A Complete Guide to Wholly-Owned Subsidiaries in India
Learn about setting up a wholly-owned subsidiary in India, including the company incorporation process, benefits, and compliance.
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Introduction
India's strong economic growth and excellent business environment make it an attractive choice for global companies. Establishing a wholly-owned subsidiary in India gives companies complete control over their operations while capitalizing on local market opportunities. A 2022 report published by EY states that more than 71% of MNCs consider India as an attractive market for their business expansion.
In this guide we will walk you through the essential steps and considerations for setting up a wholly-owned subsidiary in India.
What is a Wholly-Owned Subsidiary?
A wholly-owned subsidiary is one whose entire share capital is owned by its foreign parent company. This structure offers the parent firm with complete control over the subsidiary's operations, management, and strategic choices. It is also called as Private Limited Company.
"In India, foreign companies can set up wholly-owned subsidiaries. However, the Indian government places certain restrictions on foreign companies wishing to create wholly-owned subsidiaries in certain sectors.
Benefits of Setting Up a Wholly-Owned Subsidiary in India
A wholly-owned subsidiary in India has various advantages as mentioned below :
The parent company has complete control over the subsidiary's activities and decisions.
Market Access: Direct access to India's large and growing market.
Limited Liability: The subsidiary's liability is limited, thereby protecting the assets of the parent.
Strategic Flexibility: The ability to carry out the parent company's strategies without outside interference.
Tax Advantages: Access to a variety of tax benefits and perks under Indian laws for setting up foreign company in India.
What is the Difference between a Subsidiary and Wholly-Owned Subsidiary in India
Subsidiary and wholly-owned subsidiary are two different legal business structures in India. Here's a clear distinction between the two structures:
Subsidiary Company - A subsidiary company is a business structure that is owned and controlled by a parent or holding company. The parent company must hold minimum 51% of the subsidiary's shares.
Wholly Owned Subsidiary - As per Section 2(87) of the Indian Companies Act, 1956, a wholly-owned subsidiary is a company where the parent company owns 100% of the shares.
Key Differences
Ownership: In subsidiary parent company owns majority shares, while a wholly-owned subsidiary is 100% owned by the parent company.
Shares: In a subsidiary, the parent company should hold minimum 51% of the shares and not 100%. In WOS shares are fully owned by parent company.
Control: In a subsidiary the parent company has a majority stake & In a wholly-owned subsidiary, the parent company has complete control over the operations.
Step by Step Process to Set up a Subsidiary in India
Incorporating a Wholly owned subsidiary business in India is completely digital however it is still an lengthy and difficult procedure. Business Owners of Management should decide which legal structure to form as a subsidiary as private limited subsidiary or a public limited subsidiary. The incorporation of setting up subsidiary in India is as follows:
Apply and obtain Director Identification Number (DIN)
Apply and Obtain Digital Signature Certificate (DSC)
Check for Name Availability and Register the company name name via ROC
Finalise the Memorandum of Association and Articles of Association.
Fill and submit online incorporation application (Spice+_.
Obtain Company Incorporation Certificate to start the business operations
Create a company seal and letterheads
Obtain Permanent Account Number (PAN)
Register with the Employee’s Provident Fund Organization if nos. of employees exceed state threshold
Register for GST (mandatory only if turnover exceed more than 20 lacs or 40 lacs)
Finalise Statutory Auditor who will audit your books of accounts
How to Set up a Subsidiary in India
List of Required Documents to Setup Subsidiay in India
Below mentioned is the exhaustive list of documents which are required to apply for setting up subsidiary in India also it is to be ensured that all the documents must be duly notarised and apostilled:
Proof of Address for the registered place of business – Rent agreement in case of a rented property and copy of ownership documents if the property is owned (Note : need not to be notarized)
Copy of Utility Bills (Latest upto 3 months only) (Note : need not to be notarized)
Copy of board resolution passed by the promoter for starting company in India
Copy of certificate of incorporation for foreign company
Documents Relating to Directors and Shareholders
Digital Signature Certificate (DSC) of all directors and shareholder
Director Identification Number (DIN) of all directors and shareholder
Identity Proof and address proof of the Directors and Shareholders
Pasprt Size Photographs of Directors and Shareholders
Shareholding details of of first directors in all other entities (globally)
Signed Declaration by Directors and Shareholders
Once these documents are submitted to MCA, they will issues Certificate of Incorporation which will be a 21 digits alpha-numeric code issued by ROC.
Post Incorporation Compliances
Post Incorporation of Wholly Owned Subsidiary in India there are several legal and compliance requirements that are mandatory to be compliant with. Here's a simplified overview of the same:
Holding the First Board Meeting : As per Companies Act 2013, the subsidiary must hold its first Board of Directors meeting within 30 days of its incorporation.
Opening Bank Account - The subsidiary must open a designated corporate bank account to manage its financial transactions. Also it is prohibited to do the transactions in the name of individuals
Registering the Registered Office - As per Companies Act, 2013 ,the subsidiary must udate a registered office address within 15 days of incorporation.
