• Flexibility in Tax Residency and Avoidance of Permanent Establishment (PE) Risks
  • Subsidiaries are automatically tax residents in India, providing clarity and avoiding the Permanent establishment (PE) risks typically associated with Branch and Liaison offices.
  • PE disputes often result in higher tax liabilities and compliance burdens for branch offices.

• GST and Input Tax Credit: Subsidiaries engaged in taxable supplies can claim Input Tax Credit (ITC) under the Goods and Services Tax (GST) regime, reducing their net GST liability.

BASIC REQUIREMENTS FOR FORMING A SUBSIDIARY COMPANY IN INDIA

Indian Directors:
At least one director must be a resident of India, as per the Companies Act, 2013.

Shareholding Structure:
The foreign parent company can hold up to 100% of the shares, depending on the sector-specific Foreign Direct Investment (FDI) policy.

Authorized Capital:
No minimum capital requirement, but sufficient funds should be allocated for operational needs.

Registered Office:
A local address in India is mandatory for the subsidiary's official correspondence and compliance filings.

Sector-Specific Approvals:
Certain sectors may require prior approval from the Reserve Bank of India (RBI) or other regulators before incorporation.

Parent Company Financials:
Submission of the parent company's incorporation documents, financial statements, and board resolution approving the investment duly apostille or consularised and translated in English.

Compliance with FEMA Regulations:
All investments and operations must adhere to the Foreign Exchange Management Act (FEMA) guidelines

DRAWBACKS OF OPERATING A SUBSIDIARY COMPANY IN INDIA

Higher Compliance Costs: Subsidiaries are subject to extensive compliance requirements under the Companies Act, 2013, FEMA, and tax laws, leading to higher administrative and legal costs.

Double Taxation Risk: Transfer pricing regulations may lead to scrutiny of transactions between the subsidiary and the parent company, potentially increasing the tax burden.

Profit Repatriation Restrictions: Repatriating profits to the parent company is subject to dividend distribution tax (if applicable) and compliance with FEMA regulations, making it complex and time-consuming.

Initial Capital Requirements: Although no fixed minimum capital is mandated, some sectors may require significant initial investment, which can be a financial burden.

Limited Liability May Be Misleading: While liability is limited to the subsidiary’s assets, any guarantees or commitments made by the parent company may expose it to risks indirectly.

Sectoral FDI Caps: Certain sectors impose caps or restrictions on foreign investment, limiting operational flexibility.

Legal Challenges in Dispute Resolution: As a separate legal entity, the subsidiary must independently handle litigation, which can be costly and time-consuming, especially if it involves cross-border disputes.

Time-Consuming Winding-Up Process: Closing a subsidiary involves complex legal procedures, including settling debts, obtaining tax clearances, and complying with ROC and RBI requirements.

WHAT ALL YOU WILL GET FROM REGISTER YOUR STARTUP

• Certificate of Incorporation of Subsidiary Office from Registrar of Companies
• MOA, AOA
• Share Certificates
• RBI approval Letter
• Digital Signature for all the directors
• PAN of the Subsidiary Company
• TAN of the Subsidiary Company
• Bank account opening documents
• ESI & EPF Registration Letter
• Handbook on Taxations
• GST Registration

STEP-BY-STEP PROCESS FOR FORMING A SUBSIDIARY COMPANY IN INDIA

1. Pre-Incorporation Approvals

Foreign Direct Investment (FDI) Compliance: The process of incorporating subsidiary company in India starts with deciding, if the object of subsidiary company falls under Automatic or approval route.If under the approval route, obtain prior approval from the Foreign Investment Promotion Board (FIPB) or concerned authority.

2. Name Reservation

Platform: Ministry of Corporate Affairs (MCA) portal using SPICe+ Part A.

Action: Reserve the company’s name, ensuring compliance with naming guidelines under the Companies Act, 2013.

3. Digital Signature Certificates (DSC)

Obtain DSCs for proposed directors and shareholders for e-filing purposes.

4. Director Identification Number (DIN)

Apply for DIN for individuals who will be directors of the subsidiary, through SPICe+ Part B.

5. Drafting Incorporation Documents

Key Documents:

• Memorandum of Association (MOA): Outlines the company’s objectives. (Physical copy of MOA shall be prepared; e-MOA.(Duly apostilled or notarized in country of origin).
• Articles of Association (AOA): Governs internal operations and management. (Physical copy of AOA shall be prepared; e-MOA.(Duly apostilled or notarized in country of origin).
• Declaration forms such as INC-9 by first subscriber(s) (Duly apostille or notarized in country of origin).
• DIR-2 declaration from first Directors along with Copy of Proof of Identity and residential address. (Translated in English & Duly apostille or notarized in country of origin).
• Declaration from the foreign subscribers in respect of not having PAN. (Duly apostille or notarized in country of origin).
• DIR-2 from the Resident Director along with a self-attested copy of PAN and resident Proof.

