A Comprehensive Guide on Foreign Subsidiary Company Compliances in India

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February 22, 2023

A Comprehensive Guide on Foreign Subsidiary Company Compliances in India

A foreign subsidiary company is a subsidiary (holding majority shareholding) that a parent company sets up in any foreign country. The subsidiary operates as a separate legal entity and is responsible for conducting business in the foreign country. Setting up a foreign subsidiary company can provide many benefits, such as access to new markets and the ability to tap into local expertise and resources. However, it is important to ensure that the foreign subsidiary is in compliance with all relevant laws and regulations in such a foreign country. This includes compliance with including but not limited to company law, tax laws, labour laws, and other business-related regulations. A fully compliant foreign subsidiary can avoid costly fines and penalties and ensure the success and longevity of its operations in the foreign country. This article will shed some light on foreign subsidiary company compliances in India and will also help you understand the consequences of non-compliance.

Some of the key compliances for a foreign subsidiary company in India include:

Foreign Exchange Management Act (FEMA): FEMA regulates the flow of foreign currency into and out of India and sets out the rules for foreign investment in the country. It is highly important to adhere to the FEMA requirements. 

Tax Laws: The foreign subsidiary must comply with the Indian tax laws, which can include the Central Goods and Services Tax Act, 2017 (GST), professional tax, corporate tax, etc.

Labor Laws: The foreign subsidiary must comply with Indian labour laws, which can include laws related to minimum wage, working hours, employee benefits, etc.

Company Law: The foreign subsidiary must comply with Indian company law, which includes the Companies Act, 2013 and Rules related to the incorporation, management, and winding up of companies.

Environmental Regulations: The foreign subsidiary must comply with Indian environmental regulations, which can include rules related to air and water pollution, waste management, and wildlife protection.

Intellectual Property Laws: The foreign subsidiary must comply with Indian intellectual property laws, which can include laws related to patents, trademarks, and copyrights.

Foreign Direct Investment (FDI) Policy: The foreign subsidiary must comply with India's foreign direct investment (FDI) policy, which sets out the rules and regulations for foreign investment in the country.

Goods and Services Tax (GST): The foreign subsidiary must comply with India's goods and services tax (GST) regulations, which include rules related to the calculation and payment of GST.

Ensuring compliance with these and other legal requirements is essential for the success and longevity of a foreign subsidiary company in India. By ensuring that all compliances are met, the foreign subsidiary can avoid costly fines and penalties, and help ensure that its operations in India are successful.

Foreign Subsidiary Company Compliance in India under the Income Tax Act

Tax Residency: The foreign subsidiary company must be a tax resident in India. This means that the company's place of effective management must be in India.

Tax Liability: The foreign subsidiary company is subject to tax in India on its income arising in India or deemed to accrue or arise in India.

An Overview of Foreign Subsidiary Company in India

A foreign subsidiary company in India is a subsidiary that a foreign parent company sets up to operate in India. The foreign subsidiary operates as a separate legal entity in India and is responsible for conducting business activities in India, which means it has its own financial and tax obligations and can enter into contracts and conduct business in its own name. The foreign subsidiary is also subject to Indian laws and regulations, which can include compliance with Company law, tax laws, labour laws, and other business-related regulations.

The definition of a foreign subsidiary company in India is important to understand, as it can have significant implications for the parent company and its operations in the foreign country. By establishing a foreign subsidiary company, a parent company can access new markets and tap into local expertise and resources, while also maintaining a separate legal entity in India.

Steps for setting up:

Step 1: Choose the Right Type of Company

The first step in setting up a foreign subsidiary in India is to determine the type of company you would like to establish. The most common types of companies for foreign investment are the private limited company, the limited liability partnership (LLP), and the branch office. Each of these options has its own advantages and disadvantages, so it's important to choose the one that best suits your needs.

Step 2: Obtain Approval and Register Your Company

Once you have decided on the type of company you would like to set up, you will need to obtain approval from the Indian government, if any. However, most of the business sectors in India fall under the automatic route and do not require prior approval. The business sector not falling within the automatic route requires prior approval. This approval is usually granted through the Reserve Bank of India (RBI) or the Foreign Investment Promotion Board (FIPB). Once you have obtained the necessary approval, you will then need to register your company with the Registrar of Companies (ROC).

Step 3: Secure the Required Licenses and Permits

Before you can start operating your foreign subsidiary in India, you will need to obtain the necessary licenses and permits depending on the type of business you are setting up. The said licenses can include licenses for importing and exporting, manufacturing, or operating in a specific industry, etc.

Step 4: Comply with Tax and Labour Laws

In addition to securing the necessary licenses and permits, you will also need to ensure that your foreign subsidiary is in compliance with India's tax and labour laws. This may include registering for GST, professional tax, and corporate tax etc., as well as obtaining a permanent account number (PAN) and a tax deduction and collection account number (TAN).

Step 5: Maintain Compliance

Once your foreign subsidiary is up and running, it's important to maintain compliance with all relevant laws and regulations. This may include filing regular reports and returns, such as annual returns and tax returns, as well as ensuring that your company continues to meet the requirements for any licenses and permits it holds.

In conclusion, setting up a foreign subsidiary company in India can be a complex and time-consuming process, but it can also offer a number of benefits to foreign investors. By following these steps and being mindful of the compliance requirements, you can help ensure that your foreign subsidiary is successful and in compliance with all relevant laws and regulations.

