Being the seventh-largest economy in the world with over 1.3 billion people, India is a vast market and the best option for foreign company incorporation

What is a Foreign Subsidiary Company?

A foreign subsidiary company is a company that is incorporated in one country but is owned or controlled by a company in another country. The parent company is known as the holding company. Foreign subsidiaries are often used by companies to expand their operations into new markets or to take advantage of lower costs or tax rates in other countries.

Incorporation of a Foreign Subsidiary Company in India

Incorporating a foreign subsidiary in India involves establishing a distinct legal entity, typically a private limited company, with foreign ownership. This process necessitates compliance with Indian laws and regulations, including obtaining the necessary approvals from the Reserve Bank of India (RBI) and the Ministry of Corporate Affairs (MCA). Once registered, the foreign subsidiary can engage in business activities, benefit from India’s vast market potential, and navigate the complex but rewarding landscape of the Indian business environment.

How Does a Foreign Subsidiary Work?

A foreign subsidiary is a separate legal entity from its parent company. This means that it has its own board of directors, management team, and employees. The foreign subsidiary is also subject to the laws and regulations of the country in which it is incorporated.

The parent company typically has a majority stake in the foreign subsidiary, often a private limited company, which gives it control over the company’s operations. However, the foreign subsidiary remains a separate legal entity, and the parent company is not liable for the subsidiary’s debts or liabilities.

When Should You Set Up a Foreign Subsidiary Company?

There are a number of reasons why a company might choose to set up a foreign subsidiary. Some of the most common reasons include:

• To expand into new markets: A foreign subsidiary can give a company a local presence in a new market, which can make it easier to reach customers and partners.
• To take advantage of lower costs or tax rates: Some countries have lower costs of labor and other resources than others. Additionally, some countries have more favorable tax rates than others. By setting up a foreign subsidiary in a low-cost or low-tax country, a company can reduce its overall costs.
• To gain access to new technologies or expertise: Some countries have a strong track record of innovation in certain industries. By setting up a foreign subsidiary in one of these countries, a company can gain access to new technologies and expertise.
• To reduce risk: By diversifying its operations across multiple countries, a company can reduce its overall risk. For example, if a company’s operations in one country are disrupted due to war, political instability, or other events, the company can still generate revenue from its operations in other countries.

Checklist for Establishing a Foreign Subsidiary Company

• Choose a business structure. The most common business structures for foreign subsidiaries are private limited companies and public limited companies.
• Register the subsidiary with the local authorities. This process will vary depending on the country in which you are setting up the subsidiary.
• Obtain the necessary licenses and permits. The licenses and permits required will vary depending on the nature of your business.
• Open a bank account for the subsidiary.
• Hire employees and set up operations.

Audit of Foreign Subsidiary of Indian Company

The audit of a foreign subsidiary of an Indian company, which requires Indian company registration, is governed by the Companies Act, 2013, and the Accounting Standards issued by the Institute of Chartered Accountants of India (ICAI). The audit must be conducted by a chartered accountant who is registered with the ICAI.

The scope of the audit will depend on the size and complexity of the foreign subsidiary. However, the auditor must generally review the following:

• The financial statements of the subsidiary
• The subsidiary’s compliance with the laws and regulations of the country in which it is incorporated
• The subsidiary’s compliance with the group’s accounting policies and procedures

The auditor must also assess the risks of material misstatement of the subsidiary’s financial statements and design and perform audit procedures to address those risks.

Foreign Branch Vs. Foreign Subsidiary

A foreign branch is a direct extension of the parent company. It is not a separate legal entity, and the parent company is fully liable for the branch’s debts and liabilities.

A foreign subsidiary is a separate legal entity from the parent company. The parent company typically has a majority stake in the subsidiary, but the subsidiary has its own board of directors and management team.

The following table compares foreign branches and foreign subsidiaries:

Feature	Foreign Branch	Foreign Subsidiary
Legal entity	Not a separate legal entity	Separate legal entity
Liability	Parent company is fully liable	Parent company is limited to its investment in the subsidiary
Management	Managed by the parent company	Managed by its own board of directors and management team
Taxes	Subject to the tax laws of the country in which the branch is located	Subject to the tax laws of the country in which the subsidiary is incorporated

Foreign Subsidiary Vs. Permanent Establishment?

A permanent establishment (PE) is a fixed place of business where a company has a substantial presence. A PE can be a branch, office, factory, warehouse, or other fixed place.

A foreign subsidiary is not automatically considered a PE. However, a foreign subsidiary may be considered a PE if it has a substantial presence in the country in which it is incorporated.

The following factors are considered when determining whether a foreign subsidiary is a PE:

• The nature of the subsidiary’s activities
• The duration of the subsidiary’s activities
• The resources used by the subsidiary

If a foreign subsidiary is considered a PE, it may be subject to taxation in the country in which the PE is located.

