Legal Framework for Setting Up an Indian Subsidiary

Introduction

Establishing a subsidiary in India offers foreign companies access to a vast market.Understanding the legal framework for setting up an Indian subsidiary is crucial for seamless operations.This guide outlines the essential legal steps, compliance requirements, and practical processes involved.

Summary

• An Indian subsidiary is a company partially or wholly owned by a foreign entity under Indian law
• It is primarily regulated by MCA, RBI, FEMA, Companies Act, and Income Tax Act
• The standard structure used is a Private Limited Company for ease of operations
• Incorporation requires steps like DSC, SPICe+ forms, and RBI FDI reporting
• Post-registration, the company must comply with tax and corporate filings annually
• Professional support simplifies legal, compliance, and banking challenges

What Is an Indian Subsidiary Company?

An Indian subsidiary is a company incorporated under Indian law, wholly or partially owned by a foreign parent company.It operates as an Indian entity, adhering to local regulations and tax laws.
Foreign entities often opt for a Private Limited Company structure due to its limited liability and ease of capital infusion.

Governing Laws and Regulatory Bodies

The formation and operation of Indian subsidiaries are governed by several laws and authorities:

You can verify the data from the government portal with the below mentioned Links:

• MCA Portal
• Income Tax Portal
• GST Portal

Types of Indian Subsidiaries

• Wholly Owned Subsidiary (WOS): 100% ownership by the foreign parent, permitted in sectors allowing full Foreign Direct Investment (FDI) under the automatic route.
• Partly Owned Subsidiary: Shared ownership between the foreign entity and Indian shareholders, common in sectors with FDI restrictions.

Step-by-Step Process to Set Up an Indian Subsidiary

1. Choose Business Structure: Select an appropriate structure, typically a Private Limited Company, for limited liability and ease of operations.
2. Obtain Digital Signature Certificates (DSC): Required for directors to sign electronic documents.
3. Reserve Company Name (SPICe+ Part A): Apply for name approval through the MCA portal.
4. Draft Memorandum and Articles of Association (MoA & AoA): Define the company’s objectives and internal rules.
5. File Incorporation Form (SPICe+ Part B): Submit incorporation details along with applications for PAN, TAN, GST, EPFO, ESIC, and Professional Tax.
6. Obtain Certificate of Incorporation: Issued by the MCA upon successful registration.
7. FDI Reporting: If applicable, report foreign investments through the RBI’s Single Master Form (SMF) on the FIRMS portal.
8. Register for Taxes: Obtain PAN, TAN, and GST registrations for tax compliance.
9. Open Bank Account: Establish a current account in an Indian bank for financial transactions.

Benefits of Setting Up an Indian Subsidiary

• Market Access: Direct engagement in one of the world’s largest consumer markets.
• Limited Liability: Protection for shareholders against company debts.
• Profit Repatriation: Ability to remit profits abroad post-compliance.
• FDI Opportunities: Access to sectors with 100% FDI under the automatic route.
• Brand Control: Maintain brand integrity while operating locally.
• Regulatory Compliance: Enhanced credibility with adherence to Indian laws.

Post-Incorporation Compliance Requirements

• Form INC-20A: Declaration of business commencement within 180 days.
• Annual Filings: Submission of financial statements (AOC-4) and annual returns (MGT-7) to the MCA.
• Income Tax Returns: Annual filing of ITR-6.
• GST Returns: Monthly or quarterly filings of GSTR-1 and GSTR-3B.
• FEMA Compliance: Reporting of foreign investments to the RBI.
• Director KYC: Annual submission of DIR-3 KYC for directors.

Common Challenges Faced

• Understanding Tax Regulations: Navigating GST, TDS, and other tax provisions can be complex.
• Compliance Management: Keeping track of multiple regulatory filings and deadlines.
• Banking Procedures: Delays in opening bank accounts due to KYC norms.
• Cultural and Legal Differences: Adjusting to India’s business environment and legal system.

Real-Life Example

A German automotive company established a subsidiary in Pune. With professional assistance, they completed registration, complied with FDI norms, and obtained incorporation within 15 working days. Despite initial delays in GST registration, expert guidance facilitated resolution. The company now operates multiple manufacturing units across India.

Importance of Professional Support

• Accurate Registration: Proper documentation and adherence to legal requirements.
• Timely Compliance: Meeting all regulatory deadlines.
• Tax Efficiency: Optimizing tax structures within legal frameworks.
• FDI Compliance: Ensuring adherence to foreign investment regulations.
• Access to Incentives: Identifying and availing government benefits where applicable.

Conclusion

Setting up an Indian subsidiary offers significant growth opportunities. Understanding the legal framework for setting up an Indian subsidiary, including incorporation procedures, tax obligations, FDI norms, and compliance timelines, is essential. Professional guidance can facilitate smooth establishment and ongoing operations in India.

Suggested Read :

What is CIN Number of Company?

Branch Office and Indian Subsidiary

Holding and Subsidiary Company in India

How to start a Subsidiary Company in India?

Foreign Subsidiary Company Compliance in India

FAQs