India has emerged as a lucrative market for investment for foreign companies in the past few years. Some of the reasons for same are as under:
- Highest Youth population in the world.
- Huge domestic consumption market.
- World’s 5th largest economy by nominal GDP
- Accommodating government policy for FDI
- Thriving infrastructure
- Huge opportunity for growth
- World’s largest democracy
Therefore more and more companies are setting up their business presence in India. There are many options available for foreign companies to start their business in India like a wholly-owned subsidiary, subsidiary company, Branch office, Liaison office, and joint venture, etc. in this article we will discuss a subsidiary company.
Incorporation of a subsidiary company in India:
Some salient features of subsidiary company are as follows:
- A subsidiary company is one in which 50% or more of its shares are owned by a holding or parent company.
- Incorporation of subsidiary company is easier and quicker as the parent company is required to only take prior permission of the Registrar of Companies (ROC) for incorporating.
- Once the incorporation of subsidiary company is completed, as per the taxation regulations and laws in India, it is considered as a domestic company. This means that it is eligible for all the deductions and exemptions and benefits provided by the statutes and governing bodies.
- Unlike Branch office and Liaison office, no prior approval of RBI is required for Incorporation of subsidiary company. The company is just required to intimate RBI prior to registration procedure. Further, most of the investments in subsidiary companies are covered under automatic route.
- The company is required to file all the prescribed forms and documents along with the particulars related to allotment of shares within thirty days of share allotment to all the foreign investors.
Requirements for incorporation of subsidiary company in India:
The following points shall be kept in mind for private limited company registration as subsidiary company.
- At least two shareholders and directors in the company out of which at least 1 shall be Indian resident. Therefore, legally, only one Indian director is required but for administrative purposes, 2 Indian directors are required. There can be any number of foreign directors.
- There is no minimum paid-up capital required, however, for practical purpose, it is advisable that foreign company shall open Indian subsidiary with sufficient capital since it is considered as FDI and RBI compliance need to be done every time fresh capital is introduced in the company by the parent company.
Permissible activities for a subsidiary company:
Almost all the activities under various sectors are permissible to be carried out under an automatic route except those sectors which are considered as prohibited or require a prior approval from the Government of India. Further, an Indian Subsidiary can undertake any activity that has been mentioned in Memorandum of Association (MOA) of the Indian company under the Object Clause is permissible to be undertaken.
Liabilities of a subsidiary company in India:
As per the Indian law and regulations, the liability of a parent holding in its subsidiary company is limited to the extent of all the shareholdings in the company. This is due to the independency of the subsidiary as a separate and distinct legal identity in India.
It is to be noted that any incurred debts by the subsidiary company cannot be paid with the assets owned by the parent company because of its limited liability. This advantage makes incorporation of subsidiary company by a foreign company a viable option than any other form of company registration in India as it is risk-free.
Taxability of Subsidiary company under Indian taxation laws:
After the incorporation of subsidiary company in India, it is taxable as per the following criteria-
- When annual turnover of subsidiary is less than Rs.250 Crore:
- Income is less than Rs. 1 Crore- 26% tax is levied
- Income is less than Rs. 10 Crore- 27.82% tax is levied
- Income is more than Rs.10 Crore- 29.1% tax is charged
- When annual threshold of the subsidiary is above Rs.250 Crore:
- Income is less than Rs. 1 Crore- 31.20% tax is levied
- Income is less than Rs. 10 Crore- 33.38% tax is levied
- Income is more than Rs.10 Crore- 34.94% tax is levied
Note: The income generated by the subsidiary having a permanent establishment in India is taxable under Indian laws and as per the Double Tax Avoidance Agreement (DTAA). In case there is no DTAA between India and the country of origin of foreign companies, taxes are to be paid in both the countries as per the taxation laws.
Winding up a foreign subsidiary company in India:
Unlike the easier procedure of incorporation of subsidiary company in India, the process of dissolving or winding up the business of a subsidiary company is lengthy and time constraining. It can take around six to seven months or more for the whole winding-up procedure to be completed. The time taken depends on the types of assets that the subsidiary owns and the complexity of the whole process.
Is incorporation of subsidiary company by a foreign company a better option for investing in India?
Looking at all the aspects of the incorporation of a subsidiary company in India and other related procedures, it is not wrong to say that it is one of the best options for foreign companies over any other form for making investments in India and grow their business. This is because of the multiple of benefits that come along incorporation of subsidiary company. These are as follows-
- The process of incorporation of subsidiary company is hassle-free and less time-consuming as compared to the Branch office or Liaison office.
- Corporate tax rate applicable to subsidiary companies is lesser than other forms of the entity in India.
- No restrictions on the type of activities to be undertaken by subsidiary company in India. It can process most of the operations and manufacturing activity in India.
- Foreign brand names can be retained by the Indian subsidiary.
- The compliances to be fulfilled by them are easier and simpler.
- Flexibility on addition and retirement of directors, change of registered office address, change of bank.