Setting Up a Wholly Owned Private
Limited Company as a Foreign Subsidiary in India
Establishing a wholly owned private limited company in India as a subsidiary of a foreign company is a meticulous process involving various regulatory compliances and documentation. This guide provides a comprehensive overview of the necessary steps and documents required to set up a foreign subsidiary in India.
Documents Required for Setting Up a Foreign Subsidiary Company
| From The Parent Company | From the Foreign Directors |
|---|---|
|
Certificate of Incorporation |
Identity Proof - Passport/ Driving Licence |
|
Board Resolutions authorising use of Name |
Address Proof - Bank Statement/ Utility Bills |
|
Board resolution approving the incorporation of the subsidiary |
Consent Letter |
|
Board resolution appointing authorised signatory |
Photographs |
|
SWIFT Bank details along with KYC |
*All documents must be notarized and apostilled by the Indian Embassy or the Ministry of Home Affairs in the state where the parent company or foreign director is located after translation.
Steps to Set Up a Foreign Subsidiary Company in India
Cost and Fees for Setting Up a Foreign Subsidiary Company
The total cost for establishing a foreign subsidiary company in India includes registration fees, legal fees, government charges, and professional fees. The exact cost varies based on factors such as business structure, capital investment, and regulatory compliance. The government fees for INR 1 lakh capital are as follows (excluding professional fees):
| Particulars | Cost (INR) |
|---|---|
|
Name Application |
1,000 |
|
Stamp Duty on MOA |
5,010 |
|
Stamp Duty on AOA |
5,010 |
|
MCA Fees SPICE Form |
143 |
|
Total |
11,163 |
*Note: Maximum three Directors are allowed for using this integrated form for filing application of allotment of DIN while incorporating a company.
Types of Instruments in FDI
Capital Instruments’ means equity shares, debentures, preference shares and share warrants issued by the Indian company.
| Equity shares |
|---|
|
Equity shares are those issued in accordance with the provisions of the Companies Act, 2013 and will include partly paid equity shares issued on or after July 8, 2014. |
|
Share warrants |
|
Convertible Debentures |
|
Convertible Preference shares |
FDI Compliances and Process
Initial Investment process
Foreign Currency- Gross Provisional Return (FC-GPR):
When a Foreign Body Corporate/ Foreign Residents Invest in any Indian Company. The Indian Company has to File the Prescribed FC-GPR Form with RBI on behalf of the Indian Company receiving Investment.
Such form is filed where such issue reckoned as Foreign Direct Investment (FDI).
Time Limit:
Not later than thirty days from the date of allotment or issue of equity instruments.
Documents for Form FC-GPR (Foreign Currency - Gross Provisional Return) SMF
Copy of FIRC (Foreign Inward Remittance Certificate)
Copy of KYC (Know your customer) report of the remitter
Declaration by authorized representative of the Indian Company as per format provided in SMF- FIRMS portal
Certificate by a Company Secretary as per format given in the RBI user manual stating that all requirements have been complied with
Valuation Report by Chartered Accountant/Merchant Banker indicating the manner of arriving at the price of the capital instruments issued to the person resident outside India
Board resolution for the Allotment of Securities along with list of allottees
Letter of Debit Authorization
Reasons for delay in submission, if required.
FDI Compliances and Process
Non Repatriable Foreign Investment
Non-Resident Indians and Overseas Citizen of India have an option to invest in Indian Startups through Non Repatriable Mode. This investment will be treated on par with domestic Investment and there is no need to comply with reporting requirements prescribed by RBI for FDI. However, the profits generated by the Indian Company cannot be transferred to the NRI or OCI overseas but will remain in India.
Post Incorporation Compliances
Non-Resident Indians and Overseas Citizen of India have an option to invest in Indian Startups through Non Repatriable Mode. This investment will be treated on par with domestic Investment and there is no need to comply with reporting requirements prescribed by RBI for FDI. However, the profits generated by the Indian Company cannot be transferred to the NRI or OCI overseas but will remain in India.
| Company Law Compliances | Fema Compliances |
|---|---|
|
Issuing Share Certificates Within two months from the date of incorporation, the company must issue share certificates. This also applies within two months of the allotment of additional shares. |
FCGPR Filing Within two months from the date of incorporation, the company must issue share certificates. This also applies within two months of the allotment of additional shares. |
|
Registered Office Intimation to MCA Notify the ROC of the registered office location by filing Form INC-22 with the MCA. Any change within the same city must also be reported within 15 days. |
FLA Filings File Foreign Liability and Assets Returns annually with the RBI by 15th July each year. |
|
Filing Commencement of Operations with MCA A declaration for the commencement of business must be filed using Form INC-20A within 180 days of incorporation to exercise borrowing powers and start business operations. |
Transfer Pricing Compliances File Form 3CEB with the Income Tax Department along with annual income tax returns to report inflow and outflow of funds between the parent company and the subsidiary. |
|
Appointment of Auditor At the first Annual General Meeting (AGM), appoint an auditor to hold office until the conclusion of the sixth AGM. |
*Setting up a foreign subsidiary in India requires adherence to a structured process and compliance with regulatory requirements. By following these steps, foreign companies can successfully establish and operate their subsidiaries in India, taking advantage of the vast market opportunities the country offers.
