Overview of Indian Subsidiary Company Registration

With the announcement of LPG (liberalization, privatization and globalization) policies in the global world in the year 1991, international trade and investments increased. The Indian government has been working on several schemes to encourage foreign investors to invest in businesses in India for its growth and development. India is becoming one of the fastest growing economies displaying improvement in all the economic services. The government is also working to improve its ranking under the Ease of doing business index as established by the World Bank Group. Many policies have been made to promote ease of doing business to attract foreign investors and businessmen.

Table of Contents

What is Subsidiary Company?

A Subsidiary company has been defined in the Companies Act, 2013 under section 2(87) as a company which is controlled by another company (holding company). Thus, it is important to understand the concept of a Holding Company.

A holding company has been defined under section 2(46) of the Companies Act 2013. It is a company which has more than 50% share-holding in another company. Therefore, the company having control over the management of another company is called a Holding Company.

An Indian Subsidiary Company can be defined as a company whose more than 50% of paid-up share capital lies with a foreign company.

In this situation, the foreign company is considered a holding company that will have control over the subsidiary company. Thus, it is mandatory for the subsidiary company to follow the prevailing laws in India if it has been established in India.

Both, the subsidiary and the holding company are separate legal entities. The members and shareholders of the company will have a different status from that of the company. As per the provisions of the Indian Companies Act, 2013, a subsidiary company can be established in the form of a public or a private company. 

Advantages of Indian Subsidiary Company Registration

There are several advantages of Indian subsidiary company registration. These are as follows:

• Entry into the Indian market

The competitive environment comes with several investment opportunities attracting foreign businessmen to set up their subsidiary companies in India.

• Foreign Direct Investment in India (FDI)

An investment made by a foreign company in a private company in India is called a Foreign Direct Investment. The investments are made in the form of subscribing of shares or acquisition of a private company. The government has come up with a provision related to seeking prior approval from the government if the investment is made by the company from a country which shares a border with India in the year 2020.  Therefore, Indian subsidiary registration will attract a lot of foreign investors investing in India.

• Perpetual Succession

The term perpetual succession states that the death, insolvency, change or transfer of members doesn’t affect the existence of a company. The company continues to exist even when the directors or members change or leave the company and its existence is perpetual. It survives even when there is a change in management.

• Limited Liability

Limited liability is one the biggest advantage which encourages people to choose company formation rather than choosing any other form of business

The principle which is applicable to the domestic public and private companies in India is also applicable to the Indian subsidiary company. The members and directors of the company need not use their personal assets for covering up losses of the company as per the limited liability. The members and directors have limited liability to the extent of their share in the capital only. The company is made liable for any debts not paid to any third parties. The third-party can’t cover up their losses by using the personal assets of the shareholders and directors.

• Scope of Diversification

One way of expanding a foreign business is by establishing an Indian subsidiary company. This will help the Indian economy to grow and develop. This will bring in various types of goods and services leading to an increase in competition. Thus, a foreign entity planning to establish its business in India must research about the market place and the type of customers the business will serve.

• Separate Legal Identity

As per the Companies Act, the company is considered a separate legal entity different from its shareholders and directors. The company can enter into agreements with other competent individuals as an artificial legal person. The company has the power to sue the other and be sued in its own name. The members have the authority to decide the representative of the company before the judicial system to fight cases and respond to the allegations filed by third parties against the company.

• Purchase or Rent Property in India

The subsidiary company is an artificial person has the authority and right to buy properties or rent under its name for business purposes. Due to the principle of perpetual succession, it is suggested that the property which is being used for business purposes must be brought into by the name of the company itself to avoid any future conflicts between members of the company.

Regulatory Body for Indian Subsidiary Company

The Ministry of Corporate Affairs (MCA) is the prime authority which regulates subsidiary company registration in India.  Also, ROC has the authority to handle all the procedures related to company incorporation. As an Indian subsidiary company involves the exchange of foreign currency, the Reserve Bank of India is also a regulatory authority.

Essential documents for Subsidiary Company Registration in India

There are several mandatory documents which are required to be presented and submitted to the authority for getting an Indian subsidiary company registration process complete. These are as follows:

• PAN Card (Permanent Account Number)
• Aadhaar Card
• Address Proof
• Passport, Visa for foreign national
• Attested identity proof of foreign national certified by the Indian Embassy
• Director Identification Number (DIN)
• Digital Signature Certificate (DSC)
• Utility bills when a company owns the business premises,
• And rent agreement if the company does not own the premises
• Registered office’s address proof
• MOA and AOA as per the provisions of The Companies Act, 2013
• Certificate of Incorporation

Procedure for Company Registration in India

1. Registering a Name for Indian Subsidiary

A person willing to establish an Indian subsidiary company has to fulfill all the requirements stated by the Ministry of Corporate Affairs. MCA has created SPICe+ forms to be filled by the businessmen for incorporation of a subsidiary. To establish a business, the owner has to decide on a unique name which has not been used by other existing organizations. The name should be decided to keep in mind the provisions of laws related to intellectual property. The owner can provide 6 unique names in maximum for approval. MCA gives approval to the name within a time span of 5 to 7 days.

