The establishment of a foreign subsidiary in India is governed by a structured regulatory framework. The Incorporating a Foreign Subsidiary in India process involves compliance with various laws, such as the Companies Act, 2013, the Foreign Exchange Management Act (FEMA), and guidelines from the Reserve Bank of India (RBI).
Foreign companies can establish a wholly-owned subsidiary in India by adhering to the legal and procedural requirements, which are stringent and require a comprehensive understanding of Indian laws.
Foreign Direct Investment (FDI) also plays a critical role in the incorporation process, as different sectors in India have varying levels of permissible foreign investment. The government allows 100% FDI under the automatic route in many sectors, but some sectors require prior government approval.
Key Legal Framework for Incorporating a Foreign Subsidiary in India
Companies Act, 2013
The primary law governing Incorporating a Foreign Subsidiary in India is the Companies Act, 2013. Under this Act, a foreign subsidiary is considered a company that is either incorporated as a private limited or public limited company.
The foreign parent company must own at least 50% of the share capital in the Indian subsidiary to classify it as a subsidiary under Section 2(87) of the Companies Act, 2013.
- A private limited subsidiary must have at least two shareholders and two directors, with one director being an Indian resident.
- A public limited subsidiary requires a minimum of seven shareholders and three directors.
Foreign Exchange Management Act (FEMA), 1999
FEMA governs the flow of foreign capital in India. For Incorporating a Foreign Subsidiary in India, foreign exchange regulations must be strictly followed.
This includes remitting capital from abroad to India, with the necessary reporting to the RBI and adherence to the sector-specific caps on Foreign Direct Investment (FDI). Compliance with FEMA ensures that capital infusion and repatriation of profits are lawful.
Foreign Direct Investment (FDI) Policy
The FDI Policy, governed by the Department for Promotion of Industry and Internal Trade (DPIIT), categorizes sectors into two routes for investment:
- Automatic Route: No prior government approval is required.
- Government Route: Prior approval from the government is mandatory for investment in restricted sectors such as defence, broadcasting, and real estate.
For Incorporating a Foreign Subsidiary in India, it is essential to determine under which route the proposed investment falls and comply with the respective norms.
Procedure for Incorporating a Foreign Subsidiary in India
Step 1: Obtaining a Digital Signature Certificate (DSC)
The first step in Incorporating a Foreign Subsidiary in India is obtaining a Digital Signature Certificate (DSC) for at least one director, who must be a resident of India. The DSC is essential for filing various forms electronically with the Ministry of Corporate Affairs (MCA). Foreign directors must also obtain DSCs if they are to be listed as directors of the subsidiary.
Step 2: Director Identification Number (DIN)
A Director Identification Number (DIN) is mandatory for all directors of the subsidiary. The application for DIN is made through the e-form DIR-3, accompanied by identity and address proof of the directors. A DIN is unique to each director and remains valid for future appointments as a director in other companies.
Step 3: Name Approval
The next step involves reserving a unique company name with the MCA through the RUN (Reserve Unique Name) service. The name should be distinct, and no similar company name should exist in India. The proposed name must comply with the Companies (Incorporation) Rules, 2014, and should reflect the foreign parent company’s association.
Step 4: Filing the Incorporation Form
For Incorporating a Foreign Subsidiary in India, the SPICe+ (Simplified Proforma for Incorporating Company Electronically Plus) form is filed with the ROC. The form integrates multiple services such as issuance of PAN, TAN, and GST registration. The following documents are typically required:
- Memorandum of Association (MOA) and Articles of Association (AOA) signed by the subscribers.
- Proof of office address and utility bill.
- Identity and address proof of directors and shareholders.
- Declaration by a professional (chartered accountant or company secretary) certifying compliance with legal requirements.
Step 5: Certificate of Incorporation (COI)
Upon successful verification of the documents and forms, the ROC issues the Certificate of Incorporation. The COI signifies the legal existence of the subsidiary, and it is now recognized as a legal entity in India.
Post-Incorporation Compliance for Incorporating a Foreign Subsidiary in India
Step 1: Opening a Bank Account
After Incorporating a Foreign Subsidiary in India, the company must open a bank account in its name. This is mandatory for receiving capital contributions from the foreign parent company. The bank account will be used for all official financial transactions, including equity infusion and day-to-day operations.
Step 2: Filing with the Reserve Bank of India (RBI)
Foreign Direct Investment (FDI) inflows must be reported to the RBI under the Foreign Exchange Management Act (FEMA). The subsidiary must file the following within 30 days of receiving funds:
- Advance Reporting Form (ARF): This form reports the amount received from foreign investors.
- FC-GPR (Foreign Currency-Gross Provisional Return): This is filed within 30 days of the allotment of shares to foreign shareholders. Non-compliance may lead to penalties under FEMA.
Step 3: Issuance of Shares
The foreign subsidiary must issue shares to the foreign parent company against the capital infusion. These shares can either be equity shares or preference shares. The company must also update its Register of Members, reflecting the ownership and shareholding pattern.
