A complete guide for setting up a foreign subsidiary in India

Setting up a foreign subsidiary in India is getting easier day by day due to the new government policies of the Indian government in Foreign Direct Investment (FDI), Simple and easy online procedures of Incorporation, and other supportive schemes.

In this article, we are going to give you a complete step-by-step procedure of setting up a subsidiary of a foreign company in India.

There are four major steps in setting up a subsidiary in India

  1. Incorporation of foreign subsidiary
  2. Filing for FC-GPR (for the foreign Investment that comes to India)
  3. Getting the required licenses and registration
  4. Setting up the Transfer Pricing

1. Incorporation of a foreign subsidiary in India

Company incorporation is the first step in setting up a foreign subsidiary in India. Where the directors need to select the type of entity for the Indian subsidiary.

Private Limited Company will be the best-suited entity type for incorporating the foreign subsidiary in India.

Why Is Private Limited Company the Best-Suited Entity Type for Foreign Subsidiaries?

There are many reasons that a foreign national or an NRI should choose a Private Limited Company as an entity type. Some of those I have explained below.

FDI – In the majority of sectors in India Foreign direct investment in Private Limited Companies is eligible for 100% in the automatic route. That means the company does not need any pre-approval from the government or RBI. But the company has to report to RBI about the FDI. To know more about FDI in different sectors in India read – Foreign Direct Investment (FDI) Into An Indian Private Limited Company

Raising Funds – Raising Venture Capital and Equity funds in Private Limited Company is easier, As compared to other types of entities like LLPs.

Growth and Expansion – Business Expansion and growth are easier in Private Limited Companies. Private companies can issue equity shares to the shareholders. Also adding and removing a shareholder is an easy process.

Compliance and Recognition – Even though Private Limited Companies have higher compliance and audit procedures these ensure the companies stay in compliance with regulations. As a result of that, the recognition of Private Limited Companies is way higher than other entity types.

ESOP – Offering options for attracting great talent by offering ESOPs (Employee Stock Option Plans) is available for Private Limited Companies.

2. Filing for FC-GPR:

Every Company having foreign investment required to report to RBI (Reserve Bank of India) about the investment. This process needs to be done by filling the form FC-GPR. All the shareholders (NRI’s, Foreigners, and foreign entities) who are investing some amount in the Indian entity, that's considered as FDI. Along with FC-GPR, a CA certificate needs to be filed.

3. Getting the Required Licenses and Registrations:

Once the incorporation of a subsidiary is complete the other steps can be processed parallelly. And getting the required Licenses and Registrations is completely depends on the nature and scale of the business.

However, we have mentioned below a few registrations that might require for your business.

1. Commencement of Business Compliance:

As per the Companies (Amendment) Ordinance 2018. All the companies registered on or after 2 November 2018 need to file for a certificate of commencement of business mandatorily. Within 180 days of the incorporation. In this process, the shares will be allocated to the company shareholders and the auditor needs to be appointed for the company.

2. GST Registration

Goods and Service Tax (GST) Registration is mandatory if

  • The business is E-commerce.
  • The business turnover crosses 20 Lakh rupees in a financial year.
  • The business is doing interstate transactions.

However, we advise you to take it anyway as it has the following benefits.

  • GST eliminates the cascading effects of Tax.
  • A business registered with GST can avail input credit of GST paid on purchase invoices
  • Ease of compliance
  • Efficient deployment of resources

3. LUT Registration for Exemption of GST

A letter of undertaking is a document that the user provides declaring the fulfillment of all requirements under GST. It is mandatory to furnish LUT to export goods or services or both without paying IGST. If the exporter fails to provide the LUT, then he has to pay IGST or provide an export bond.

4. Shops and Establishment license

Shops & Commercial Establishments is an act. That provides for the regulation of conditions of work and employment in shops and commercial establishments.

Shops and Establishment License is a must if the company has an office. In which persons employed are mainly engaged in office work, a hotel or restaurant, boarding, café, etc.

5. P.T. Registration

Under the Professional Tax Regulations, an employer must obtain TWO registrations. Depends on the status of whether there are people employed by the business or not.

1. Professional Tax Employer Registration - Certificate of Enrollment (EC):

Every business entity must get the Employer Registration - Certificate of Enrollment (EC). Within 30 days from the date of commencement of business. This registration is mandatory for business whether they employ any people in employment or not.

