Setting up a Wholly Owned Subsidiary in India

India’s booming economy and business-friendly policies make it a prime destination for foreign companies seeking to expand their global footprint. One popular entry strategy is setting up a Wholly Owned Subsidiary (WOS) in India. This structure allows foreign companies to maintain complete ownership and control while operating as a distinct legal entity within the country. Here’s a comprehensive guide to help you understand the process and requirements of setting up a wholly owned subsidiary in India.

1. What is a Wholly Owned Subsidiary (WOS)?

A Wholly Owned Subsidiary is a private limited company where the foreign parent company holds 100% of the shares. It operates as an independent legal entity, but ownership and control rest solely with the foreign parent. This allows the parent company to expand its operations in India while mitigating risks.

2. Legal Structure and Benefits

A WOS in India can be registered as a:

• Private Limited Company (Pvt. Ltd.) or
• Public Limited Company (Ltd.)

For most foreign companies, the Private Limited structure is preferred considering its ease of compliance, and ability to raise capital.

Key Benefits of a WOS:

• Full Control: 100% ownership by the parent company.
• Limited Liability: Shareholders’ liabilities are limited to the amount they have invested.
• Separate Legal Entity: The WOS operates as an independent legal entity, safeguarding the parent company from liabilities.
• Access to India’s Market: Direct access to India’s vast consumer base, skilled workforce, and growing industrial sectors.
• Repatriation of Profits: Earnings can be repatriated to the parent company, subject to certain regulations.

3. Eligibility and Foreign Direct Investment (FDI) Rules

India permits 100% FDI in most sectors under the automatic route, which means no prior government approval is required. However, some sectors, like defense, telecom, insurance, and retail, may require government approval or have FDI caps. It is important to check the FDI policy for the sector in which you plan to operate.

4. Key Steps for Setting up a Wholly Owned Subsidiary in India

a)    Name Approval

The first step in the incorporation process is to reserve a unique name for the subsidiary. The name must comply with the Companies Act, 2013, and should not resemble any existing company name or trademark.

b)    Incorporation Documents

The following documents are required for incorporation:

• Charter documents (Memorandum of Association and Articles of Association) outlining the company’s objectives and internal rules.
• Board resolution from the parent company approving the investment and establishing the subsidiary.
• Identity and address proof of the proposed directors.
• Digital Signature Certificate (DSC) and Director Identification Number (DIN) for at least one director (mandatory).

c)    Registered Office Address

A WOS must have a registered office in India. This can be an owned or rented space, and proof of ownership or lease agreement must be provided.

d)    Incorporation Process

Form SPICe+ (Simplified Proforma for Incorporating Company Electronically): This is an integrated form for company registration that allows for multiple registrations, including PAN, TAN, GST, EPFO, and ESIC.

Submit the required forms, including the Declaration of Compliance and Consent to Act as a Director.

Once approved, the Registrar of Companies (RoC) issues a Certificate of Incorporation.

e)    Share Capital and Allotment

The foreign parent company must invest in the share capital of the WOS. There are no minimum capital requirements, but the initial investment should align with the company’s operational plans. The capital must be brought in via inward remittances through proper banking channels.

f)     Post-Incorporation Registrations

After incorporation, the WOS must complete the following registrations:

• Permanent Account Number (PAN)
• Tax Deduction and Collection Account Number (TAN) from the Income Tax Department.
• Goods and Services Tax (GST) Registration (if applicable).
• Professional Tax .
• Opening a Bank Account for business transactions
• Shops & Establishments Registration
• Trade License

5. Compliance Requirements for a Wholly Owned Subsidiary

Once established, a WOS is subject to various compliance obligations under Indian laws:

A.    Secretarial Compliance:

A foreign subsidiary in India must adhere to various secretarial compliances under the Companies Act, 2013 to maintain legal standing and corporate governance. Here are the key requirements:

i.          Board Meetings: A foreign subsidiary must conduct at least four board meetings each year, ensuring that no more than 120 days pass between two consecutive meetings.

