Things to Know Before Forming a Subsidiary Company in India

India is emerging as one of the most Favourable global destinations for business expansion. Given its massive market potential, highly developed human resources and burgeoning economy, it's no surprise that many foreign investors are exploring ways to get a foothold in the country. A subsidiary company is one of the most common ways for foreign companies to enter the Indian market. But, before you start Indian subsidiary company registration process, it is essential to understand some of the important points regarding subsidiary business in India.

In this article we will focus on the top 5 things to know before you begin the process of subsidiary company registration in India. Whether it’s about legal requirements or taxation, these aspects will guide you to manoeuvre the nitty-gritties of businesses and make informed decisions.

Manage legal and company structure/ subsidiary types

Know about the Legal Structure of Your Company If you have to create a subsidiary company in India, you have to know about the Legal Structure of your company. An Indian subsidiary is basically a company in which the parent company owns at least 51% of the shareholding. This means the Indian subsidiary registration would have a legal entity distinct from the parent company as the company would be operating as per Indian laws.

The types of subsidiary structures you can consider for registration of subsidiaries in India are:

Private Limited Company: In India, this is the most prevalent form of subsidiary, particularly for foreign investors. It provides limited liability protection for the parent company and shareholders, and at least two shareholders and two directors must be present. This structure is perfect for companies looking to receive venture capital investments, as a private limited structure allows for raising funds from a limited number of investors.

Public Limited Company if the parent proposes to have a broader shareholding base and wishes to raise funds from the public then it may choose for a public limited subsidiary. A P.L.C. has to have at least three directors and seven shareholders, and can offer shares to the public.

Limited Liability Partnership (LLP) : Another form of subsidiary that can be established is through LLP It provides limited liability to its partners and has a more flexible management structure than a private limited company. But this may not be right for giants or fundraising.

Choosing the right company registration for Indian subsidiary is heavily dependent on the nature of business and goals of the Parent company. We would also recommend seeking advice from a company registration professional regarding how you should operate your business.

What Are FDI Laws?

The subsidiary company registration in India is heavily dependent on India’s Foreign Direct Investment (FDI) policy. The FDI policy specifies the rules and sectors for foreign investment That’s why, before making an entry by setting up a company as your subsidiary, you must be well aware of the FDI guidelines and limitations relevant to your sector.

India permits FDI via two routes:

Foreign Direct Investment (FDI) pathways are divided into two routes: automatic and government approval route. This route applies to most sectors, including technology, manufacturing, and e-commerce, with exceptions for sectors such as defense, retail, and real estate.

Approval from Government:  In some sensitive sectors such as defense, broadcasting, and banking where foreign investment is permitted, the foreign investors may require the approval of the government before investing. The parent company would then need to apply with the ministry in charge, including information about the business and the investment.

The percentage of owing in limited sectors for foreigners has been determined as per the laws by the Indian government and is another notable thing to be noted. Indian businesses are protected from foreign entities in a number of sectors, for instance, in the defence sector, foreign direct investment (FDI) is capped at 49% and in the retail sector 51%.

Therefore, you can avoid unnecessary legal implications while setting up your subsidiary company in India by being aware of the policies followed.

Taxation and Compliance: When setting up a subsidiary in India, taxation is a significant aspect. Your subsidiary will enter the Indian tax regime and be liable under corporate income tax, Goods and Services Tax (GST) and other applicable laws. Here are the important tax-related things you need to know:

Corporate Income Tax: Subsidiary company in India are treated as separate legal entity and taxed. Domestic companies are subject to a corporate tax rate of about 25% to 30%, depending on their turnover, and other factors. For foreign companies, the rate can be as high as 40% or higher.

Transfer Pricing: As the subsidiary will be associated with a foreign parent company, the transactions between them will be required to follow the Indian Transfer Pricing regulations. These rules help ensure that inter-company transactions are conducted at arm’s length and adhere to fair pricing standards.

GST: Your subsidiary will need to register if selling goods and/or service, In case your subsidiary is providing, goods and/or service, they have to register under GST and comply with tax filing requirements. GST rate will vary based on the type of goods/services provided.

Withholding Tax: Payment made from the Indian subsidiary to the foreign parent company in respect to dividend, royalties and interests is likely to be liability to withholding tax. The rate that will be applied can be lower depending on the Double Taxation Avoidance Agreement (DTAA) between India and the home country of the parent company.

Professional taxe consultancy in India or professional taxe advisor in India With this in mind, familiarizing yourself with the tax landscape could save time and money, and ensure your subsidiary runs smoothly.

Establishing a Physical Presence in India

There needs to be a physical presence in India to set up a subsidiary company. Indian subsidiary company registration process is not only cover legal proceedings but strategic aspects such as how to settle office, staffing, and local operation functions.

Registered Office: Every company by law is required to have a registered office in India as per Indian law. This office will be the official address of the company’s communications with the government and other entities. Depending on your requirements, you can either buy office space, lease it or get virtual office space.

Directors and Shareholders: Your Indian subsidiary should have a minimum of at least two directors, and at least one of them must be an Indian resident. You also require shareholders — they can be either a person or entities. As long as they fulfill the legal requirements, foreign investors can select directors and shareholders from the parent company.

Opening a Local Bank Account: A local bank account is another crucial step in establishing a subsidiary. This bank account will handle all transactions, from receiving payment to payment of taxes. (Bank account: You need various documents, including the company’s registration certificate, proof of address, and the identification details of the directors)

Hiring local employees can make it easier to run your subsidiary. This is because India has a big, skilled workforce, and you can tap into local talent who can handle operations, marketing and sales for you.

The legal papers and processes

In India, subsidiary company registration with relevant legal procedures, as well as particular documentation, are all required. It’s important that you know those requirements before starting the registration process. Here are the key steps involved:

Acquire Digital Signature Certificate (DSC): Every director and shareholder of the subsidary company needs to obtain a DSC which is required for signing the electronic documents in the registration process.

Obtain Director Identification Number (DIN) – A unique identification number allotted by the Ministry of Corporate Affairs (MCA) to each director.

Company Name Approval: The name of your subsidiary company has to be approved by the Registrar of Companies (ROC) to ensure that it is indeed unique and does not conflict with any other business.

Incorporation Documents: This refers to the legal documents used to establish a company, specifically the Memorandum of Association (MOA) and Articles of Association (AOA), which outline the objectives, operations, and governance structure of the company.

Incorporation with MCA: In the last part, the documents are to file with the Ministry of Corporate Affairs (MCA) to receive a Certificate of Incorporation, which creates the subsidiary.

Conclusion

India is now one of the fastest-growing businesses in the world and is the perfect place to form a subsidiary company in India. But you need to understand the legal, financial and operational implications before you start the registration process. To read on, you can become familiar with the factors based on which you can set up a smooth and successful venture in the country; legal structure; FDI regulations; taxation; physical presence; and documentation.

ServicesPlus is the best and guide you in Indian subsidiary company registration. Our consultants can help you select the most suitable company format, ensure compliance with FDI regulations, manage tax adherence, and deal with the whole registration process. Join hands with us to set up your india subsidiary and to tap the potential of this dynamic economy. For additional information, reach out to us today.