2. Professional Tax Employee Registration - Certificate of Registration (RC):

Every employer liable to Professional Tax on behalf of their employees must get Employee Registration Certificate. Within 30 days of his becoming liable to pay tax.

Professional Tax Employee Registration is a must for all employers. Who employ people with salary or wages of Rs.15000 /- or more. Certificate of Enrollment (EC) is a must for obtaining the Certificate of Registration (RC).

6. ESI and PF Registration:

ESI is Employee State Insurance (ESI) and PF is the Provident Fund (PF). These are two social security schemes available to employees working in India.
For companies, where 10 or more people are employed irrespective of their monthly earnings ESI registration is a must.

Just like the ESI scheme. The Employees Provident Fund (EPF) is a Contributory fund. With contributions from both the employee and their employers.
EPF is a compulsory and contributory fund for Indian organizations that have employed 20 or more persons.

The employer must get the registration within 1 month of attaining the strength.

There are other Licenses and Registrations which might need. Such as Import Export Code (IEC), Trade License, FSSAI License (food), Etc. but as said earlier these completely depend on the nature and scale of the business.

4. Transfer pricing setup

In taxation and accounting, transfer pricing refers to the rules and methods for pricing transactions within and between enterprises under common ownership or control. Because of the potential for cross-border controlled transactions to distort taxable income, tax authorities in many countries can adjust intragroup transfer prices that differ from what would have been charged by unrelated enterprises dealing at arm’s length.

Transfer pricing is the setting of a price for the goods and services sold between the related entities within an enterprise. For example, if a subsidiary company sells goods or services to its parent company, the cost of those goods and services will be paid to the subsidiary company will be Transfer Pricing.

When a parent company incorporates a subsidiary, they need to set up some regulations on transfer pricing to ensure the fairness and accuracy of transfer pricing among the parent and subsidiary entity.

To Know more about Transfer Pricing read - Everything You Need To Know About Transfer Pricing In India

To start this process with incorporation the following documentation and process need to be followed

Basic requirements to start a subsidiary Company in India.

  • The Subsidiary company must have minimum 2 directors. Can have Max up to 15
  • One resident Indian director is required
  • Two Shareholders are required (all can be foreigners or foreign entities)
  • You will require an Indian address which will act as a subsidiary company address. You many or may not have your team working from this address.

Once the above requirements are fulfilled the process of incorporation can be started as follows

1. Apply DSC for anyone the director – Digital signature certificate is required for any one of the directors of the company. We recommend getting this for the Indian director. (This process takes 1-2 days of time)

2. Apply for name reservation of the subsidiary company - Name reservation of the subsidiary company needs to be done, for which the following documents from the parent entity is required. (This process takes 1 day of time)
a.Incorporation certificate
b.MOA and AOA of the company
c.Board resolution of the company (Wazzeer shall provide the format)
d.Trademark Registration certificate (if any)
Please note these documents must be Notarized and apostilled in that particular country, where the parent company is located

3.Drafting of AOA and MOA: - Drafting of the companies documents such as Article of Association (AOA) and Memorandum of Association (MOA) (This process takes 2 days of time)

4. File for Incorporation: - Once the name has been approved the MCA (Ministry of corporate affairs) will give 20 days of time to file for the incorporation documents. Which means the approved name will be reserved for the next 20 days. These days you will need to get the below documents. (This process takes 4 days of time)
a.For Each Director and shareholder
• Identity Proof
o Passport Copy (Mandatory for Foreigners and Indians with Passport)
o PAN Card Copy (Mandatory for Indians)
o If an Indian doesn’t have a passport then
o Driving License
o Voter ID
• Address Proof (Latest one)
o Electricity Bill
o Phone Bill
o Mobile Bill
o Bank Statement
b. For Registered office of the subsidiary
• Rent agreement/lease deed
• NOC from the owner
• Utility Bill
Please note documents issued/signed outside India must be notarized and apostilled

5. Approval of Incorporation from MCA: Once the MCA reviews and approves all the documents, you will receive an Incorporation Certificate. Along with the PAN number and TAN number of the company.

The next process will be Opening a current bank account of the company and once the shareholders transfer the share subscription amount to the company’s bank account, they will be allocated with the company shares.

After this the company will apply for the commencement of business certificate and start its business and hiring the employees, meanwhile, the other required registrations mentioned above can be taken up parallelly.

If you have any questions feel free to reach out to us at Wazzeer

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