What is a Foreign-Owned Subsidiary in India?

A foreign-owned subsidiary in India is a private limited company registered under the Companies Act, 2013, where more than 50% of the shares are held by a foreign company or individual.
These subsidiaries are considered resident Indian companies for taxation and compliance purposes. They are legally distinct from their parent company, and can enter into contracts, open bank accounts, and carry out operations independently.

Key Features:

• Incorporated under Indian law
• Majority shareholding held by a foreign entity
• Can repatriate profits, subject to conditions
• Taxed on global income earned in India

Why Tax Policy Matters for Foreign Subsidiaries

India’s tax environment plays a significant role in determining how cost-effective it is for a foreign company to operate through a subsidiary. Here’s why tax policy is critical:

• Tax Rates Directly Impact Profitability: India’s corporate tax rates, surcharges, and minimum alternate tax can significantly influence the post-tax returns of subsidiaries.
• Compliance Requirements Are Mandatory: Every subsidiary must adhere to TDS, GST, advance tax payments, and annual filing norms under the Income Tax Act.
• Tax Treaties Can Reduce Liability: Double Taxation Avoidance Agreements (DTAA) can help subsidiaries avoid paying tax twice on the same income.

How Does GST Apply to Foreign Subsidiaries?

Foreign subsidiaries in India must comply with Goods and Services Tax (GST) if they are supplying taxable goods or services.

GST Applicability:

• GST Registration is mandatory if aggregate turnover exceeds ₹20 lakh (₹10 lakh in special category states).
• If importing services from the parent company, GST is paid under the reverse charge mechanism.
• Foreign subsidiaries engaged in exports may claim GST refund on input tax credit.

Proper classification, tax invoice issuance, and monthly GST returns (GSTR-1, GSTR-3B) are essential to stay compliant. You can validate the information on gst.gov.in

Impact of India’s Tax Treaties on Foreign Subsidiaries

India has signed over 90 Double Taxation Avoidance Agreements (DTAA) with countries such as the USA, UK, Japan, and Singapore. These treaties help foreign-owned subsidiaries manage their tax liability in India and abroad.

Key Impacts of DTAA:

• Avoids double taxation: Income taxed in India may be exempt or credited in the parent company’s country.
• Reduced withholding tax: On payments like dividends, interest, and royalties made to foreign parent companies.
• Certainty in taxation: DTAAs provide guidance on Permanent Establishment (PE) rules, preventing tax disputes.

Example: If a subsidiary pays royalty to its US parent company, India–US DTAA reduces withholding tax rate to 15% instead of the standard 25%.
For treaty details, refer to incometax.gov.in.

Step-by-Step: How to Set Up a Foreign Subsidiary in India

Here’s a simplified 7-step process to start a foreign-owned subsidiary in India:

1. Choose Company Name and Check Availability: Select a unique name and apply for name reservation through the RUN (Reserve Unique Name) service on MCA portal.
2. Obtain Digital Signatures (DSC) for Directors: Digital Signature Certificates are required to sign incorporation documents electronically.
3. Apply for Director Identification Number (DIN): Every proposed director must have a DIN, which can be applied for in the SPICe+ form.
4. File Incorporation using SPICe+ Form: Submit the incorporation form online via the MCA portal. This form also includes PAN, TAN, ESIC, EPF, and GST application.
5. Open a Bank Account in India: Once incorporated, open a current account in the subsidiary’s name for transactions.
6. Infuse Share Capital and Issue Shares: The foreign shareholder transfers capital into the Indian bank account, and the company allots shares accordingly.
7. Register with RBI under FEMA Regulations: File FC-GPR form with RBI to report foreign investment under FEMA regulations via firms.rbi.org.in.

Benefits of Setting Up a Foreign Subsidiary in India

• 100% Ownership Allowed: Most sectors allow full foreign ownership under the automatic route, meaning no prior government approval is needed.
• Access to Indian Market: A local subsidiary allows access to India’s vast and growing consumer base while operating as a domestic entity.
• Limited Liability Protection: The liability of the foreign company is limited to its shareholding in the Indian subsidiary.
• Eligibility for Tax Incentives: Subsidiaries in sectors like manufacturing or SEZs can avail concessional tax rates and deductions under Income Tax Act.
• Easier Compliance Management: Compared to liaison or branch offices, subsidiaries have more freedom and clarity under Indian laws.
• Repatriation of Profits: Dividends and profits can be repatriated post applicable taxes and compliance with RBI norms.
• Transfer Pricing Framework Available: Well-defined rules for inter-company transactions help avoid disputes with tax authorities.

Challenges Foreign Subsidiaries May Face in India

• Complex Tax Filings: Multiple taxes (corporate tax, GST, TDS) require separate returns and compliance timelines.
• Transfer Pricing Scrutiny: Any transaction with the foreign parent must follow arm’s length principles and documentation.
• Changing Tax Rules: Indian tax laws are evolving, requiring constant monitoring of updates and amendments.
• High Penalties for Non-Compliance: Delays or defaults in tax filings can lead to interest, penalties, and notices from authorities.
• Sectoral Restrictions on FDI: Certain sectors still require prior approval or have FDI caps.

Example: How Tax Policy Impacted a German Firm in India

A German automotive company started an Indian subsidiary in Pune. It paid royalty to its parent for technology use. Initially, the company deducted 25% TDS. Later, they realized that under the India–Germany DTAA, the applicable withholding tax was only 10%. After adjusting their filings, they claimed a refund and corrected future deductions, saving over ₹50 lakhs annually.

This shows how understanding tax policies and treaty benefits can impact the bottom line.

How EbizFiling Can Help Foreign Subsidiaries

Starting and managing a foreign subsidiary in India can be overwhelming—especially with all the tax laws and compliance timelines. That’s where EbizFiling comes in.

We don’t just assist with the paperwork; we partner with you throughout the entire lifecycle of your subsidiary in India. From setting up your entity with the Ministry of Corporate Affairs to helping you obtain PAN, TAN, and GST registrations, we take care of the basics, so you don’t miss a step.

Once you’re operational, we handle your tax filings (ITR-6, TDS, GST), ensure you’re complying with transfer pricing norms, and even help you use DTAA benefits to reduce your tax burden.

If you ever face a notice from tax authorities or get stuck in compliance issues, our experts represent you and help resolve matters efficiently. We’re not just a service provider we’re your compliance partner in India.

Conclusion

India’s tax framework affects every aspect of a foreign subsidiary’s operations. From GST to DTAA, each policy impacts compliance and costs. A clear understanding reduces risks and supports tax efficiency. With expert guidance, your business can grow seamlessly in India.

Suggested Read :

Registering a Foreign Subsidiary

Branch Office vs Subsidiary

Holding and Subsidiary Company in India

How to start a Subsidiary Company in India?

Understanding FEMA Compliance

FAQs