Although all the 3 entities i.e Wholly owned subsidiary company in India, Branch office in India and Liaison office in India are opened for specified purposes and are common form of business operation in India by foreign company, however registration of Indian subsidiary has following advantages over other 2 entities:
- Subsidiary company in India has a separate legal entity whereas the BO/LO has no separate entity. It means that in case of registration of wholly owned subsidiary company in India, it is considered as an Indian entity as per laws prevailing in India, however Branch office registration and Liaison office registration are considered as foreign entity in India.
- The liability of parent company is limited to the extent of its shareholding in the Wholly Owned Subsidiary.On the other hand the liability of the Branch office in India is unlimited. The assets of the parent company are at risk of attachment in case the liabilities of the branch exceeds its assets.
- Indian Subsidiary Company can expand its business activities by altering its Memorandum of Association On other hand BO/LO cannot expand its activities or undertake any new trading, commercial, or industrial activity other than that is expressly approved by the RBI.
- Since Branch office and Liaison Office has no separate entity and is considered as Foreign Company in India, therefore, there is an exposure under Income Tax. Under Income Tax, Branch office are considered as permanent establishment (PE) of foreign company and accordingly foreign company also becomes taxable in India with respect to profit attributable due to Indian entity in India. Similarly, Indian Income tax authorities tries to hold India LO also as PE of foreign company in India.
- Taxability of Subsidiary company in India is advantageous as compare to other 2 entities. Subsidiary company in India is taxed at rate of 25% plus surcharge plus education cess i.e at rate applicable to any other Indian company where as tax rate of Branch office is at 40% plus surcharge plus education cess i.e at rate applicable to foreign company. Liaison office are not taxable in India since they do not engage in any commercial activities.
- Both branch office and liaison office are opened in India with permission of Reserve Bank of India which provides approval to both the entities subject to conditions that they will be involved in only those activities in India which are permissible as per RBI rules and regulations. Therefore, both the aforesaid entities are having restricted activities in India. On the other hand, in case of subsidiary company registration in India, there is no such restrictions about permissible activities. Therefore, wholly owned subsidiary in India can do any activities which are permissible as per its Memorandum of Association and Article of Association.
- Another advantage of subsidiary company in India is that the subsidiary company in India can retain its name brand.
Thus, it may be seen form above that for a foreign company which wants to open business in India, there are many options available, however, registering a subsidiary company in India is more advantageous in terms of lower tax rate and permissible activities.