Displaying Company Information - It is mandatory for every company in India to display its registered name, registered office address, corporate identification number (CIN), contact details, and Goods & Services Tax (GST) identification number (if any) outside every other place it conducts its operations.
Appointing an Auditor - The Board of Directors must appoint an statutory auditor within 30 days of incorporation. If company fail to appoint auditor, the members must appoint an statutory auditor at an EGM within 90 days of incorporation.
Director Disclosure Requirements -According to the Companies Act 2013, every director must disclose their interests in other companies (Indian + Foreign companies), firms, or associations by providing a written notice in Form MBP 1.
Maintaining Statutory Registers - The subsidiary must keep all statutory registers (financial and agreements) and other records at its registered office.
Issuing Share Certificates -Share certificates must be issued to the shareholders within 60 days of incorporation.
Preparing Financial Statements - The subsidiary must prepare and maintain accurate books of account, financial statements, and other relevant records at its registered office, as per the Companies Act.
Obtaining Commencement Certificate - The subsidiary must obtain a certificate of commencement from ROC within 180 days of incorporation of company.
Obtaining Business Licenses - The subsidiary must obtain all necessary business licenses and registrations from various government agencies, depending on the nature of its operations.
Transfer Pricing Regulations - Foreign Subsidiary must comply with Transfer Pricing rules and regulations and conduct all the business operations within arm length rules as defined in Income Tax Act.
By complying with these legal requirements, the subsidiary can ensure a smooth and compliant establishment in India.
Download Ebook on Ultimate Guide for Foreign Company to Setting up Office in India (Download)
Why Setup Wholly-Owned Subsidiary in India
Establishing a wholly-owned subsidiary in India provides various advantages to foreign companies, making it most viable alternative for company expansion.
1. Complete Control
One of the fundamental benefits of a completely owned subsidiary is that the holding company maintains complete control over its operations and strategic decision making process. This enables the parent company's policies and business practices to be implemented without any external influence.
2. Limited Liability
The structure of a wholly-owned subsidiary restricts the parent company's liability to the subsidiary's share capital. This means that if there are any legal or financial concerns in future, the parent company's assets will be protected and will not be dragged to the court of law
3. Investment Policies
The goal of India's Foreign Direct Investment (FDI) policy is to draw in international capital. The majority of industries simplify the investment procedure by allowing 100% FDI through the automated route, which eliminates the need for previous government approval.
4. Employment and Talent Acquisition
India has a large pool of highly qualified workers in many different sectors. This talent pool can be used by a wholly-owned subsidiary to develop a skilled staff, which will spur innovation and business expansion.
Taxes for Wholly-Owned Subsidiary in India
When forming a wholly-owned subsidiary in India, understanding the tax implications is essential for compliance and strategic financial planning. The following is a complete description of the different taxes that apply to subsidiaries in India.
Taxation of Foreign Company in India is as per below table
Nature of Income
Tax Rate
Royalty for technical services from the government or any Indian
50%
Other income
40%
Surcharge Rate
Income
Tax Rate
INR 1 crore – INR 10 crore
2%
> INR 10 crore
5%
Health and Education Cess
The Health and Education Cess is an additional tax levied on income tax paid by taxpayers. The calculation is as follows:
4% of the total income tax liability
4% of any aplicable surcharge.
The total of the cess amount is added to the taxpayer's overall tax liability.
For example, if a taxpayer's income tax burden is ₹10,000 with a 10% surcharge, the Health and Education Cess is:
4% of ₹10,000 = ₹400
4% of (10% of ₹10,000) = ₹40
Total Cess: ₹400 + ₹40 = ₹440.
The Health & Education Cess funds a variety of health and education activities in the country.
Minimum Alternate Tax (MAT)
The Minimum Alternate Tax (MAT) is a provision in the Income Tax Act that requires companies to pay a minimum amount of tax, even if they have lowered their tax liability due through various deductions and exclusions.
The MAT rate equals 15% of the company's book profits and Book profits are determined under the requirements of Section 115JB of the Income Tax Act.
Various Compliance and Regulatory Requirements
Annual Filings: The subsidiary has to file annual financial statements and reports to the RoC.
Taxation: Comply with Income tax rules, including the Goods and Services Tax (GST), Corporate Tax, and other applicable taxes.
Statutory Audits: Conduct annual audits in accordance with the Companies Act, 2013.
Transfer Pricing Regulations: Ensure that transfer pricing regulations are followed while managing transactions between the holding company and its subsidiaries.
Conclusion
Setting up a wholly-owned subsidiary in India provides a solid foundation for foreign company to extend their worldwide presence. Businesses that understand the India company registration procedure, regulatory regulations, and strategic considerations can effectively negotiate the difficulties of the Indian market and capitalize on its growth opportunities.
How Jordensky can help
Jordensky experts have a great deal of experience with company incorporation, helps companies set up every step of the way while making sure they follow Indian laws. We will provide services such as registering taxes, getting licenses, and fulfilling legal obligations.
Jordensky offers continuous compliance help, such as yearly filings, tax audits, and adherence to employment laws, beyond the initial setup. Businesses can confidently manage the intricacies of the Indian market by collaborating with Jordensky, guaranteeing seamless operations and sustained success.
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