Setup Business in India Form of Wholly Owned Subsidiary Company

by EzyBiz India Tax & Accounting Consulting Firm

A foreign company looking to setup business in India can do so in several ways like the incorporation of an Indian entity or continue to work in India as a foreign entity. If the intent is to incorporate an Indian entity, they have the following options for company incorporation in India.

Private Limited Company Registration.
Public Limited Company Registration.
Registration of Limited Liability Partnerships.
Registration of Joint Ventures in India.

Another option for foreign company registration in India is in form of a foreign entity. Here, they have the following options, namely:

Liaison office Registration in India.
Branch Office Registration in India.
Project office Registration in India.

Further, it may be noted that a foreign company can acquire 100% shares in an Indian Private Limited Company, in such a case, the Indian company will become a wholly-owned subsidiary of a foreign parent company. When instead of acquiring 100% shares in an Indian company, the foreign company acquires shares more than 50% in an Indian company, the Indian company will become a subsidiary of a foreign company.

Subsidiary company registration is the most preferable form of entity registration in India and is quite.

suitable for companies that want to do full-scale business activities in India to stay in India for a long period of time. Also, suitable for companies that want to use their global brands in India.

Permissible activities for the Wholly Owned Subsidiary company in India

The Wholly Owned Subsidiary company can do any business activities which are prescribed under its memorandum of association subject to FDI guidelines.
Indian Wholly owned subsidiary can be set up subject to FDI guidelines. Foreign companies can invest in the majority of business sectors in India under automatic routes. Only for investment in some sectors and for investment over the specified limit, prior approval of government is required which is called a government route.
There are some prohibited lists of business in FDI guidelines. It means subsidiary companies in India cannot be engaged in prohibited business activities.

Therefore, this is an important aspect to be kept in mind before the registration of a wholly-owned subsidiary in India.

Conditions required for registration of a wholly-owned subsidiary company

Wholly Owned Subsidiary can be registered in India either as Public Limited Company or Private Limited Company.
For Wholly Owned Subsidiary as Private Limited Companies, minimum 2 Directors and minimum 2 shareholders are required out of which at least 1 Director shall be Indian Citizen and Indian Resident.
For Wholly Owned Subsidiary as Public Limited Companies, minimum 3 Directors and minimum 7 shareholders are required out of which at least 1 Director shall be Indian Citizen and Indian Resident.
Shareholders can be companies also (including the foreign company), however, Directors has to be individuals. Companies can hold shares in Indian WOS through authorized representatives.
100% shares in an Indian subsidiary company can be held by a foreign parent company.
At least one of the Directors shall be an Indian Resident and Indian Citizen.
There should be a local office address in India.

Legal Status

The legal status of the wholly-owned subsidiary is an Indian company. Therefore, it is independent of its parent entity. It has limited liability i.e liability is limited to the amount of capital invested in the company and has separate legal existence.

Approvals Required

For subsidiary company registration in India, prior approval of ROC/MCA is required. Also, approval of RBI, AD Banker, and FIFP may be required in case of a government approval route.
Further, if the activities of the Indian wholly-owned subsidiary fall under the Government approval route, then approval from the Government has to be obtained. Government approval can be taken by filing an online application with Foreign Investment Facilitation Portal (FIFP)
Once a subsidiary company is registered in India and share subscription money has been received in the Indian subsidiary’s bank account, RBI needs to be intimated about such receipt of FDI in India by login into the portal and filing prescribed forms online. Further, allotment of shares needs to be done, Share certificates need to be issued and ROC compliance needs to be done. Any excess money received in the Indian subsidiary bank account needs to be refunded within 2 months of such receipt. Failure to make aforesaid compliance will lead to a penalty from RBI.
Besides above, the wholly-owned subsidiary company needs to comply with all the laws, rules & regulations as applicable, including but not limited to Companies Act, 2013, Foreign Exchange Management Act, 1999, Shops and Establishment Act, Income Tax Act, etc., failing which may result in heavy interest and/or penal implications.

Accordingly, the cost of running and maintaining expenses of a wholly-owned subsidiary company is high and requires expert professional guidance all the time.

Tax Applicability

The wholly-owned subsidiary, being a company, is liable to tax on global income at different tax rates like 15%, 22%, 25%, and 30% depending upon case to case. Also, Subject to MAT @ 15% of book profits.

Repatriation of Profits

For the repatriation of profits out of India, there are no restrictions. No specific approvals are required. The profits can be repatriated outside India subject to proper payment of taxes in India, filing of forms 15CA and 15CB, and completion of other procedural compliance.

Exit out of India

Winding up procedure of wholly-owned subsidiary company is a complex procedure. Also, it is time-consuming. Further, it also depends upon the exit strategy adopted. Exit can be either by sale of shares or by liquidation. However, exit is possible only when all compliances under various statutes have been completed and there is no litigation pending before any authorities in India.

Thus, from above, it may be seen that wholly-owned subsidiary has many advantages due to which more and more foreign companies are opting for registration of the wholly-owned subsidiary company in India. It allows Indian subsidiary companies to use the brand name of the parent company. Further, it has less tax rates as compared to other entities in India like Limited Liability Partnerships. Although the compliance cost of a subsidiary company in India is slightly higher due to overall benefits, it is best suited for foreign companies.