5 Things to Know Before Forming a Subsidiary Company in India

It must be quite a journey that you’ve finally decided to form a subsidiary company in India. No doubt, you also have multiple reasons why you prefer setting your market presence in a country with low labor and infrastructure costs. Obviously, subsidiary incorporation will help build a stronger company brand, cost advantages, tax benefits, risk mitigation, autonomy, sales opportunities, etc.

However, you may wonder how you must prepare for a successful subsidiary incorporation in a foreign jurisdiction of India. As we all know, there’s no straightforward answer. We’ve shared some practical tips and steps to simplify your preparation for a legal entity establishment in India.   

This blog explores the five key aspects of a subsidiary formation in India focusing on the registration process, time and running costs, compliance & cultural factors, and workforce management, which are key determinants of your decision-making. Also, you’ll learn the best ways to address or navigate the complexities around these key factors to ensure a successful subsidiary incorporation. Before we dive into the five key aspects, let’s revisit the meaning of a subsidiary company and some unique advantages of forming a subsidiary in India.

What is a Subsidiary Company?

A subsidiary is a separate entity partially or fully owned by a business entity or corporation, known as a “parent company” or “holding company”. Mostly, the parent company owns at least 51% of the subsidiary company’s shares. In some cases, the former company acquires 100% shares of the latter company to exercise absolute control over the subsidiary.

Advantages of Forming a Subsidiary Company in India

India piques the interest of foreign companies looking to expand their global footprint. One key reason is the country has emerged as one of the fastest-growing economies in the world. This means setting up a subsidiary company in India, businesses gain access to one of the largest markets globally. Let’s explore some major advantages of subsidiary incorporation in India.

Talent Availability: Foreign companies see India as a reservoir of skilled workforce across diverse fields, including IT, engineering, designing, finance, legal, and management. Over 1.5 million tech students graduate from premier Indian academic institutions every year. The country has one of the largest English-speaking and dynamic young populations, representing a key future global workforce. Companies can easily tap into Indian talents and quickly start Indian operations.

Cost-effective Operation: Compared to many Western countries, India’s labor costs are substantially lower. This allows foreign companies to hire skillful professionals at reduced costs. On average, hiring an Indian professional is 3-4 times lower than the cost of hiring employees in many Western countries. In the long run, this plays a crucial role in running a cost-effective business operation.  

Tax Benefits: The Indian government recently reduced the corporate tax rate on foreign companies from 40% to 35%. Reducing the tax burden is a big relief for foreign businesses with a permanent establishment in India. The government offers tax incentives and subsidies to attract more foreign investment, especially in Special Economic Zones (SEZs). Also, the country has the Double Taxation Avoidance Agreements (DTAAs) with many countries, helping you to avoid double taxation on the same income. 

Infrastructure Development: Over a decade, India’s infrastructure has improved significantly due to several Indian government initiatives, including the Smart Cities Mission. Today, you will notice India’s major cities like Bengaluru, Mumbai, Delhi, Pune, Hyderabad, Ahmedabad, and Chennai have world-class infrastructure and invested significantly in advanced technologies. So, the availability of state-of-the-art facilities in Indian smart cities and the wide integration of advanced technologies in workplaces allow seamless communication and business operations. Many foreign businesses prefer setting up their subsidiary in these cities.

Also, India’s favorable business environment, strategic location, time zone advantages, and the availability of support services further attract foreign businesses to set up an entity.

Subsidiary Closure Is More Difficult: A Major Challenge

Subsidiary closure is daunting in India. It takes 3-4 months to strike off a company’s name from the Registrar of Companies. It may take longer if ROC objects or rejects the application. You need to apply by filling out the E-form STK-2 and your documents need to be verified. You have to consider the possibility of triggering bankruptcy clauses or acquiring a no-objection certificate. Also, winding up a private limited company may take a year or two after getting clearance from government departments. So, the exit of a subsidiary in India is not only an expensive affair but also time-consuming.

5 Key Considerations Before Forming a Subsidiary Company in India

You must consider the following five factors as they are crucial in establishing a successful subsidiary in India. Let’s explore them in detail. 

Subsidiary Company Registration in India

To initiate the procedure of foreign company registration in India, your subsidiary will need two directors and two shareholders. One of the directors should be an Indian resident and both should have a Direct Identification Number (DIN) to avoid administrative time delays. The shareholders can be individuals or businesses and the parent company should be publicly limited. 

