When a foreign Company plans to expand their business & market presence in India, one of the most common question they have is to how to enter into India. Which is the best legal structure for them?
How to setup the business in India? What are the legal requirements they need to fulfill to expand their presence in India?
Usually, a foreign Company has 3 options to establish its legal structure in India:
1) Subsidiary Company
2) Branch office
3) Liaison office
In this article, we’ll discuss why subsidiary Companies are one of the best options for foreign companies which are looking to expand their presence in India. Subsidiary Company form of organization can be chosen due to the following reasons:
1) Easy Incorporation & Closure-
Setting up a Subsidiary Company is an easy process as compared to other forms of organizations like branch or liaison office. While forming a Subsidiary Company, there is no specific approval required from the RBI or ROC. Only relevant forms & documentation needs to be submitted as prescribed under the Companies Act, 2013 & FEMA Act, 1999. Further closure of the Subsidiary Company is much easier. Only strike-off form needs to be submitted to the ROC for striking off the Company, along with other specific requirements.
2) No restricted activity-
They can engage in activities as they want. They can engage in different business activities separate from its parent Company allowed under its MOA & FDI norms. There are no prohibited activities for the Subsidiary Company except for sectorial restrictions under Foreign Direct Investment (FDI) (e.g., atomic energy, lottery, gambling).
3) Independent Entity-
Subsidiary Company is a separate legal entity from its parent Company. It has no dependence on the parent Company. Further, in case of any court cases in India, only the subsidiary Company is liable for it. Parent Company has no relation to it. As per Section 2(87) of the Companies Act, 2013, a subsidiary company is one in which the holding company controls the composition of the Board of Directors or holds more than 50% of the total share capital.
4) No Profit Track Record Requirement -
For setting up a subsidiary Company, there is no such prerequisite of a track record of profit of the parent Company like a branch or liaison office or any other requirement. Subsidiary Company be easily setup in India.
5) No RBI approval required-
There is no requirement to obtain RBI approval for setting up Subsidiary Company in India. RBI does not play any role in setting up of Subsidiary Company in India except for certain reporting requirements like FC-GPR filings and annual return on foreign liabilities and assets (FLA return).
6) Ease of Compliance-
In Subsidiary Company setups, compliance is much easier to follow. There is no regular reporting requirement to RBI in case of Subsidiary Company setups, which is usually required in case of branch & liaison office setups. 7) Lower Taxation- Subsidiary Companies are taxable at the rate of 22%/25%/30% + Surcharge & cess based on turnover, whereas branch offices are taxed at the rate of 40% + + Surcharge & cess in India. Due to its lower taxation in India, Subsidiary Companies are a preferable form of organization in India.
8) Can have a separate name-
Subsidiary Companies can have a separate name from its holding Company abroad. There is no such requirement for subsidiary Companies to have the same name as of parent Company. There requirement is usually there in case of branch office in India.
Conclusion :
Still mandatory requirements of ROC & RBI needs to be fulfilled during Subsidiary Company setups in India like having 1 Indian resident director, opening a bank account in India & certain form filing requirements to be fulfilled in India.Therefore, it is advised to consult a professional prior to setting up a Company in India.
At Vidhu Duggal & Company, we specialize in helping foreign Company setups In India and FEMA compliance requirements without any regulatory hurdles. If you’re unsure about how to go ahead with setting up your presence in India, you can reach out to us at vidhu@vidhuduggalandco.com Our team of experts assists with all type of Company setups in India.
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