Corporate Law

In today's globalized business landscape, expanding operations across borders has become a strategic imperative for many companies. For foreign businesses, establishing a subsidiary in India can be a transformative move. However, with great opportunities come great responsibilities, especially concerning compliance. In this blog post, we'll explore the intricacies of compliance for foreign subsidiaries in India. We'll also touch upon relevant rules and important sections that are integral to this compliance process.

Compliance Framework: Rules and Sections

Compliance for foreign subsidiaries in India encompasses several aspects, each governed by specific rules and sections. Here's an overview of key areas and the relevant rules and sections:

Company Incorporation (Companies Act, 2013): The first step is incorporating the foreign subsidiary as per Indian laws. The Companies Act, 2013, provides the legal framework for company incorporation.

Foreign Exchange Management Act (FEMA): FEMA governs foreign exchange transactions in India, and compliance is critical for foreign subsidiaries.

Relevant Sections:

1. Section 6(3): This section specifies that a person residing outside India cannot hold, own, transfer, or invest in foreign exchange, foreign security, or any immovable property situated outside India without the prior permission of the RBI. This rule is significant for foreign subsidiaries as it underscores the importance of obtaining necessary approvals before engaging in such transactions.
2. Section 9: Section 9 of FEMA regulates dealings in foreign exchange and foreign securities. It prohibits individuals and entities in India from engaging in any transaction involving foreign exchange or foreign securities unless it is in accordance with the provisions of FEMA and the rules and regulations made under it.
3. Section 10: This section empowers the RBI to impose restrictions on current account transactions and capital account transactions. For foreign subsidiaries, this means that the RBI can impose limitations on certain transactions, which may impact their ability to transfer funds or engage in specific financial activities.
4. Section 15: Section 15 of FEMA pertains to the penalties and adjudication process. It outlines the penalties that can be imposed for violations of FEMA provisions.

Transfer Pricing (Income Tax Act, 1961): Transfer pricing regulations ensure transactions between the foreign subsidiary and its parent company are at arm's length prices.

Relevant Sections:

1. Section 92: It mandates that any income arising from an international transaction (including transactions between a foreign subsidiary and its parent company) shall be computed having regard to the arm's length price. This essentially means that transactions between related parties must be conducted at prices or profit margins that would be charged in similar transactions between unrelated parties.
2. Section 271AA: This section imposes a penalty on companies that fail to maintain adequate documentation to substantiate their transfer pricing compliance. It highlights the importance of maintaining comprehensive transfer pricing documentation, including details of the methodology applied and data supporting the arm's length pricing.

Taxation (Income Tax Act, 1961): Foreign subsidiaries must comply with Indian taxation laws, including corporate tax and withholding tax.

Relevant Sections:

1. Corporate Taxation (Section 115BAA and Section 115BAB): Section 115BAA specifies a concessional corporate tax rate for certain domestic companies, while Section 115BAB provides a lower corporate tax rate for new manufacturing companies. Foreign subsidiaries need to understand and optimize their tax liability under these sections to ensure tax efficiency.
2. Withholding Tax (Section 195): Section 195 deals with the withholding tax obligations of Indian entities when making payments to foreign entities. Foreign subsidiaries must ensure proper withholding and compliance with this section to avoid tax disputes.

Financial Reporting (Indian Accounting Standards - Ind AS): Compliance with Ind AS is essential for foreign subsidiaries in India.

Relevant Ind AS:

1. Ind AS 21 (Foreign Exchange Transactions): This standard addresses the accounting treatment for foreign exchange transactions, including exchange rate fluctuations and recognition of foreign exchange gains or losses in the financial statements of foreign subsidiaries.
2. Ind AS 103 (Business Combinations): Ind AS 103 outlines the accounting treatment for business combinations, including the acquisition of control over another entity. This standard is crucial when a foreign subsidiary is acquired or merged with another entity in India.

Annual Filings (Companies Act, 2013): Regular filings with regulatory authorities, such as the Ministry of Corporate Affairs (MCA), are necessary to maintain legal status.

Relevant Sections:

1. Section 129 (Financial Statements): Section 129 mandates the preparation and filing of financial statements, including the balance sheet, profit and loss statement, and cash flow statement, along with the Director's Report.
2. Section 137 (Copy of Financial Statements): Section 137 requires foreign subsidiaries to provide a copy of their financial statements to the Registrar of Companies (ROC) within a specified period after the annual general meeting.
3. Section 139 (Appointment of Auditors): This section outlines the requirements for the appointment and qualifications of auditors for foreign subsidiaries and their roles in the annual audit process.

GST Compliance: Foreign subsidiaries engaged in the supply of goods or services in India must comply with GST regulations.

    Relevant Sections:

1. Section 22 (GST Registration): Section 22 mandates GST registration for foreign subsidiaries if their aggregate turnover in India exceeds the prescribed threshold. Registration is essential to legally collect and remit GST.
2. Section 31 (Invoicing): This section outlines invoicing requirements, including the format and content of GST invoices, which foreign subsidiaries must adhere to when conducting business transactions in India.
3. Section 37 (Filing Returns): Section 37 pertains to the filing of GST returns, specifying the frequency, due dates, and the types of returns that foreign subsidiaries must file to report their GST liabilities.