India is progressing at a fast pace to become one of the most attractive business destinations globally. The pro-business policies, investment opportunities, and inviting foreign companies to collaborate on domestic projects are a few moves to project India as a business-friendly country.
Furthermore, the Indian laws and regulations allow foreign companies to open subsidiaries in the nation and reap numerous benefits. The companies can open various subsidiaries and create a profitable venture by leveraging the vast market size of India and the massive talent pool.
Opening a subsidiary business in India is very easy and follows a simple procedure. However, there are a few guidelines in place which you must know.
What are the types of subsidiaries in India?
There are two main categories of subsidiaries in India:
In this type of subsidiary, the parent company owns 100% of the subsidiary's shares. However, wholly-owned subsidiaries can only be formed in sectors that allow 100% Foreign Direct Investments (FDI).
In this type of subsidiary, the parent company owns 50% of the subsidiary's shares.
Before setting up a subsidiary in India, it is important to get approval from the Reserve Bank of India.
How to Set Up Subsidiary in India?
Incorporating a subsidiary business in India is a lengthy and difficult procedure. Most companies decide whether to form a private limited or a public limited subsidiary based on how active they plan to be in the country. The incorporation procedure includes the following steps:
- ~Obtain a Director Identification Number (DIN) online
- ~Obtain a Digital Signature Certificate (DSC) online
- ~Register the business name via the Registrar of Companies
- ~Prepare the Memorandum and Articles of Association
- ~Fill out an online incorporation application
- ~Request a certificate to begin operations
- ~Create a company seal
- ~Get a Permanent Account Number (PAN)
- ~Register with the Employee's Provident Fund Organization
- ~Register for VAT
Benefits of Setting Up an India Subsidiary
Following are the benefits of a subsidiary company in India:
1. The subsidiary will get significant financial and personnel support from the parent company. Consequently, the subsidiary will be able to leverage technical know-how, training, consultancy, employees, subscription money, and much more.
2. The parent company can open a new channel of funds by constantly subscribing to new shares of the subsidiary
3. The subsidiary can offset the losses of the parent company with its profits
4. Various companies can collaborate to create a joint venture as a subsidiary that leads to better revenues and market coverage
Documents to prepare when opening a subsidiary in India
There are two kinds of documents necessary before opening a subsidiary in India:
1. Company Related
- ~Memorandum of Association and Articles of Association
- ~Proof of Address of registered place of business – Rent agreement in case of a rented property and copy of ownership documents if the property is owned
- ~Copy of Utility Bills
- ~Copy of resolution passed by the promoter
- ~Capital Layout of the company
- ~Copy of certificate of incorporation for foreign corporates
2. Directors and Shareholders Related
- ~Digital Signature Certificate (DSC) and Director Identification Number (DIN) of the directors and designated shareholders
- ~Proof of identity and address of the Directors and Shareholders
- ~Photographs of Directors and Shareholders
- ~The shareholding of first directors in other entities
- ~Declaration by Directors and Shareholders
What business forms can India subsidiaries take?
Subsidiaries in India are represented separately from the parent company and they must follow the relevant rules and regulations as mandated by Indian law.
While opening a subsidiary in India, companies have to select one of the following business types:
Private limited company: This entity is the best for small and medium-sized businesses. Furthermore, they have minimal reporting requirements, making them the most popular in India. Subsidiary laws in India require a minimum of two subscribers and $1,620 in paid-up capital. A minimum of two directors are compulsory for private corporations, with a maximum of 15. You must prepare financial statements and submit them to a statutory audit within six months of the fiscal year's end.
Public limited company: The Securities and Exchange Board of India (SEBI) lists the requirements for setting up this legal entity. According to India's subsidiary legislation, you require roughly $8,100 in minimum paid-up capital and at least seven subscribers. A minimum of three directors is essential, but no more than 15. The accounting and auditing obligations are the same for both public and private subsidiaries.