6. Filing Incorporation Application

Platform: MCA portal using SPICe+ Part B form.

• Action: Submit details of directors, shareholders, registered office, and incorporation documents.
• Integrated Services:
• Automatic PAN and TAN allotment.
• Optional GST registration.

8. Certificate of Incorporation (COI)

Upon successful scrutiny, the MCA issues the COI, which contains the Corporate Identification Number (CIN).

9. RBI Reporting for Foreign Investments

FDI Reporting:

Report inward remittance received for share subscription to the RBI through Form FCGPR within 30 days of allotment.

The company must provide details of foreign investment to the Authorized Dealer (AD) Bank for onward reporting to RBI.

10. Open a Bank Account

• Submit COI, PAN, List of Directors, Board Resolution for opening Current Bank account, MOA, and AOA to open a current account in the company’s name for business transactions.

What is Apostilling? Apostilling is a form of certification under the Hague Convention, recognized in India, that validates foreign-issued documents.

When is Consularization Required? If the parent company’s home country is not a signatory to the Hague Convention, consularization by the Indian Embassy or Consulate in that country is necessary.

Ensure all apostilled or consularized documents are accompanied by certified English translations if they are in a foreign language.

FOREIGN SUBSIDIARY INCORPORATION CHECKLIST

The following details are required for the nominee (Indian) shareholder and director (Already having director identification number in India (DIN):

1. Proof of identity and residential address- Self-attested PAN and Aadhar
2. Mail ID and Phone number
3. Passport Size Photo

FOLLOWING DETAILS ARE REQUIRED FOR NOMINEE SHAREHOLDER AND DIRECTOR (NOT HAVING DIN):

1. Proof of identity: –Self-Attested Passport or Driving License or Voter Id
2. Mail ID and Phone number
3. Passport Size photo
4. Duration of stay at present address.
5. Highest educational qualification
6. Proof of residential address- Self-Attested Bank Statement only one page with address (not older than 2 months)
7. Self-attested PAN and Aadhar
8. Occupation.

FOLLOWING DETAILS ARE REQUIRED FOR FOREIGN INDIVIDUAL:

• Apostilled copy of Proof of identity – Self-attested Passport
• Apostilled copy of Proof of residential address- Utility bill or Phone bill having complete address or Latest Bank statement only one page with address (not older than two months)
• Mail ID and Phone number
• Passport Size photo

The current address proof must be notarised by a Public Notary in the country of residence and apostilled.

FOR REGISTERED OFFICE:

• Proof of Registered Office Address (Utility Bill of Premises) not older than 2 months)
• Lease Deed/ Rent Agreement
• NOC from the Owner of the Premises
• PAN of the Owner

STEP – II: INFORMATION/ DOCUMENTS REQUIRED FROM FOREIGN COMPANY

• Apostille / Notarized copy of the resolution of foreign Company ‘mentioning the name of authorized representative, no. of subscription of shares’.
• Apostille/ Notarized copy of ID Proof of authorized representative, if such person is non–resident of India.
• Apostille/ Notarized copy of Charter of Foreign Company.
• Name of one Resident Director.
• Name of Nominee (in case of incorporation of WOS)

POST-INCORPORATION COMPLIANCES OF SUBSIDIARY COMPANY

Commencement of Business:

• Attach proof of the subscription money received from shareholders.
• Non-compliance may result in penalties and a potential strike-off of the company by the Registrar of Companies (RoC).

Goods and Services Tax (GST) Compliance

• GST Registration: Obtain GST registration if turnover exceeds the prescribed threshold or if the company is engaged in taxable activities.
• GST Filing: File regular GST returns (GSTR-1, GSTR-3B, GSTR-9, etc.) as applicable

FEMA and RBI Compliance

• FDI Reporting: File Form FC-GPR with the Reserve Bank of India (RBI) within 30 days of allotting shares to the foreign parent company.
• Annual Return on Foreign Liabilities and Assets (FLA): Submit FLA annually to the RBI by 15th July of each financial year.
• ODI Compliance: Ensure the parent company adheres to Overseas Direct Investment (ODI) guidelines, if applicable

