Roles of a Foreign Subsidiary company and Advantages of Foreign Subsidiary

Introduction

A foreign subsidiary is an Indian company that has more than 50% of its shares controlled by a foreign parent company. Despite the fact that the company is a subsidiary of a foreign company, it will be governed by Indian laws. Do not be worried if you have only a basic understanding of the role of a foreign subsidiary in India.

But to understand the roles of a foreign subsidiary in India it is important to learn about the advantages of it in India and other basic knowledge related to the Companies Act, 2013.

Insights on the Companies Act, 2013 for Foreign Subsidiaries

The Companies Act of 2013 has been adaptable and accommodating to a diverse range of corporate entities. Furthermore, the Act permits the establishment of a subsidiary of a foreign company in India. The fact that an Indian market is a great place for international businesses that encourages foreign companies to establish subsidiaries. The company established as a subsidiary of a foreign company must be incorporated in accordance with Indian legal standards and cannot be influenced by the law in the country where the parent company is incorporated.

In terms of legal compliance, a foreign subsidiary is no different than an Indian company, except that it may have a little more on its plate than an Indian company. Regardless of the country in which the parent company is registered, the subsidiary company must be incorporated in India.

Advantages of Foreign Subsidiary

• Provides Financial Advantages

By establishing a foreign subsidiary, you can gain greater access to local resources, assets, and grants. It can also be advantageous tax-wise because your subsidiary pays corporate taxes independently of the parent company.

• Builds trust and credibility

In many countries, having an official business presence can help your company gain credibility. Because your company complies with all local regulations, local businesses, governments, industries, and consumers are more likely to take you seriously. This can boost brand trust and recognition in your new market.

• It safeguards your parent company

A foreign subsidiary, unlike a representative or branch office, is treated as a separate legal entity from its parent company. While the parent company retains control over its subsidiary, liability and risk are generally separated.

Compliance roles of a Foreign Subsidiary

The compliances of a foreign subsidiary company are determined by the type of company into which it is incorporated. The annual turnover of the company, the number of employees employed by the company, and the industry in which it operates are the other relevant factors that determine the set of compliances that must be followed by the company. subsidiaries in India must essentially comply with the provisions outlined in the following laws:

• FEMA (Foreign Exchange Management Act), 1999
• GST (Goods and Service Tax) Act, 2017
• RBI Compliances
• Companies Act, 2013
• SEBI rules and regulation

Know more: Foreign subsidiary company compliance in India 

Apart from the above-mentioned compliances, there are three types of compliances in general: (Infographic)

1. Periodic Compliance
2. Annual compliance of a subsidiary company
3. Compliances based on events.

Periodic compliance of a foreign subsidiary in India

These compliances must be followed on a regular basis by the foreign subsidiary company. These compliances may occur at regular intervals, such as multiple times within the same year, or on a quarterly or semi-annual basis.

Annual compliance of a subsidiary company

These requirements must be met at least once a year. This category includes GST (Goods and Services Tax) and TDS (Tax Deducted at Source) filings, as well as various compliances mandated by the RBI and SEBI guidelines.

Compliances based on events

These compliances become mandatory if certain events or conditions occur, such as those outlined in the RBI and FEMA guidelines.

• FC – GPR: The form is concerned with the remittance made available to the shareholders of the subsidiary company, and it specifies the method of transfer of funds made by the company to its shareholders.
• FC – TRS: This form is used when an Indian resident transfers shares of a foreign subsidiary company to a non-resident investor or vice versa. A sale or a gift deed can be used to facilitate the transfer. The FDI (foreign direct investment) rules require that such business transactions be reported within 60 days of the transfer’s inception. Regardless of whether the Indian resident is the transferor or the transferee, the form FC-TRS must be filed by the Indian resident or the investee company.

Final thoughts

In view of the time, effort, and resources required to establish (and dissolve) a subsidiary, you must be certain it is the right decision before proceeding. These subsidiaries can help with international expansion, but only after you’ve validated your new markets.