Penalties for non-compliances
In case of non-filing of FCGPR or FLA filings within prescribed period, shall attract a general penalty as per Section 13 of FEMA,1999
Thrice the sum involved in such contravention where such amount is quantifiable, or
Up to two lakh rupees where the amount is not quantifiable
And where such contravention is a continuing one, further penalty which may extend to five thousand rupees for every day after the first day during which the contravention continues
| From The Parent Company | |
|---|---|
|
AAC/ APR/ Share certificate delays In case of non-submission/ delayed submission of APR/ share certificates (FEMA 120) or AAC (FEMA 22) or FCGPR (B) Returns (FEMA 20) or FLA Returns (FEMA 20 (R)) |
Rs.10000/- per AAC/APR/FCGPR (B) Return delayed. Delayed receipt of share certificate – Rs.10000/- per year, the total amount being subject to ceiling of 300% of the amount invested. |
| Allotment / Refunds | |
|
AAC/ APR/ Share certificate delays Para 8 of FEMA 20/2000-RB (non-allotment of shares or allotment/ refund after the stipulated 180 days) |
Rs.30000/- + given percentage: |
Post Incorporation Compliances
Tax effect on FDI transactions is at 3 stages under Indian Income Tax Act
Investment Stage
With regard to FDI in Limited Company, investor can acquire shares of the Indian Company by investing in Equity shares or Convertible Debentures either at premium or at Par/ Face value. As per Income Tax Act, private limited companies receiving money towards equity share capital at a premium is taxable if the issue price is above the fair value determined by merchant banker however this provision is not applicable for FDI as the investment is by Non-resident.
Financial Year End
At the end of every financial year the company has 3 stages of tax implications
Net Profit is nothing but Profit before Taxes which every business generates. Tax Rates on profits differ based on nature of entity usually Limited Companies attract 22-25% tax rate and LLP attracts 30% tax rate excluding surcharge and Cess.
What is important to note here is that if the Indian Company generates revenue from its foreign Parent Company or pays for direct cost to foreign Parent Company then such transactions have to be benchmarked to arm’s length pricing as per Transfer Pricing Guidelines which is in line with OECD.
Refer our Newsletter and Booklet on International Transfer pricing for more information.
Dividend is a mode of distribution of profits generated by the business to its shareholders. This is applicable only for limited Companies and not to LLP.
As per Indian Income Tax Act, Dividends are no longer taxable in the hands of the companies as the Dividend Distribution Tax has been removed. Now the shareholder has to pay the tax on receiving dividend as per applicable dividend tax rates.
However as per Section 195 every foreign remittance from India attracts withholding of taxes at applicable rates in conjunction with DTAA. Usually withholding on dividends range from 10% - 20%. Dividends are taxable in the country of residence or source depending on the provisions of DTAA and taxes withheld is available for set off in the country of residence of the investor
However, for LLP Profit after Tax is freely repatriable to partners overseas.
Tax Planning Note: Here you may note that even though LLP attract higher taxes on profits, the effective tax is actually lower than Limited Companies (including dividend).
Refer Profit Repatriation section below for more options on transferring earnings
Exit
The Foreign Investor may exit from Investment in Indian Company by way of sale of stake i.e., Equity Shares in case of Limited Company or Partnership in case of LLP. Equity Shares are considered as Capital Asset as per Income Tax Act and hence transfer attracts Capital Gain Tax.
In case of listed equity shares holding period more than 12 months is considered as long-term capital asset
Tax Planning Note: Capital Gains is arrived at by reducing Cost of Acquisition from the Sales Consideration. Cost of Acquisition includes all allied cost of acquiring the shares like Share premium, Legal Costs and other relevant costs, apart from this this cost can be expanded by applying the inflation index relevant to the year of sale there by reducing tax impact. Hence proper documentation will help in minimizing tax impact.
Remitting Money from India
Choosing the Right Profit Repatriation Strategy
As discussed in the tax planning section, transferring profits generated by the Indian Business to the foreign promoter or investor can be expensive due to incidence of Income Tax at dual stages in case of Private Limited Company.
Many companies use following strategies to transfer profits from Indian Entity
Royalties
Commonly, Indian companies pay a royalty to either a holding company or the foreign owner company for technological collaboration. The payment is made for the right to use manufacturing processes, technical expertise, design, drawings, trademarks, and brand names.
If the Indian company uses a technology or process or brand name that is patented or trademarked by the parent foreign company, then the Indian company is liable to pay royalties to the foreign company for using the foreign company’s intellectual property.
Royalty payments to a foreign company usually attracts withholding of taxes at 10-15% Under the Income Tax Act, plus any applicable surcharge and education cess. The tax is calculated on a gross basis on the total royalty payments. Taxability of royalty may also differ based on DTAA with recipient country.