ii.          Annual General Meeting (AGM): The company must hold its Annual General Meeting within six months from the end of the financial year, typically by September 30th.

iii.          Filing of Annual Returns: The subsidiary is required to file Form MGT-7 (Annual Return) and Form AOC-4 (Financial Statements) with the Registrar of Companies (RoC) every year. These include details about the company’s shareholding, management, and financial position.

iv.          Statutory Registers: The subsidiary must maintain various statutory registers such as Register of Members, Directors, and Charges.

v.          Director Appointment and Compliance: At least one director must be an Indian resident. Directors must also obtain a Director Identification Number (DIN) and ensure compliance with provisions regarding disqualification and disclosure of interests.

vi.          Foreign Exchange Compliance: Transactions involving foreign investments must comply with Foreign Exchange Management Act (FEMA) regulations, and related filings (such as FC-GPR for equity allotments) must be submitted to the Reserve Bank of India (RBI).

vii.          Event-Based Filings: For significant changes like appointment or resignation of directors, alteration of share capital, or amendments in the Memorandum or Articles of Association, appropriate forms (such as DIR-12, PAS-3, etc.) must be filed with the RoC within specified timelines.

viii.          Secretarial Audit: If the subsidiary falls under certain thresholds (like paid-up capital exceeding INR 50 crore), it must undergo a Secretarial Audit by a practicing Company Secretary.

Regular secretarial compliance helps ensure that the foreign subsidiary remains in good standing and avoids penalties.

B.    Income Tax Compliance:

A foreign subsidiary operating in India must comply with the country’s income tax regulations. Here’s a brief overview of the key compliance requirements:

i.          Corporate Tax Filing: A foreign subsidiary is required to file annual income tax returns. The corporate tax rate is generally 25% for companies Lower rates may apply under special conditions or tax holidays in certain sectors.

ii.          Transfer Pricing: Transactions between the foreign parent company and the subsidiary (such as goods, services, or royalties) must adhere to India’s transfer pricing regulations. This ensures that transactions occur at market prices (arm’s length principle), and transfer pricing documentation must be maintained to avoid penalties.

iii.          Advance Tax: Subsidiaries must pay advance tax quarterly if their total tax liability for the financial year exceeds INR 10,000. Failure to do so may result in interest penalties.

iv.          Withholding Tax (TDS): Subsidiaries must deduct tax at source (TDS) on various payments like salaries, contractor fees, and interest payments. The applicable TDS rates vary depending on the type of payment and the recipient’s residency status.

v.          Filing of Tax Audit Report: If the foreign subsidiary’s turnover exceeds INR 1 crore, it must undergo a tax audit and submit a tax audit report along with the annual income tax return.

vi.          Dividends and Repatriation: While India has abolished the Dividend Distribution Tax (DDT), dividends repatriated to the foreign parent may still be subject to withholding tax (typically 10-20%) unless mitigated by a Double Taxation Avoidance Agreement (DTAA).

vii.          Annual Filing Deadlines: The due date for filing income tax returns for a foreign subsidiary is generally September 30th, following the end of the financial year (March 31st). Any tax liability must be settled by this deadline to avoid interest and penalties.

Compliance with these tax regulations is essential to avoid penalties and ensure smooth operations. Appointing a tax consultant or advisor can help foreign subsidiaries stay compliant with the evolving tax laws in India.

