Introduction- Foreign Subsidiary Company Compliances in India
Foreign Subsidiary Company Compliances establish in Indian subsidiaries to take advantage of the country’s vast market potential and develop low-cost manufacturing bases. However, to ensure compliance with Indian regulations and to protect their interests, foreign companies need to understand the key considerations and requirements for setting up a subsidiary in India. This blog post provides an overview of the key stages involved in setting up a foreign subsidiary company in India, including company registration, tax filing, and employee visa processing.
Compliance with Indian law for foreign subsidiary companies.
A foreign subsidiary company set up in India is required to comply with Indian law and regulations. The foreign subsidiary must also file annual returns and audited financial statements with the Registrar of Companies. In addition, other compliance requirements must be undertaken depending on the nature of the business of the foreign subsidiary.
Foreign companies looking to do business in India often find the labyrinthine Indian legal system daunting. This is unsurprising, as Indian law is famously complex, and is constantly evolving to keep up with the country’s rapid economic growth.
Some of the most important laws that a foreign company doing business in India must comply with are the Foreign Exchange Management Act (FEMA), the Companies Act 2013, and the Income Tax Act 1961. These laws are constantly being amended.
Types of compliance required that have to be met by a foreign subsidiary.
The following are the more important compliances that have to be met by the foreign subsidiary company as per Sections 380 and 381 of the Companies Act, 2013:
- Form FC-1 under Section 380: The FC-1 form is important as the form has to be filed within thirty days of the incorporation of the subsidiary company in India. The form is not to be submitted alone, it must be accompanied by the required files, certifications, etc. from other regulatory bodies in India such as the RBI.
- Form FC-3 under Section 380: This form needs to be submitted to the respective Registrar of Companies (ROC) depending upon where the company is incorporated in India. The form must contain the details of the areas where the business is going to conduct operations as well as the financial records of the company.
- Form FC-4 under Section 381: This form is concerned with the annual returns of the company. It has to be filed within sixty days from the end of the preceding financial year.
- Financial statements: The company has to submit financial statements on its Indian business and operations. This must be submitted within six months of the end of the financial year. They must contain: – Statements on the transfer of funds – Statements of earnings repatriated – Statements on related party transactions such as statements on sales, transfer of property, purchases, etc.
- Audit of accounts: All accounts of the foreign subsidiary company must be audited by a Practicing Chartered Accountant. These accounts should be properly arranged and made available by the company for the audit.
- Authentication and translation of documents: All the documents that are submitted by the company to the ROC must be validated by a practicing lawyer in India. These documents also need to be translated into English before their validation and submission.
There are several taxation and filing requirements that foreign subsidiaries need to adhere to in India. These can be broadly classified into three categories:
- Income Tax
- Corporate Tax
- Other Taxes
Foreign subsidiaries are subject to Indian income tax on their global income. This includes income from both Indian and foreign sources. The income is taxed at the rate of 30%. However, several deductions and exemptions are available, which can reduce tax liability.
Foreign subsidiaries are also subject to Indian corporate tax. The base corporate tax for existing companies was reduced from 30% to 22% and for the new manufacturing firms incorporated after 1 October 2019, and started operations before 31 March 2023, the rate was cut down to 15% from 25%.
Several other taxes may be levied on a foreign subsidiary company in India. These taxes are generally in addition to the corporate income tax, and can include:
- Capital gains tax on the sale of shares in an Indian company by a foreign company
- Transaction Tax (STT) on the sale of shares by a foreign company
- Withholding tax on payments made to foreign companies
- Transfer pricing documentation requirement
Penalties for non-compliance
A foreign subsidiary company must meet all compliances as there can be severe consequences if they fail to do so. There are several penalties that a foreign company can face for not complying with Indian laws. Some of these penalties are criminal, while others are administrative. Criminal penalties can include fines, imprisonment, and/or forfeiture of property. Administrative penalties can include fines, imprisonment, and/or the revocation of licenses or permits. The following are the penalties that may be levied against a company for not meeting their compliances: –
Under Section 392 of the Companies Act 2013 (effective from April 1, 2014):
- Any foreign company that violates any part of Chapter XXII of the Act will be fined Rs 1 lakh-3 lakh, depending on the severity of the infraction. If the violation continues, a Rs 50,000 fine will be levied for every day it persists.
- Any officer of a foreign company who is in default can be punished by imprisonment for up to 6 months and/or a fine of Rs 25,000. Meeting all compliances is important for companies so that they can continue conducting business as usual without any issues.
If you are a foreign company looking to establish a subsidiary company in India, then you need to be aware of the various compliance requirements. This blog post provides an overview of the key stages involved in setting up a foreign subsidiary company in India, including company registration, tax filing, and employee visa processing. By understanding the key considerations and requirements, you can help ensure a smooth and successful setup process for your Indian subsidiary.