Pros of Establishing a Foreign Subsidiary

• Access to new markets: A foreign subsidiary can give a company a local presence in a new market, which can make it easier to reach customers and partners.
• Take advantage of lower costs or tax rates: Some countries have lower costs of labor and other resources than others. Additionally, some countries have more favorable tax rates than others. By setting up a foreign subsidiary in a low-cost or low-tax country, a company can reduce its overall costs.
• Gain access to new technologies or expertise: Some countries have a strong track record of innovation in certain industries. By setting up a foreign subsidiary in one of these countries, a company can gain access to new technologies and expertise.
• Reduce risk: By diversifying its operations across multiple countries, a company can reduce its overall risk. For example, if a company’s operations in one country are disrupted due to war, political instability, or other events, the company can still generate revenue from its operations in other countries.

Cons of Establishing a Foreign Subsidiary

There are a number of cons to establishing a foreign subsidiary, including:

• Complexity and cost: Establishing a foreign subsidiary can be a complex and costly process. Companies need to comply with the laws and regulations of the country in which the subsidiary is incorporated. They may also need to hire professional advisors, such as lawyers and accountants, to help them with the process.
• Loss of control: Once a foreign subsidiary is established, the parent company may have less control over its operations. This is because the subsidiary is a separate legal entity with its own board of directors and management team.
• Exchange rate risk: Companies that establish foreign subsidiaries are exposed to exchange rate risk. This is because the value of their investments in the subsidiaries can be affected by fluctuations in the exchange rate between the parent company’s currency and the currency of the country in which the subsidiary is incorporated.
• Regulatory risk: Companies that establish foreign subsidiaries are exposed to regulatory risk. This is because the laws and regulations of the country in which the subsidiary is incorporated can change at any time.
• Cultural risk: Companies that establish foreign subsidiaries may also face cultural challenges. This is because the business culture of the country in which the subsidiary is incorporated may be different from the business culture of the parent company’s country.

Foreign Subsidiary Company Compliances in India

Foreign subsidiary companies in India are subject to a number of compliances under the Income Tax Act, of 1961, and the Goods and Services Tax (GST) Act, of 2017.

Compliances Under the Income Tax Act and the GST Act

Some of the key compliances under the Income Tax Act and the GST Act that foreign subsidiary companies in India need to comply with include:

• Filing of income tax returns: Foreign subsidiary companies in India are required to file income tax returns on an annual basis.
• Payment of income tax: Foreign subsidiary companies in India are required to pay income tax on their taxable income in India.
• Filing of GST returns: Foreign subsidiary companies in India that are registered for GST are required to file GST returns on a monthly or quarterly basis.
• Payment of GST: Foreign subsidiary companies in India that are registered for GST are required to pay GST on their taxable supplies in India.

Importance of Meeting Compliances

It is important for foreign subsidiary companies in India to meet all applicable compliances. Failure to do so can result in penalties, interest, and even prosecution.

In addition, meeting all applicable compliances can help foreign subsidiary companies to maintain a good reputation in India and to avoid any disruptions to their business operations.

Income Tax Rate on Foreign Subsidiaries Company in India

The income tax rate on foreign subsidiaries in India is the same as the corporate tax rate, which is currently 25%. However, there are some reduced tax rates available for certain types of businesses, such as manufacturing companies and companies that invest in certain infrastructure projects.

What are the Alternatives to Setting Up a Foreign Subsidiary?

There are a number of alternatives to setting up a foreign subsidiary, such as:

• Setting up a branch: A branch is not a separate legal entity from the parent company. The parent company is fully liable for the branch’s debts and liabilities.
• Establishing a representative office: A representative office is a physical presence in a foreign country that is used to explore market opportunities and to promote the parent company’s products or services. A representative office cannot engage in any commercial activity.
• Entering into a joint venture with a local company: A joint venture is a partnership between two or more companies. Joint ventures can be a good way to gain access to local knowledge and expertise.
• Licensing the parent company’s products or services to a local company: Licensing is a way to allow a local company to use the parent company’s intellectual property, such as its trademarks, patents, and copyrights.

The best alternative for your company will depend on your specific needs and objectives.

Foreign Subsidiary Company FAQs

How are foreign companies taxed in India?

Foreign companies are taxed in India on their income that is attributable to India. This income can include profits from business operations in India, dividends from Indian subsidiaries, and interest on loans made to Indian residents.

Is the subsidiary taxable?

Yes, subsidiaries are taxable. Subsidiaries are separate legal entities from their parent companies, and they are subject to the tax laws of the country in which they are incorporated.

What is the income tax rate for wholly owned subsidiaries?

The income tax rate for wholly owned subsidiaries is the same as the corporate tax rate, which is currently 25%.

Can a foreign company have a subsidiary in India?

Yes, a foreign company can have a subsidiary in India. Foreign companies are allowed to invest in India through a number of different routes, including setting up a subsidiary.

Is a foreign subsidiary company an Indian company?

A foreign subsidiary company is not an Indian company. A foreign subsidiary company is a separate legal entity from its parent company, and it is subject to the laws of the country in which it is incorporated.