The company must comply with the rules and regulations per the Indian Companies Act, 2013. According to the Act, a subsidiary cannot be privately owned, in a partnership, or a limited liability company (LLC). Company name approval and document submission are required to complete the process of a separate entity incorporation. Also, you’ll get a corporate address once your subsidiary company registration is completed. Also, the company has to be registered with multiple government agencies to continue smooth business operations in India.

Time Required to Set Up a Subsidiary Company in India

Setting up a subsidiary in India generally takes 2-4 months. Until your subsidiary registration process is completed, you can’t kickstart your operations or even start hiring for your company. Also, setting up an office and IT infrastructure takes time, and foreign companies can’t rent an office or invest in infrastructure without having a legal entity.  

Costs of Subsidiary Incorporating in India

A subsidiary formation in India will cost anywhere from USD 645 to 2,582. However, if you’re looking to form a public limited company, a minimum paid-up capital of USD 6,436 is required. This is a one-time cost for company registration in India. Additionally, you are required to understand two other important cost considerations. 

• Running Cost 

Running a subsidiary in India comes under a regular statutory audit per the guidelines of the Company Act, Income-tax Act, and a transfer pricing audit. The running costs of your subsidiary include tax payments, Goods and Services Tax (GST), Tax Deducted at Source (TDS), and other related filings like monthly, quarterly, and annual returns. If you fail to comply with the tax regulations, you will be subjected to delayed filing fees and penalties.

• Compulsory Margin Money and Repatriation of Money 

Suppose you establish a subsidiary in India for cost advantages with no sales activities. In that case, you must know how much compulsory margin money you must deposit and how you will repatriate the deposited money. According to Indian regulations, a foreign subsidiary isn’t allowed to make losses and must show profit statements annually.   

It’s mandatory to have an annual 12-16% profit margin also known as arm’s length costing along with your investment when setting up an entity in India. Since your subsidiary is a cost center, there will be no revenue to offset the incurred costs, such as employee salaries, auditor’s fees, office fees, etc. So, a subsidiary must raise an invoice that can offset the incurred expenses plus profit margin to run its operations. As a parent company, you’ve to pay this extra money. 

Until your subsidiary doesn’t generate revenue to incur the operational costs, you have to back it up by sending a decided percentage margin. This percentage keeps accumulating in the Indian banks and cannot be touched. And, the government will charge approximately 22-25% tax on the margin amount annually. The only way you can repatriate that money or send it back to your country is to pay a dividend to the shareholders. Here, the government charges 30% plus as the dividend tax. This, in turn, impacts your fund flow in the parent company.

Let’s take an example. Suppose the cost of your subsidiary company in India with 6 employees comes to around USD 40,000 per month. Annually, it would be USD 480,000 (40,000*12). Additionally, you have to deposit a profit margin of at least 12%, which comes to USD 57,600 and this amount is blocked in Indian banks. The government charges at least 22% annual income tax on the margin, which is USD 12,672. Now, your margin amount is only USD 44,928 after the tax deduction. You keep piling up the investment amount when you move from one year to another and the margin amount, which you can’t use, keeps on adding. If you want to repatriate the accumulated profit, there is a minimum charge of 30% as a dividend tax.

Workforce Management Burdens 

Besides cost and time factors, you need to map out a strategy for your workforce selection and handling management burden for your Indian team. Creating a good work environment and employee satisfaction is crucial to smooth business operations of a subsidiary company. Let’s explore the key areas you must focus on for better employee relations and management. 

• Recruitment: Finding the top talent in India requires a proper understanding of the local market, candidate expectations, expected salary range, and local job boards. It’s time-intensive and daunting to scout for, convince, and hire the top Indian professionals.  

• HR Policies & Functions: Setting HR policies for the effective functioning of your employees requires knowing the Indian regulations around work timing, national/regional holidays, paid leaves, maternity leave, etc.

• Payroll & Tax Processing: You must ensure mandatory tax and payroll compliance as per Indian laws. The payroll & tax processing includes monthly payroll execution, taxation compliances, accounting, employee benefits, bookkeeping, coordination with auditors, etc. You will need to hire a dedicated team for the task.

