What is a Foreign Subsidiary Company? And Foreign Subsidiary Company Compliance in India

Introduction

The incorporation of the company determines the compliances. Understanding the compliances that must be met in light of a company’s type, the operations of its industry, its yearly revenue, the number of employees, etc. The Income Tax Act, Firms Act, Transfer Pricing Guidelines, and FEMA Guidelines must all be complied with by foreign subsidiary companies. In this article information on Foreign Subsidiary Company Compliances in India is mentioned. Along with that information on “What is a Foreign Subsidiary Company?”, Importance to comply with the Indian compliance by a Foreign Company, and Role of FDI in Foreign Subsidiary Company is explained.

What is a Foreign Subsidiary Company?

A company is considered to have a foreign subsidiary if a foreign company owns at least 50 percent of its equity shares. The holding company or parent firm in this scenario is the foreign company. To be regarded as a foreign subsidiary company in India, a company must be incorporated in India. Where the parent firm is incorporated is irrelevant.

The TDS (Tax Deducted at Source), GST, PF, ESI (Employee State Insurance), and other Indian tax requirements must all be followed by all businesses, including those with international subsidiaries. Depending on the sector, the place of incorporation, the number of employees, and the volume of sales, different overseas subsidiary companies would have different compliance requirements.

An Indian Private Limited Company or limited company may accept up to 100 percent of foreign direct investment for the majority of the sector. Due to a flourishing economy and a hospitable climate for international investors, FDI has multiplied in India during the last few years.

Importance to comply with the Indian Compliance by a Foreign Company

A foreign subsidiary company must comply with all regulations because there maybe serious repercussions if they don’t. If necessary compliance requirements are not met, the company may be subject to fines, penalties, and/or criminal charges, which may end in imprisonment under applicable legislation (s). The following are the punishments that can be applied to a business for failing to comply: –

In accordance with Section 392 of the Companies Act 2013:

• As per the companies Act, if a Foreign company breach any rules and regulations then the company is liable for a fine of minimum INR 1 lakh and a maximum of INR 3 lakh. A fine of INR 50,000 shall be levied for each day the offence continues if it is still in progress.
• Every officer of a foreign firm who is in default is subject to a minimum fine of INR 25,000 and a maximum fine of INR 5 lakh, as well as a term of imprisonment of up to 6 months. In order to maintain proper business operations free from government intervention, it is critical for a company to comply with all legal requirements.

Due to the above reason it is important for a foreign company to comply with the Indian Compliance, otherwise company needs to pay heavy fines.

Role of FDI in Foreign Subsidiary Company

The following payment methods are available to an Indian company that offers convertible debentures or shares in accordance with FDI (Foreign Direct Investment):

• Transfer via customary financial procedures.
• Debit to a person’s NRE or FCNR (Foreign Currency Non Resident Accounts) account held with a bank.
• The conversion of a due royalty, lump sum, technical know-how fee, or ECB (External Commercial Borrowings) will be considered consideration for the issuance of shares.
• With the FIPB (Foreign Investment Promotion Board) approval, the conversion of import payables, pre-incorporation expenses, and share swaps maybe considered consideration for the issuance of shares.
• Debit to a non-interest-bearing Escrow account in Indian Rupees that is kept with the AD (Authorize Dealers) Category I bank on behalf of residents and non-residents in order to pay the share purchase consideration. This account was formed with the approval of the AD Category I bank.

Foreign Subsidiary Company Compliances in India

• Form FC-1 under Section 380: This form is essential since it needs to be submitted within 30 days after the subsidiary company’s Indian formation. The required documents, certifications, and so on from other Indian regulatory bodies, such as the RBI, must be submitted with the form.
• Audit of Accounts: Accounts must be audited by a practicing chartered accountant for the entire overseas subsidiary company. These accounts ought to be properly organized and made available for the company’s audit.
• Form FC-4 under Section 381: The yearly returns of the Company are covered by this form. It must be submitted within 60 days of the preceding fiscal year’s conclusion.
• Document translation and authentication: Each document that the Company submits to the ROC must be certified by an active Indian lawyer. Before being approved and submitted, these documents also need to be translated into English.
• Form FC-3: Depending on where the company was incorporated in India, Form FC-3 under Section 380 must be delivered to the appropriate Registrar of Companies (ROC). The form must contain details on the locations where the company will conduct its business as well as its financial records.
• Financial statements: For its activities and business in India, the company must file financial statements such as AOC 4 and MGT 7 (Except for OPC and Small Business). This needs to be turned in within six months of the conclusion of the fiscal year. Statements on the transfer of cash and statements on repatriated earnings are required to be included. – Statements on transactions between related parties, such as sales, property transfers, purchases, and so forth.

Foreign Subsidiary Company Compliance in India as per Income Tax Act

• A yearly compliance is one that needs to be met. The business must comply with these regulations on an annual basis. For instance, the business must perform the following each year: GST reporting; TDS reporting pursuant to the Income Tax Act; RBI compliance – Adherence to SEBI laws and regulations – Financial Statements for the Year.
• There are three fundamental sorts of compliances, one of which is event-based, as was previously stated. This indicates that these compliances are only necessary if the company takes a particular course of action.
• The company is required to comply with periodic compliances on a regular basis. This kind of compliance happens frequently throughout the year as opposed to annual compliances. These standards could have to be satisfied every quarter or every two years.

RBI Regulations and FEMA Guidelines

• The transfer of shares in a foreign subsidiary company from an Indian resident to a non-resident investor, or vice versa, is covered by this. Such a transfer maybe made through a sale or a gift. Such a transaction must be recorded in accordance with foreign direct investment regulations within sixty days of the transfer date.
• The investee company or the Indian resident is in charge of submitting this form in this instance. Whether the Indian resident is the transferer or the transferee, this rule applies.
• A remittance received by the shareholders of a foreign subsidiary firm is the subject of FC-GPR. The form outlines the method of remittance from the company to its shareholders.

Conclusion

The government has established rules and regulations that all businesses founded in India must abide by. Whether Indian or company registered by foreigners or citizens own the companies does not change the fact that this is in force. The sole distinction between the two is that subsidiaries with foreign ownership are subject to more laws and restrictions than those with Indian ownership.