A foreign subsidiary company in India is subject to a number of compliances, to ensure smooth operation. 

Benefits enjoyed by a Foreign Subsidiary Company in India

There are several benefits that a foreign subsidiary company in India can enjoy, which may include:

Access to new markets: Setting up a foreign subsidiary in India provides a foreign parent company with access to a large and growing market. This can help the parent company expand its customer base and increase its revenue. 

Local expertise and resources: A foreign subsidiary can tap into local expertise and resources, including local suppliers, distributors, and a well-educated workforce. This can help the subsidiary be more competitive and successful in the local market.

Improved brand recognition: Having a presence in India can help a foreign parent company improve its brand recognition in the country, which can lead to increased brand recognition customer loyalty, and a sense of confidence in the customers.

Reduced costs: Setting up a foreign subsidiary can help reduce costs by allowing the parent company to take advantage of local resources and take advantage of favorable exchange rates.

Improved operational efficiency: A foreign subsidiary can operate more efficiently by being closer to its customers and suppliers, and by having local knowledge of the market.

Increased control and flexibility: By establishing a foreign subsidiary, a parent company can have more control over its operations in the foreign country and have greater flexibility in terms of its business operations.

By enjoying these benefits, a foreign subsidiary company in India can help its parent company achieve its goals and succeed in the global marketplace.

Consequences of non-compliance for Foreign Subsidiary Companies

The consequences of non-compliance by foreign subsidiary companies in India can be severe, and can include:

Fines and penalties: If a foreign subsidiary company fails to comply with Indian laws and regulations, it may be subject to fines and penalties imposed by government agencies. These fines and penalties can be substantial and can have a significant impact on the financial health of the company.

Reputational damage: Non-compliance can also lead to reputational damage for a foreign subsidiary company in India. This can result in loss of credibility and trust among customers, suppliers, and investors, which can harm the company's reputation and long-term success. 

Business disruptions: Non-compliance can result in business disruptions, such as the seizure of goods or the shutdown of operations. This can cause significant losses for the company and can be especially damaging for companies that rely on a steady flow of products and services.

Legal action: In some cases, non-compliance can result in legal action being taken against the foreign subsidiary company. This can result in costly lawsuits and a negative impact on the company's financial performance.

Loss of license: In extreme cases, non-compliance can result in the loss of license to operate in India, which can be a major blow to a foreign subsidiary company.

It is important for foreign subsidiary companies in India to understand the importance of compliance and to take the necessary steps to ensure that they are in compliance with all relevant laws and regulations. By doing so, they can avoid these consequences and help ensure the long-term success of their operations in India.

Conclusion 

In conclusion, registering a business as a foreign subsidiary company in India can provide a foreign parent company with many benefits, including access to a large and growing market, local expertise and resources, and improved operational efficiency. However, it is important for foreign subsidiary companies in India to understand the importance of compliance with Indian laws and regulations. Failure to comply can result in significant fines and penalties, reputational damage, business disruptions, legal action, and in extreme cases, the loss of license to operate in India.

Therefore, it is essential for foreign subsidiary companies in India to be well-informed about the compliance requirements and to take the necessary steps to ensure that they are in compliance with all relevant laws and regulations. By doing so, they can enjoy the benefits of operating in India while avoiding the consequences of non-compliance. This Compliance Guide provides a useful starting point for foreign subsidiary companies looking to establish themselves in India and helps to ensure that they are fully compliant with the laws and regulations of the country.

When setting up a foreign subsidiary company in India, there are many questions that may arise. In this section, we will answer some of the most frequently asked questions to help provide clarity and guidance on the process.

Frequently asked questions 

1. What are the requirements for setting up a foreign subsidiary company in India? 

The requirements for setting up a foreign subsidiary company in India includes registering the company with the Registrar of Companies with a minimum of two directors and shareholders, obtaining the necessary licenses and permits, and ensuring compliance with all relevant laws and regulations, including company law, tax laws, labour laws, and environmental regulations.

2. What is the process for registering a foreign subsidiary company in India? 

Answer: The process for registering a foreign subsidiary company in India typically involves obtaining registering the company with the Registrar of Companies by filing the incorporation form, obtaining the necessary licenses and permits depending on the nature of business activities and ensuring compliance with all relevant laws and regulations. The process can be complex and time-consuming, and therefore it is recommended that foreign subsidiary companies seek the guidance of legal and financial professionals.

3. What are the benefits of setting up a foreign subsidiary company in India? 

Answer: The benefits of setting up a foreign subsidiary company in India include access to a large and growing market, local expertise and resources, and improved operational efficiency. Foreign subsidiary companies can also take advantage of favorable tax policies and a favorable business climate in India.

4. What are the consequences of non-compliance for foreign subsidiary companies in India?

The consequences of non-compliance for foreign subsidiary companies in India can include fines and penalties, reputational damage, business disruptions, legal action, and in extreme cases, the loss of license to operate in India.

5. What are the costs involved in setting up a foreign subsidiary company in India? 

Answer: The costs involved in setting up a foreign subsidiary company in India can include the costs of obtaining licenses and permits, registering the company with the Registrar of Companies, and ensuring compliance with all relevant laws and regulations. Other costs may include legal and financial fees, as well as the costs of setting up infrastructure and operations in India. The costs will vary depending on the size and complexity of the company, and it is recommended that foreign subsidiary companies seek the guidance of professionals to help estimate these costs.

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