SUBSIDIARY ENTITY SET UP IN INDIA

Planning a subsidiary entity set up in India can come with risks. The venture can be costly, time-consuming and has no guarantee of success. Non-resident companies must open a legal entity to hire staff and operate their payroll in India and generally opt for establishing a private limited liability subsidiary to gain a foothold in the world’s sixth-largest economy. There are apparent attractions for foreign companies making a move. India is predicted to attract Foreign Direct Investment (FDI) of between 120-160 billion US dollars annually by 2025. Statistics from the Department for Promotion of Industry and Internal Trade showed that the computer software and hardware industry attracted the highest FDI between April and September 2021, followed by automobiles, services, trading metallurgy and construction sectors.

It is easy to stumble while chasing two objectives – advancing your company at home while crossing the world into new territory. However, expanding overseas is a significant step, especially for companies opening a legal entity in their new territory thousands of miles from their home base. If the move fails, companies face the extra expenditure and stress of closing the business, selling property and paying off employees. The sensible alternative is to use a Professional Employer Organisation (PEO) and Employer of Record (EOR) such as Bradford Jacobs to locate the finest local talent and administer your payroll in India – speedily and risk-free. Your company will be up-and-running in days rather than weeks or even months.

How to Set Up an Indian Subsidiary?

Are you interested in a subsidiary entity set up in India? The most popular choice is to open a limited liability company as a subsidiary. This operates under the 2013 Companies Act, which deals with management and administration, shares capital and securities, accounts, directors, shareholders, and meeting requirements. Foreign companies must take this step if they are planning to hire staff and operate their payroll in the country.

The Ministry of Corporate Affairs (MCA) imposes strict registration procedures for foreign companies establishing a subsidiary, including:

  • Filing eForm FC-1 with the Registrar of Companies (ROC), signed electronically by authorized representatives of the foreign company
  • The foreign company’s directors do not need to register a Director Identification Number (DIN)
  • The Digital Signature Certificate (DSC) of the authorized representative of the foreign parent company must be registered with the ROC

General requirements include:

  • Must apply for and write the unique reserved name with the ROC
  • Minimum of two shareholders and a maximum of 200 who cannot be employees
  • The Board of directors has a minimum of two individuals, at least one of whom must be an Indian resident
  • Directors of the subsidiary must have a DIN and digital signature before incorporation
  • Provide Articles and Memorandum of Association
  • The parent company has a minimum of 50% of the subsidiary’s share capital
  • There is no mandatory minimum share capital
  • Obtain a Certificate of Incorporation from the ROC after applying on Form INC-7
  • Additional documentation includes IDs of the officers and directors; proof of registered office address; occupations of directors and shareholders; Permanent Account Number (PAN) for both the company and the directors, completed on Form DIR-12

To operate payroll for the subsidiary’s staff, other procedures include:

  • Apply to the Income Tax Department for Form 49B to obtain the 10-character alpha-digit Tax Account Number (TAN). This sets up a tax account and enables companies to deduct tax at source for remitting to the revenue. Alternatively, the TAN can be applied for online via the National Securities Depository Limited (NSDL) website
  • To obtain the 11-digit TIN for the company, submit the form in duplicate to the relevant state’s Tax Identification Number (TIN) Facilitator Center.
  • The TIN is issued by the Commercial Tax Department of the relevant state.
  • Apply to the Income Tax Department for a Permanent Account Number (PAN) to submit taxes to the authorities and make other financial transactions. Individuals also have a PAN number.
  • Obtain the Employee State Insurance (ESI) number from the Employee State Insurance Corporation (ESIC) and the Employees Provident Fund number from the Employees Provident Fund Organization

Benefits of Setting Up an Indian Subsidiary

Specific advantages for a foreign company opening a private limited liability company in India include the entity having a separate legal identity from the parent company. The parent company’s liability is generally limited to the share capital it has invested and is not responsible for the debts or liabilities of the subsidiary. The same applies to its shareholders. The subsidiary operates under India’s Companies Act and the Income Tax Act, benefitting from the same arrangements applying to local companies.

Through its subsidiary, the parent company has the advantage of maximizing opportunities of expanding further into South Asia, the Far East and among Pacific Rim nations. And India is the ideal launch pad – the sixth-largest economy in the world and a significant target for international expansion. India is predicted to attract Foreign Direct Investment (FDI) of between 120-160 billion US dollars annually by 2025. Statistics from the Department for Promotion of Industry and Internal Trade highlighted that the computer software and hardware industry attracted the highest FDI between April and September 2021, followed by automobiles, services, metallurgy and construction sectors.

Other benefits for a subsidiary:

  • Easier to obtain potential benefits and incentives and enter into contracts with other Indian companies
  • More impact with clients and suppliers, as subsidiaries imply more permanency than branches
  • Employees feel more stability and job security than being with a branch, which in India faces restrictions on how they can operate.

In the broader commercial sense, opening a subsidiary makes a statement of a company’s commitment to expanding into foreign markets, in this case, the opportunities offered by Asian and Pacific Rim economies.

However, there is a more straightforward option to the risks and costs of setting up a subsidiary in India by working with Bradford Jacobs. Using a global Professional Employer Organisation (PEO) such as Bradford Jacobs means staff can be sourced, placed in their roles and be up and running within days rather than months. All the payroll, taxation and compliance difficulties are under control thanks to our Employer of Record (EOR) services.

Subsidiary Laws in India

Foreign-owned subsidiaries in India operate under the 2013 Companies Act and the Income Tax Act in the same way as locally-registered businesses. The Companies Act establishes regulations for management and administration, share capital and securities, accounts, directors, shareholders, and meeting requirements. However, the Ministry for Corporate Affairs (MCA) does impose different registration requirements for foreign-owned subsidiaries. Procedures and conditions include:

Registration and Documentation:

  • Apply to the Registrar of Companies to register the unique company name
  • Foreign-owned subsidiaries must file eForm FC-1 with the ROC, signed electronically by authorized representatives of the foreign company
  • Register the Digital Signature Certificate (DSC) of the authorized representative of the foreign parent company
  • Have a Certificate of Incorporation issued by the ROC after applying with Form INC-7
  • Provide Articles of Association and Memorandum of Association
  • Additional documentation includes IDs of the officers and directors; proof of registered office address; occupations of directors and shareholders, supplied on Form DIR-12
  • Permanent Account Number (PAN) for both the company and the directors

Accounts and Taxation:

  • There is no minimum requirement for share capital, although companies typically deposit INR 100,000 (€1,200, US$1,320)
  • Shareholders taxed on earnings over INR one million (€12,125, US$13,175)
  • Register for Goods and Services Tax (changed from Value Added Tax in July 2017) with the Income Tax Department
  • As a registered resident company, the subsidiary is liable for tax on its worldwide profits and is also taxed on distributed dividends

Management:

  • Minimum of two shareholders and a maximum of 200, non-employees
  • Board of directors with a minimum of two individuals, at least one of whom must be an Indian resident local director
  • Directors of the subsidiary must have a DIN and digital signature before incorporation (does not apply to directors of the foreign parent company) and have overall management responsibility.
  • The parent company has a minimum of 50% of the subsidiary’s share capital
  • Some industries allow 100% foreign investment, but only with approval from the Reserve Bank of India
  • Initial AGM required within 18 months of incorporation; subsequent meetings within six months after the end of the financial year

LOOKING TO EXPAND INTO INDIA?

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