2. Apply for Director Identification Number and Digital Signature Certificate

DIN is issued by the regulatory authority established for the appointment of directors. The company should also apply for Digital Signature Certificate. The signature can be used as an electronic signature of the company for signing documents in digital space.

3. Apply for the PAN and TAN Number

Once the owner has applied for DSC and DIN, the owner has to apply for the company’s PAN and TAN. It is one of the mandatory requirements for the incorporation of a company.

4. Open a Bank Account for the Subsidiary

To deal with the flow of money in the company’s name, it is mandatory for the company to have a bank account in its name. All monetary transactions should be carried out from the company’s bank account.

5. GST Number

GST stands for Goods and Service tax. After completion of all the above-mentioned steps, a GST number is provided to the company for taxation purposes. This GST number is applicable when different activities are performed by the company. Every company established in India is under an obligation to apply for a GST number.

6. Initiating Operations

This is the last step for Indian subsidiary company registration. Once every above-stated step has been performed, the company can start its business operations.

Compliance related to Indian Subsidiary Registration

To form a legal and valid Indian Subsidiary company, it is mandatory to abide by certain defined compliances in the Indian Subsidiary Registration Process. The compliance are as follows:

• A foreign company established in India has to comply with laws related to foreign exchange under the Foreign Exchange Management Act, 1999.
• A company established in India has to mandatory complied with the provisions defined under the Companies Act, 2013.
• The Central Bank of India (RBI) has several compliances with regard to foreign exchange management which an Indian subsidiary company has to comply with.
• It is mandatory for all companies in India to file income tax returns as per the provisions under the Income Tax Act, 1961. At present, the corporate tax rate is 25% in India. Thus, an Indian subsidiary company established by a foreign country has to comply with the corporate tax rates prevailing from time to time.
• It is the responsibility of the companies to file annual returns with the Ministry of Corporate Affairs and The Registrar of Companies.
• It is mandatory to comply with the Securities Exchange Board of India (SEBI) if it lists its securities on a stock exchange. The companies are also under the obligation to comply with the SEBI (Listing Obligations and Disclosure Regulations).

Taxes on Subsidiaries in India

The taxation system has clearly defined a taxation policy for Indian subsidiary companies. Such companies established in India have to mandatorily follow the taxation policies prevailing at the time for payment of timely taxes.

The company is obligated to pay taxes on all the incomes earned within or outside the country of India. The taxable income also includes dividends from foreign subsidiaries.  

The tax rates prevailing for foreign subsidiaries in India are stated below:

• 50% - Royalty received for technical services from the government or any Indian;
• 40% - for Other income
• When the income of the company is between Rs. 1 Crore and Rs. 10 Crores, a surcharge of 2% is levied on the same company. In the case where the income is above Rs. 10 crores, a surcharge of 5% is levied.
• A 4% of health and education cess is added while calculating the total tax to be paid.
• The companies that opt for concessional tax payment under Section 115BAA and 115 BAB are not required to pay Minimum Alternate Tax (MAT). Other companies are required to pay a 15% tax on book profits.

There are a number of tax benefits provided for setting up Indian subsidiary companies. Some of the incentives are:

• Concessional tax rates have been provided to the Indian subsidiaries which protect them from payment of taxes through MAT. Such provision protects the Indian subsidiaries in oil exploration, air transportation, shipping business, etc.
• Assets purchased for business expansion or start-up business and expenditure made for the same is allowed to be amortized as expense over the span of 5 years from the date of business expansion or start-up.
• Any expense made by the company is allowed to be amortized within the time period of 5 years during the process of merger, demerger or amalgamation.
• A tax rebate of 100% is given to companies for any contribution made to a political party or an electoral trust in any form except cash.

FDI in Private Limited Company

In most of the sectors, 100% FDI is allowed. Only a few sectors need prior approval from the Central Government for making foreign investments by a foreign company or an individual. The below-stated sectors require prior approval of the government for making investments:

• Private security agencies
• Civil aviation
• Mining
• Print Media and broadcasting
• Establishment and operation of Satellite
• Pharmaceuticals
• Trading of food products

A foreign national or entity can establish a wholly owned Indian subsidiary with 100% ownership to them. There are certain qualifications required to be fulfilled by a public and private company. These are:

• For a private company –
• There is no minimum capital requirement.
• 2 minimum directors (one should be a resident of India)
• 2 minimum shareholders
• For a public company –
• 3 minimum directors
• At least 7 shareholders