C.     Foreign Exchange Management Act (FEMA) Compliance:

A foreign subsidiary in India must comply with the Foreign Exchange Management Act (FEMA), which regulates foreign investments and cross-border transactions. Key compliance requirements include:

     i.            Foreign Direct Investment (FDI): The subsidiary must adhere to sector-specific FDI limits and routes (automatic or government approval). Upon receiving foreign investment, the company must file Form FC-GPR with the Reserve Bank of India (RBI) within 30 days of allotment of shares.

     ii.            Inward Remittance: All foreign capital inflows must be routed through authorized banking channels, and the subsidiary must report these remittances to the RBI via Advance Reporting Form within 30 days of receipt.

    iii.            Annual Return on Foreign Liabilities and Assets (FLA): The subsidiary must submit the FLA return to the RBI by July 15th every year, providing details of foreign liabilities and assets.

    iv.            Transfer Pricing: Any financial transactions between the foreign parent company and the subsidiary, such as loans or royalty payments, must comply with transfer pricing rules and FEMA regulations.

    v.            External Commercial Borrowings (ECBs): If the subsidiary raises loans from foreign entities, it must follow ECB guidelines, including reporting the borrowing to the RBI and adhering to interest rate and end-use restrictions.

     vi.            Repatriation of Profits: Any repatriation of dividends or profits to the parent company must comply with FEMA regulations, ensuring that taxes are paid and proper documentation is maintained.

Strict adherence to FEMA regulations is essential for foreign subsidiaries to avoid penalties and ensure smooth international transactions

D.     Other Statutory Compliances for Foreign Subsidiaries in India

In addition to tax, secretarial, and FEMA compliances, foreign subsidiaries in India must adhere to various other statutory regulations, including:

      i.          Goods and Services Tax (GST): If the subsidiary engages in the supply of goods or services, it must obtain GST registration and file monthly/quarterly GST returns (GSTR-1, GSTR-3B) along with an annual return (GSTR-9). However, A foreign subsidiary in India that provides services exclusively to foreign entities may qualify for GST exemption under the category of export of services, provided it meets certain conditions.

     ii.          Employees’ Provident Fund (EPF): If the subsidiary employs more than 20 people, it must register for EPF and contribute a portion of employees’ salaries to the provident fund. Monthly returns must be filed.

    iii.          Professional Tax: The subsidiary must register for professional tax and deduct the applicable amount from employees’ salaries, filing periodic returns with the local authorities.

     iv.          Employees’ State Insurance (ESI): If the subsidiary has more than 10 employees (in some states 20), it must register for ESI and contribute towards employees’ medical insurance under the scheme.

     v.          Shops and Establishment Act: Depending on the state where the subsidiary operates, it must register under the Shops and Establishment Act, which governs working hours, leave policies, and other employment-related matters.

vi.          Labour Law Compliance: The subsidiary must comply with various labor laws, including the Minimum Wages Act, Payment of Wages Act, and Factories Act (if applicable).

   vii.          Corporate Social Responsibility (CSR): If the subsidiary’s net worth exceeds INR 500 crore, turnover exceeds INR 1000 crore, or net profit exceeds INR 5 crore, it is required to spend 2% of its average net profits on CSR activities.

   viii.          Environmental and Industry-Specific Laws: If applicable, the subsidiary must comply with laws related to environmental protection, safety standards, and sector-specific regulations (such as pharma, telecom, etc.).

Maintaining compliance with these statutory regulations is crucial to ensure the smooth and lawful operation of the foreign subsidiary in India.

6. Challenges and Considerations

While setting up a WOS offers numerous benefits, there are some challenges foreign companies may face:

• Navigating regulatory frameworks: India has a complex regulatory landscape, especially regarding FDI and FEMA rules.
• Compliance Burden: Regular statutory and tax compliance is mandatory and can be demanding.
• Transfer Pricing and Repatriation Rules: Proper documentation and pricing strategies are essential to avoid tax disputes.

Setting up a Wholly Owned Subsidiary in India is an effective strategy for foreign companies to capitalize on India’s growing market. While the process involves navigating a robust regulatory framework, the benefits of full ownership, market access, and operational control make it an attractive option. With careful planning, adherence to compliance requirements, and strategic use of India’s tax treaties, foreign companies can establish a successful and profitable presence in the country.

For professional assistance in setting up and managing a wholly owned subsidiary in India, feel free to reach out to FINOUT (www.finout.in) who can guide you through the legal, financial, and operational aspects of the process.