includes obtaining a Digital Signature Certificate (DSC), Director Identification Number (DIN), name approval, and filing incorporation documents with the Ministry of Corporate Affairs (MCA).

Taxation of a Subsidiary Company in India

Taxation for a subsidiary company depends on whether it is a domestic or foreign subsidiary. The Indian government imposes various taxes, including corporate tax, Goods and Services Tax (GST registration), and transfer pricing regulations.

1. Goods and Services Tax (GST) for Subsidiary Companies

All subsidiary companies must comply with GST registration if their annual turnover exceeds ₹40 lakh (₹20 lakh for service providers).

Key GST Compliance Requirements

• GST registration must be completed through the GST portal.

• Monthly or quarterly GST returns must be filed.

• GST input tax credit can be claimed for purchases.

• GST cancellation is required if the business ceases operations.

2. Transfer Pricing Regulations for Subsidiary Companies

When a subsidiary company in India engages in transactions with its parent company (especially if it's a foreign entity), it must follow transfer pricing regulations under the Income Tax Act.

Key Aspects of Transfer Pricing:

• Transactions must be at "arm’s length" (fair market value).

• Proper documentation and compliance are mandatory.

• Transfer pricing audits may be conducted by the tax authorities.

Failure to comply can result in penalties and additional tax liability.

3. Dividend Taxation for Subsidiary Companies

Earlier, companies were required to pay Dividend Distribution Tax (DDT) on profits distributed to shareholders. However, from April 1, 2020, DDT has been abolished, and dividends are now taxed in the hands of shareholders at their applicable tax rate.

For foreign subsidiaries, dividends received from an Indian subsidiary may be taxed under DTAA agreements, reducing tax liability.

Other Important Tax and Compliance Considerations

1. AD Code Registration for Exporting Subsidiary Companies

If a subsidiary company deals with exporting goods or services, it must obtain AD Code Registration. This registration is required for receiving export payments in a business’s current account through an Authorized Dealer (AD) bank.

2. GST Cancellation for Inactive Subsidiaries

A subsidiary that stops business operations must apply for GST cancellation to avoid penalties and unnecessary tax filings. The process includes:

• Submitting a request on the GST portal.

• Clearing outstanding GST liabilities.

• Receiving cancellation approval from the GST department.

3. Filing of Annual Tax Returns

A subsidiary company must file Income Tax Returns (ITR) annually, along with GST returns and financial statements with the MCA.

Conclusion

Subsidiary company taxation is essential for compliance and financial efficiency. Whether dealing with corporate tax, GST registration, AD code registration, or transfer pricing, companies must adhere to regulatory guidelines to avoid penalties and optimize tax benefits.

Proper tax planning, company registration, and compliance with GST cancellation rules ensure smooth operations for a subsidiary company, enabling it to contribute effectively to its parent company's global expansion strategy.