Types of Compliances for Foreign Subsidiary Companies in India

With the increasing globalization and liberalization, many foreign companies have entered India for growing their business portfolio and for diversification. All the companies whether Indian or foreign that have been established and set up in India must follow the norms and regulations prescribed by the statutes and formulated by the government. The difference is that the compliances to be done by a foreign subsidiary company in India as compared to the Indian entity are much more.

Types of Compliances for Foreign Subsidiary Companies

Section 2(42) of the Companies Act, 2013 defines a foreign company as-

“42. “foreign company” means any company or body corporate incorporated outside India which—

  • Has a place of business in India whether by itself or through an agent, physically or through electronic mode; and
  • Conducts any business activity in India in any other manner.”

Types of Compliances for Foreign Subsidiary Company:

As per the regulated norms, laws, and statutes, there are three basic types of compliances that are time-based. Types of compliances for foreign subsidiary company must be fulfilled as per their intermittency which is as follows-

  1. Annual Compliances for foreign subsidiary: These are the compliances for foreign subsidiary companies that must be completed on an annual or yearly basis. The norms under this must be met mandatorily by the company once for each financial year. Either a wholly-owned subsidiary company or partially-owned subsidiary company, whatever type of foreign company it is, these annual compliances must be done every year-
  • Compliances for foreign subsidiary under Reserve Bank of India (RBI).
  • Compliances under the Securities Exchange Board of India (SEBI) rules and regulations.
  • Compliances as under FEMA (Foreign Exchange Management Act)
  • Filing of Tax Deducted at Source (TDS) as per Income Tax Act.
  • Compliances related to regulations for ESI and EPF.
  • Annual financial statements including the following statements-
  1. Transfer of funds
  2. Repatriated earnings and income
  3. Party related transactions such as sales, property transfer, purchases, etc.
  • Goods and Services Tax or GST Filing.
  • Compliance for foreign subsidiary also includes filing the following forms duly-
  1. Form FC-1
  2. Form FC-3
  3. Form FC-4
  4. Event-based Compliances for foreign subsidiary: Another type of compliance for the foreign subsidiary is the event-based ones. This implies that such compliances are required to be fulfilled by the company particularly while making certain actions or in important events. As per the regulations and guidelines of the Reserve Bank of India (RBI) and Foreign Exchange Management Act (FEMA), there are two event-based compliances for foreign companies. These are-
  • Form FC-TRS: This has to be filed when the shares of the foreign subsidiary company are being transferred between an Indian resident to a non-resident investor and vice-versa. Such transfers are allowed by the means of sale or a gift.

The policies of Foreign Direct Investments (FDI) require such transactions or transfers to be intimated within 60 days from the date of the transaction. It is to be noted that the obligation to file Form FC-TRS as compliance for foreign subsidiary as the case may be totally rests upon the Indian resident or the company investee. It doesn’t matter whether the Indian resident is a transferor or the transferee.

  • Form FC-GPR: This form concerns the remittances or payments that have been received by the foreign subsidiary company’s shareholders. It is to be filed to specify the mode through which such transfers have been made by the company.
  1. Periodic Compliances for foreign subsidiary: These are the compliances for a foreign subsidiary that has to be completed on a periodical basis. These compliances unlike the annual compliances are to be done multiple times in a year at regular intervals. These can be based monthly, quarterly, or half-yearly as per the requirements.

Importance of meeting the Compliances for foreign subsidiary:

All the above-mentioned compliances for foreign subsidiary must be mandatorily met irrespective of their occurrence time. If the company fails to fulfill them then there can be severe consequences like penalties, interests, and forms of punishment. If non-compliance is severe then the company can also face criminal charges and accusations under the applicable laws. Section 392 of the Companies Act, 2013 states the penalties to be levied for non-compliance for the foreign subsidiary. The section came into effect from April 1, 2014, and states that-
“392. Punishment for contravention:

Without prejudice to the provisions of section 391, if a foreign company contravenes the provisions of this Chapter, the foreign company shall be punishable with a fine which shall not be less than One Lakh rupees but which may extend to three Lakh rupees and in the case of a continuing offense, with an additional fine which may extend to fifty thousand rupees for every day after the first during which the contravention continues and every officer of the foreign company who is in default shall be punishable with imprisonment for a term which may extend to six months or with fine which shall not be less than twenty-five thousand rupees but which may extend to five lakh rupees, or with both.”

Section 392 and the penalties it states for not meeting the requirements under compliances for foreign companies can be explained as under-

  1. If the foreign subsidiary company is found guilty of contravening any of the provisions under chapter XXII of the Companies Act, 2013 and notwithstanding with anything stated in Section 391 of the Act, in such cases the company can be punished and levied with a fine or penalty of not less than Rs. 1 Lakh. This penalty can be extended up to Rs. 3 Lakh as per the severity of not meeting the compliances for foreign subsidiary. If in case the company continues to offend the regulations, then a penalty of Rs. 50,000 per day basis are added up to the date of continuation of the non-compliance.
  2. Each and every officer at the default of the foreign subsidiary company are charged with punishment of imprisonment for a period not more than 6 months or they can be levied with a fine of Rs. 25000 which is extendable up to Rs. 5 Lakh.

Therefore, it is utterly important to meet all the compliances for foreign subsidiary and the parent firm for continuing the business without a hassle and interference from the regulatory bodies or authorities.

We at Ezybiz India Consulting LLP, with our team of experts and professionals, can help the foreign entities in business registration in India. We will take care of all the compliances related work for the companies both online and offline. To know more, please visit www.ezybizindia.in

Author: Anil Agrawal
EZYBIZ India Consulting LLP, New Delhi. The firm is business and tax consultancy firm providing consultancy in Taxation, Regulatory, Transfer pricing, Valuation, Corporate funding and Business set up matters. He may be reached at 9899217778 or anil@ezybizindia.in.