Such payments are deductible expense for the Indian company under section 37 as it a business expense, hence reduces the tax outflow for the Indian Company. The Foreign parent company can claim credit of the withholding of taxes paid in India, while filing Income Tax returns in respective country. However, if the Indian Company is a captive unit of the parent company then this mode of payment can be counter intuitive as every cost has to be billed back to the parent company as per Transfer pricing guidelines.
Under FEMA, royalty payments are categorized as current account transactions and are permitted under the automatic route without any limits.
Interest on Loan
RBI allows Investment in Indian Companies through Equity (FDI) as well as Debt. Debt as per FEMA is termed as External Commercial Borrowings (ECB).
ECB even though is not as simple as FDI compliances (read ECB guidelines), it is an effective way of raising finance for capital intensive businesses. The Compliances include initial reporting of ECB and monthly ECB returns to be filed with RBI. It is important to note that ECB is allowed only for investment in Machinery and Capital assets and not for working capital purposes like salaries.
Advantages of ECB are that
The capital invested is not locked like FDI forever and it can be repaid by the Indian Company along
Interest on ECB can be paid by Indian company which is tax deductible
Another option if you find ECB route as complicated would be to issue convertible debentures, which are considered as FDI under the FEMA however can carry interest on the same which is payable by the Indian Company.
Under FEMA, Loan Repayment and Interest is allowed under automatic route only monthly reporting is required
Management Fees
The parent company can charge management fees for the Indian Company for deputing management staff like Group CFO will take care of finances of all subsidiaries, similarly HR policies may be framed at the group level, headed by Group HR and similarly certain other management fees like the training and ERP deployment consulting as well as marketing strategic services might be provided as group level which is benefiting the Indian Company business. The Indian Company can pay for such service fees.
Payments for services, such as management and consultancy fees or IT services by Indian company may or may not attract withholding of taxes, depending on the nature of payments and definitions as per DTAA. Withholding of taxes may range from 0% to 10% plus surcharge, cess. Such payments are deductible expenses for the Indian Company as per Income Tax. Captive centers will attract provisions similar to Royalties.
Meanwhile, under FEMA, payments for services qualify as current account transactions. Service fees up to US$1,000,000 per project (US$10,000,000 per infrastructure project) can be remitted under the automatic route. However, any remittance exceeding this amount requires RBI approval.
Share buyback
Due to the removal of dividend distribution tax (DDT), now the profits distributed by a private limited company is fully taxable in the hands of the recipient and many Indian companies are looking at different options through which they can distribute the profits generated by the company. One of the ways is that Company can explore the share buyback option. Here the company can utilize reserves by offering to buy the shares at a pre-defined price. Usually, this price will be at a premium, that is more than the acquisition price. After the buyback of shares, the company will cancel the shares and reduce their share capital so the share holding pattern will remain unchanged.
However, there is a withholding tax of 20 percent on distributed income at the time of buyback. Distributed income is the difference between the amount paid at the time of buyback and amount received by the company at the time of issue of shares.
Taxation will depend on the DTAAs, in the event of share buybacks, operate diversely, and the tax liability depends on the specific tenets of each DTAA.
The Companies Act of 2013 also creates several regulatory obligations for companies that want to use share buybacks:
The Articles of Association (AOA) for the Indian company should be amended to authorize share buybacks.
Each buyback should be authorized through a special resolution passed at the general meeting of the respective company and completed within 12 months of any such resolution.
A limit of 25 percent per financial year (FY) applies on equity share buyback. The consideration for such shares is capped at 25 percent of the total paid up capital plus free reserves per FY.
In addition, no free securities should be issued for six months after a share buyback and the debt-to-equity ratio post buyback should be 2:1.
Capital reduction
Capital reduction is similar to share buyback however under capital reduction, there is no limit described as per companies act of 25% of share capital and free reserves for the financial year. Hence this method is used when amount exceeds share buyback limit as per Companies Act.
The Companies Act, 2013 states that approval is required from the shareholders (as a special resolution), creditors, and the state High Court for capital reduction.
Under FEMA, the pricing of capital should adhere to RBI guidelines; no approvals are required for non- resident investors for capital reduction, so long as a few procedural compliances are ensured.
Exit from FDI
*Indian here refers to Resident Indian as per definition of residential status provided by RBI
Form FC-TRS or Foreign Currency Transfer of Shares needs to be filed in case of transfer of shares of an Indian Company from a resident to a Non-Resident/Non-Resident Indian and vice versa through its authorized dealer bank.
The form shall be filed with the Authorized Dealer bank within Sixty days transfer of capital instruments or receipt/remittance of funds whichever is earlier.
The penalty for non-filing of FC-TRS is imposed by the way of Late Submission Fee (LSF)
| Amount involved (₹) | LSF as % of amount involved | Maximum amount of |
|---|---|---|
|
Up to ₹10 million |
0.05% |
300% of the amount involved or ₹1 million, whichever is lower |
|
More than ₹10 million |
0.15% |
300% of the amount involved or ₹10 million, whichever is lower |
* The % of LSF will be doubled every twelve months.The floor (minimum applicable amount) for LSF will be Rs. 100. Company can apply for compounding of Violation as mentioned in Initial Investment Section
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