Step 4: Registrar of Companies (ROC) Filings
Post incorporation, compliance filings with the ROC are mandatory. This includes filing annual returns (Form MGT-7) and financial statements (Form AOC-4) as per the Companies Act, 2013. Non-compliance can result in significant fines or penalties, including the possible disqualification of directors.
Step 5: Tax Registrations
The newly incorporated foreign subsidiary must obtain a Permanent Account Number (PAN) and Tax Deduction and Collection Account Number (TAN) from the Income Tax Department. If the subsidiary’s turnover exceeds the GST threshold, it must also register under the Goods and Services Tax (GST). Ensuring proper tax registrations is critical for the lawful operation of the subsidiary.
Step 6: Compliance with Sectoral Regulations
Depending on the nature of the business, the foreign subsidiary may need to comply with additional sector-specific regulations. For example, a subsidiary in the financial services sector may require approval from the Securities and Exchange Board of India (SEBI), while a telecom subsidiary may need to comply with guidelines from the Department of Telecommunications (DoT).
Taxation and Regulatory Aspects of Incorporating a Foreign Subsidiary in India
Corporate Taxation
Foreign subsidiaries are subject to Indian corporate tax laws under the Income Tax Act, 1961. As of FY 2023-24, the corporate tax rate for subsidiaries is as follows:
- 25% for companies with a turnover of up to INR 400 crore.
- 30% for companies with a turnover exceeding INR 400 crore.
- A 15% concessional tax rate is available for manufacturing companies established after October 1, 2019, under Section 115BAB, provided they commence production before March 31, 2024.
Additionally, companies may be subject to Minimum Alternate Tax (MAT) if their tax liability is lower than 15% of their book profits. Compliance with these tax regulations is essential for Incorporating a Foreign Subsidiary in India.
Transfer Pricing Regulations
Transfer pricing rules under the Income Tax Act, 1961, apply to transactions between the foreign parent company and the Indian subsidiary. These rules ensure that transactions are conducted at arm’s length to prevent tax evasion.
Withholding Tax on Dividends
Dividends distributed by the foreign subsidiary to its parent company are subject to withholding tax. As per the current tax regime, dividend payments attract a withholding tax rate of 20%, which can be reduced depending on the provisions of the Double Taxation Avoidance Agreement (DTAA) between India and the home country of the parent company.
Goods and Services Tax (GST)
Foreign subsidiaries operating in India may be liable for GST if they engage in the sale of goods or services. The applicable GST rate varies depending on the type of goods or services supplied. Subsidiaries with an annual turnover exceeding INR 40 lakh must register for GST. Non-compliance with GST regulations can attract penalties and fines.
Foreign Exchange Management Act (FEMA) Compliance
Compliance with FEMA is a continuous obligation for foreign subsidiaries. This includes proper reporting of foreign investments, adherence to limits on foreign borrowings, and ensuring that all cross-border transactions comply with Indian foreign exchange laws. Violations of FEMA provisions can lead to severe penalties, including fines and legal action by the Enforcement Directorate.
Conclusion
Incorporating a Foreign Subsidiary in India presents substantial opportunities for foreign companies looking to tap into one of the world’s fastest-growing economies. The legal framework, while complex, provides a structured path for foreign businesses to establish a presence in India.
However, failure to comply with post-incorporation obligations and tax regulations can lead to legal complications, fines, and operational delays. For businesses willing to invest in legal expertise and ensure continuous compliance, the rewards of Incorporating a Foreign Subsidiary in India far outweigh the challenges.
Proper planning, coupled with adherence to sector-specific rules and proactive engagement with Indian authorities, is key to achieving long-term success in the Indian market.
FAQs on Incorporating a Foreign Subsidiary in India
1. How long does it take to incorporate a foreign subsidiary in India?
The process typically takes 15-30 days, depending on the timely submission of required documents and approvals from authorities such as the Registrar of Companies (ROC).
2. Is government approval mandatory for Foreign Direct Investment (FDI) in all sectors?
No, government approval is not required in sectors under the Automatic Route. However, certain sectors, such as defence or real estate, require prior approval under the Government Route.
3. What are the post-incorporation compliance requirements for a foreign subsidiary in India?
Key requirements for Incorporating a Foreign Subsidiary in India include opening a bank account, reporting FDI inflows to the RBI, issuing shares to the parent company, annual filings with the ROC, and complying with sector-specific regulations.
4. How long does it take to incorporate a foreign subsidiary in India?
The process of Incorporating a Foreign Subsidiary in India typically takes 15-30 days, depending on the timely submission of required documents and approvals from authorities such as the Registrar of Companies (ROC).
5. What are the penalties for non-compliance with post-incorporation filing requirements?
Non-compliance with ROC filings, RBI reporting, and other legal obligations can result in fines, penalties, or disqualification of directors, along with legal action under FEMA and the Companies Act, 2013.
