We hope this article helps you understand the legal requirements of foreign subsidiaries' compliances in India.
All businesses operating in India must adhere to the government’s rules and regulations whether the companies are owned by Indian or foreign entities or citizens. The only difference is that foreign-owned subsidiary companies must adhere to more rules and regulations than Indian-owned companies. Let’s see the Foreign Subsidiary Company Compliances in India.
What is a Foreign Subsidiary Company?
A foreign subsidiary company is one in which a company incorporated in another country owns 50% or more of the company’s equity shares. In this case, the foreign company is referred to as the holding company or parent company.
A company must be incorporated in India in order to be considered a foreign subsidiary company in India. It makes no difference where the parent company is incorporated.
Compliance is based on many aspects of the business. All compliances must be met according to the type of company that is incorporated, the industry of operations, the annual turnover, and the number of employees. Section 2(42) of the Companies Act, 2013, defines a foreign company as one that must follow regulations and rules established by multiple statutes and orders, such as:
- Companies Act, 2013 – Income Tax Act, 1961
- FEMA (Foreign Exchange Management Act), 1999 – RBI compliances, etc
- GST, 2017 – SEBI rules and regulations.
Essential Compliances
The following are the more essential compliances that the foreign subsidiary company must meet in accordance with Sections 380 and 381 of the Companies Act, 2013:
- Form FC-1 under Section 380: The FC-1 form is vital because it must be filed within thirty days of the subsidiary company’s incorporation in India. The form must be accompanied by the necessary files, certifications, and so on from other regulatory bodies in India, such as the RBI.
- Form FC-3 under Section 380: Depending on where the company is incorporated in India, this form must be submitted to the relevant Registrar of Companies (ROC). The form must include information about the areas in which the company’s operations will take place and the company’s financial records.
- Form FC-4 under Section 381: This form is concerned with the company’s annual returns. It must be filed within sixty days of the end of the previous fiscal year.
- Financial statements: The company is required to submit financial statements for its Indian operations and business. This must be submitted within six months of the fiscal year’s end. They must include: – Statements on the transfer of funds – Statements on repatriated earnings – Statements on related party transactions such as sales, transfers of property, purchases, and so on.
- Audit of accounts: A Practising Chartered Accountant must audit all of the foreign subsidiary company’s accounts. These accounts should be adequately organised and made available for audit by the company.
- Authentication and translation of documents: All documents submitted by the company to the ROC must be validated by an Indian lawyer in practice. These documents must also be translated into English before they can be validated and submitted.
Compliances Under the Income Tax Act and the GST Act
There are three types of compliances based on the intermittency of these compliances:
Periodic Compliances:
Periodic compliances are those that the company must meet regularly after company formation. Unlike annual compliances, this type of compliance occurs at regular intervals throughout the year. These requirements may need to be met on a quarterly or semi-annual basis.
Annual Compliances:
Annual compliances are those that must be met once a year. Every year, the company is required to meet these compliances. Every year, for example, the company must do the following: – GST filings – TDS filings under the Income Tax Act – RBI compliance – SEBI rules and regulations compliance – Annual Financial Statements
Event-based Compliances:
As said before, there are three basic types of compliances, one of which is event-based. This means these compliances are only required in the event of a specific event or action by the company.
Under the RBI regulations and FEMA guidelines, there are two event-based compliances:
FC-TRS: This relates to transferring shares in a foreign subsidiary company from an Indian resident to a non-resident investor or vice versa. A transfer of this nature can take the form of a sale or a gift. Foreign Direct Investment policies require that such a transaction be reported within sixty days of the transfer date. In this case, the Indian resident, or the investee company, is responsible for filing this form. This applies whether the Indian resident is the transferer or the transferee.
FC-GPR: This relates to a remittance received by the shareholders of a foreign subsidiary company. The form specifies the mode of transfer of the company’s remittance to its shareholders.
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Importance of Meeting Compliances
A foreign subsidiary company must comply with all regulations, as failure to do so can result in severe penalties. Failure to meet required compliances may result in fines, penalties, and criminal charges with imprisonment under provisions relating to applicable law.
The following are the penalties that can be imposed on a company for failing to meet their compliances:
Under Section 392 of the Companies Act 2013 (as of 01 April 2014) :
- Irrespective of what is stated in Section 391, if a foreign corporation is found to have violated any provisions of Chapter XXII of the Act, the business will be fined not less than ₹1 lakh and up to ₹3 lakh. If the offence continues, a fine of ₹50,000 will be levied for each day that it continues.
- Every officer of a foreign company who is in default faces imprisonment for up to 6 months and/or a fine of at least ₹25,000, which can be increased to up to ₹5 lakh. It is critical for a company to meet all of its compliances in order to continue with its business operations without interference from the authorities.
FAQs
What is the role of FDI in a foreign subsidiary company?
Foreign Direct Investment (FDI) plays a crucial role in establishing foreign subsidiary companies by allowing foreign investors to invest in and own shares of companies operating in another country. In the context of a foreign subsidiary company, FDI provides the necessary capital and resources for its establishment, growth, and operations.
What are the advantages of having a foreign subsidiary company?
The advantages of having a foreign subsidiary company include access to new markets and customers, diversification of business operations and risk, greater control over international operations, potential tax benefits and incentives in foreign jurisdictions, enhanced credibility and competitiveness in global markets, and opportunities for technology transfer and knowledge sharing.
Why is compliance important for foreign subsidiary companies in India?
Compliance is essential for foreign subsidiary companies operating in India to ensure adherence to legal and regulatory requirements. Non-compliance can lead to legal penalties, fines, reputational damage, and business disruptions. Compliance also fosters trust among stakeholders, enhances corporate governance, and supports sustainable business growth.
What is the checklist for compliance of foreign subsidiary companies in India?
The compliance checklist for foreign subsidiary companies operating in India may include obtaining necessary approvals and registrations, filing of annual returns and financial statements, compliance with foreign exchange regulations, taxation laws, appointment of statutory auditors, maintenance of corporate records, and adherence to labour laws and employment regulations.
What is the difference between a foreign company and a foreign subsidiary?
A foreign company is incorporated and registered in a country other than India, while a foreign subsidiary is a company incorporated in India but controlled by a foreign company through majority ownership of shares. While both operate outside their home country, a foreign subsidiary is subject to the laws and regulations of the country where it is incorporated.
What are the key compliances required for foreign subsidiary companies operating in India?
Key compliances required for foreign subsidiary companies operating in India include compliance with the Companies Act, filing of annual returns and financial statements, adherence to foreign exchange regulations and FDI norms, compliance with taxation laws and transfer pricing regulations, appointment of statutory auditors, and adherence to labour laws and employment regulations.
Can a foreign subsidiary company operate independently or does it require support from the parent company?
While a foreign subsidiary company operates as a separate legal entity, it may require support from the parent company, especially during the initial stages of establishment and operation. Support may include financial assistance, technology transfer, managerial expertise, access to markets, and strategic guidance. However, once established, a foreign subsidiary company can operate independently within the framework of its business objectives and regulatory requirements.