Financial Compliance

• Appointment of Auditor: Appoint a statutory auditor within 30 days of incorporation.
• Audit of Accounts: Ensure accounts are audited annually by a Chartered Accountant.
• Filing of Tax Audit Report: Submit tax audit report under the Income Tax Act if applicable turnover limits are exceeded

Labour Law Compliance

• PF and ESI Registration: Register under Provident Fund (PF) and Employee State Insurance (ESI) schemes if employee thresholds are met.
• Labour Welfare Laws: Comply with laws like the Payment of Gratuity Act, Bonus Act, and applicable state labor laws

Board Meetings and General Meetings

• First Board Meeting: Conduct the first board meeting within 30 days of incorporation.
• Subsequent Board Meetings: Hold at least four board meetings annually, with not more than 120 days between two meetings.
• Annual General Meeting (AGM): Conduct the AGM within six months of the end of the financial year.

Record Keeping and Reporting:

• Books of Accounts: Maintain proper books of accounts at the registered office.
• Payroll Compliance: Ensure proper payroll records, including salary slips, PF, and ESI contributions.

CLOSURE OF SUBSIDIARY COMPANY IN INDIA

Strike-Off under the Companies Act, 2013

This method is used when the company is inactive and has no liabilities.

Eligibility:

The company has not commenced operations since incorporation or has not been operational for the last two years.

All financial statements and annual returns are filed up to date.

Process:

• Board Meeting:
  • Convene a Board Meeting to pass a resolution for closure.
  • Authorize a director to file necessary applications.
• Clear Liabilities:
  • Settle all outstanding liabilities, including statutory dues, employee salaries, and creditor payments.
• Filing STK-2:
  • File Form STK-2 with the Registrar of Companies (RoC) along with:
    • Board resolution.
    • Statement of Accounts (not older than 30 days).
    • Affidavit and Indemnity Bond from all directors.
    • No Objection Certificate (NOC) from creditors (if applicable).
• Publication of Notice:
  • The RoC will publish a public notice inviting objections to the strike-off.
• Strike-Off Approval:
  • If no objections are raised, the RoC will issue a notice striking the company off the register.

VOLUNTARY LIQUIDATION UNDER INSOLVENCY AND BANKRUPTCY CODE (IBC), 2016

This method is used when the company intends to liquidate its assets and has the means to settle liabilities.

Eligibility:

• The company must be solvent and able to pay off its debts.
• Shareholders pass a special resolution for voluntary liquidation.

Process:

• Appointment of Liquidator:
• Appoint an Insolvency Professional (IP) as the liquidator.
• Declaration of Solvency:
• Directors must file a declaration of solvency with the RoC.
• Public Notice:
• Publish a notice in a newspaper to inform creditors and stakeholders.
• Settlement of Claims:
• The liquidator will collect and liquidate assets to settle liabilities.
• Distribution of Surplus:
• Any remaining funds are distributed among shareholders.
• Final Report:
• File the liquidator’s report and application with the National Company Law Tribunal (NCLT) for approval.

COMPULSORY LIQUIDATION BY NCLT

This method is initiated by the creditors or other stakeholders if the company cannot pay its debts or is involved in fraudulent activities.

Process:

• Filing of Petition:
  • Creditors or stakeholders file a petition for winding up with the NCLT.
• Appointment of Liquidator:
  • NCLT appoints an official liquidator to take over the company’s operations.
• Liquidation Process:
  • Liquidator sells assets to settle liabilities.
• Distribution and Dissolution:
  • Surplus is distributed, and the company is dissolved upon NCLT approval.

Fast-Track Exit Scheme

Applicable for dormant companies or companies without significant assets or liabilities.

Process:

• File a Fast-Track Exit application through Form STK-2.
  • Submit required documents, including an affidavit, indemnity bond, and NOC from creditors.
• Timeline for Closure: Strike-Off: 4–6 months.
• Voluntary Liquidation: 6–12 months.
• Compulsory Liquidation: Varies based on complexity.
• Each method requires careful planning and strict adherence to compliance norms to avoid penalties. Consult registeryourstartup.com to ensure a smooth closure.

Key Considerations During Closure:

• Tax Clearance:
  Obtain a tax clearance certificate from the Income Tax Department.
• Employee Settlements:
  Clear outstanding dues for employees, including gratuity and PF.
• Asset Disposal:
  Dispose of company assets and submit a report to the relevant authority.
• Statutory Filings:
  File all pending returns and reports with the RoC and other authorities.
• NOC from Regulatory Bodies:
  Obtain NOCs from authorities like GST, RBI (if applicable), and creditors.