Post Incorporation Compliance
Forming a corporation has become simpler over time, which encourages full compliance by businesses. The management should be aware of post-incorporation compliance to avoid penalties or punishments.
The following are the major steps for subsidiary company formation in India:
First meeting: The company must organize its first meeting of the Board of Directors within 30 days of its establishment, according to Section 173(1) of The Companies Act 2013. Directors can attend the meeting in person or by video conference.
Bank account: The company must have a bank account, even before seeking the authorities for incorporation. There cannot be any transactions in the name of any individual because the firm is an artificial entity.
Official address: A company must have a registered office within 15 days of its incorporation, according to Section 12(1). All official communication from various authorities will be sent to this address.
Company name: Every company will be required to display its name in all locations where it conducts business. Display the name in the most common language in the area. A seal engraved with the company's name, letterheads with the appropriate information, and printed negotiable instruments are also required.
Auditor: The first auditor must be chosen by the Board of Directors (BOD) within 30 days of the firm's registration, according to Section 139(1). If that fails, the members must appoint the auditor at an extraordinary general meeting within 90 days. The initial auditor's term will last until the first annual general meeting.
Interest disclosure: As required by section 184(1) of the Companies Act 2013, each director must disclose their interest in any company, firm, body corporate, or association of individuals at the first board meeting. Any modifications to the disclosures must be reported to the board of directors. If there is an independent director, they must declare that they fit the independence standards in the first board meeting as a director.
Statutory registers: At the company's registered office, the company is required to keep statutory registers. The same must be kept in the prescribed format, failing which the company will face fines.
Share certificate: The share certificate must be issued to a shareholder within 60 days after the company's incorporation date.
Books of Accounts: According to section 128, every firm must keep proper books of accounts that provide an accurate and fair picture of the company's financial situation.
Certificate of business certificate: The company must get a certificate of commencement of business within 180 days. They also have to file a disclosure issued by the directors, stating that each subscriber has paid the amount due on the shares.
Taxes on Subsidiaries in India
Companies based in India are subject to Indian taxation on all income earned inside and outside the country, regardless of whether it is transferred to India.
Dividends from foreign subsidiaries are also included in the Indian company's worldwide taxable income. In the hands of an Indian firm, interest from international subsidiaries is completely taxable, with a credit provided for foreign tax withheld or paid up to the Indian tax on the interest.
Taxation of foreign subsidiaries in India is according to the given table:
There are a few more taxes levied in addition to the above rates:
Health & Education Cess:
4% of income tax and the applicable surcharge is added to the total tax liability.
Minimum Alternate Tax (MAT):
Domestic and foreign companies have to pay a 15% Minimum Alternate Tax, applicable on the book profits. MAT is levied on those companies who do not opt for tax sections 115BAA or 115BAB.
Tax incentives for businesses setting up a subsidiary in India
Foreign companies avail the following tax benefits for setting up a subsidiary in India:
- ~Foreign enterprises that have chosen presumptive taxation are exempt from the provisions of MAT. These benefit foreign enterprises in shipping, air transportation, oil exploration, and turnkey construction industries.
- ~Any expenditure for the start-up or expansion of a business is eligible to be amortized and claimed as an expense over five years, starting from the date of expansion
- ~Any expenses spent by a company during the process of amalgamation or demerger could be amortized and claimed over a five-year period
- ~Companies are given a 100% tax rebate for any amount contributed, except in cash form, to any political party or an electoral trust
- ~Dividends received from a foreign firm in which a Company owns 26% or more are taxed at a reduced rate of 15%. Furthermore, in the computation of Dividend Distribution Tax (DDT), dividends received from such corporations have to be subtracted from dividends distributed, lowering the DDT burden.
How Multiplier's Employer of Record Can Help You Hire & Expand in India?
Setting up a subsidiary in India can be a challenging task. The sheer number of laws and regulations on registering a subsidiary business in India, onboarding employees, processing payroll and maintaining compliance might be overwhelming for an internal team.
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