• Benefits Administration: Your employees must avail of a range of benefits, some of which are mandatory per Indian laws. Employee benefits in India include provident funds (PF), paid leaves, maternity leaves, gratuity, bonuses, leave encashment, medical benefits, health insurance, professional taxes, etc.

Additionally, you must prepare for employee training after onboarding, monitoring performance management, language & communication barriers, and arranging work schedules considering time zone differences.

Indian Compliance & Culture Complexities

Navigating Indian compliance complexities and cultural nuances can be challenging for foreign businesses looking to expand business operations in India. Your activities ranging from hiring to employing Indian professionals are subject to various Indian labor laws, tax requirements, and employment regulations.

So, it’s crucial to understand laws related to work timing, minimum wages, maximum working hours, etc. to avoid legal consequences and financial penalties. In short, carefully handling regulatory compliance is essential for a successful subsidiary incorporation in India.  

Additionally, India has diverse cultures that can impact your business operations. Regional cultural differences have various implications on employee expectations, work culture, work ethics, and flow of communication. So, understanding Indian culture and building a company culture that resonates locally is crucial for the successful operations of the subsidiary.

How to Address Your Requirements?

Now, let’s explore how to address your requirements that can help establish a successful subsidiary company in India. We advise you to consider partnering with an employer of record (EOR) or an international professional employer organization (PEO) before you start your subsidiary registration and other processes. The main reasons are explained below: 

Test the Ground Before Subsidiary Incorporation 

By partnering with EOR, you get to know more about whether the Indian market is fit for your business before committing to a long-term financial investment. Understanding the demand for your products or services, consumer behavior, and sales opportunities in India allows you to build a robust market strategy. Also, you’ll get better insights into the availability of talent specific to your industry, work culture, employee expectations, etc. You must have real-time experience dealing with certain requirements to help prepare for successful subsidiary operations. 

Explore More on EOR vs Subsidiary

Get an Experience in Workforce Management 

Working with EOR services, you’ll get the idea and experience of managing the workforce in India. You can learn from your EOR partners how they execute various tasks on your behalf to manage your Indian team. In this journey with the EOR service provider, you better understand how hiring can done in India, benefits administration and management, and Indian payroll and tax systems. With this, you can blend your experience and formulate HR policies and administration that resonate with your business goals.  

Delay Subsidiary Incorporation Until You’re Completely Ready

Until you get the complete picture of the legal complexities of hiring and employment of Indian professionals, we advise you to delay subsidiary incorporation as much as you can. On top of workforce management, understanding Indian culture and regulatory compliance takes time. However, you don’t need to worry about your operations. Your EOR partner ensures that your Indian team hits the ground running until you become fully prepared for independent operations.

Transfer the Staff From the EOR Agency 

Once you’re ready to take on your independent operations, you can easily transfer all your staff from your EOR partner without any complications. While working with an EOR agency, you might get the ideas of high-performing employees and retain those employees who are the right fit for the skill gaps in your organization. Or, if you have some freelancers or contractors already working for you, they can be easily transferred too.

Avail Easy Exit Option for Your Operations

While working with EOR services, you’ll understand the ground reality of the local market and the various hurdles around handling Indian professionals. In case, you see the odds are more than your chance of success in the long run, you must delay your subsidiary and reconsider your business expansion plan. Or, if you want to exit, you better exit from the Indian market before forming a subsidiary. It’s relatively easier or cost-saving to dissolve your Indian team when working with your EOR partner.

Why Choose Remunance for Your Subsidiary Formation in India? 

Remunance, as a leading EOR service provider in India, has assisted over 120 clients from 22 countries ensuring smooth compliance operations. We understand the Indian pulse better and have an in-depth knowledge of the Indian employment laws and regulations. We provide end-to-end support from recruitment to ongoing compliance assistance to help you set up a company conveniently under the provisions of the Company Act and the Reserve Bank of India. Your concern about entering into new territory, and dealing with compliance issues will be smoothly taken care of by us.

At Remunance, our mission is to help foreign companies succeed in India. With our expertise and support services, you can experiment and learn about effectively handling all of your requirements, allowing you to prepare the best way for the successful operations of your subsidiary company. Once you decide to operate independently, you can move that team to your subsidiary to ensure a smooth transition and kick-start your subsidiary.