5 Things to Know Before Forming a Subsidiary Company in India

If you’re planning to expand your business to India by forming a subsidiary company, consider these 5 critical points from an industry expert. These insights are essential for a smooth setup and operation.

After identifying drivers like brand building, holding company control, IP protection, exit valuation, and sales opportunities. You might have questions about the incorporation process before starting the process of forming a subsidiary company in India. It’s important to consider a few key factors to prepare effectively before your long-term commitment.

We’ll guide you through the practical aspects of incorporating a foreign subsidiary company in India, covering time and cost considerations. This includes running costs, compulsory margins, arm’s length pricing, and money repatriation. Also, the availability of time bandwidth with the management, and understanding of the Indian culture.

In this article, experts recommend testing the Indian market before forming a legal entity. They suggest leveraging the support of a Professional Employer Organization (PEO) for a smoother transition. Also, consider the time-consuming closure procedure and its preconditions before expanding your business to India. This step is crucial for informed decision-making.

Incorporation of Foreign Subsidiary in India (Process)

India piques the interest of a lot of foreign companies as it has a fast-growing market and is recognized for its skill pool. Research shows that many US companies favor Bangalore, Pune, Mumbai, Delhi, and Hyderabad for subsidiary formation in India. These cities offer a skilled workforce and strong infrastructure.

Remunance has a mission to inspire foreign companies to build successful businesses in India. Remunance offers a range of services, from Professional Employer Organization (PEO) support to foreign company registration in India. With over 100 clients from 22 countries, we’ve built a strong global presence.

Through this article, we help you gather information on a few considerations and solutions to form a subsidiary company in India.

What is a Subsidiary Company in India?

An Indian subsidiary company is a business in control of more than half of its equity shares through foreign parent company ownership. This framework lets foreign businesses build a local presence in the Indian market and profit from its expanding economy and huge talent pool. 

Though it runs as per Indian laws, the subsidiary complies with the strategic objectives of its parent company. For companies trying to increase their worldwide presence, acquire market knowledge, and seize regional prospects, establishing a subsidiary in India might be a calculated action. 

Know more: A Complete Guide for Setting Up a Subsidiary Company in India

Forming a subsidiary company in India

To form a subsidiary company in India, you need to register and have a corporate address in India. This process is known as subsidiary company registration in India.  Company formation in India is straightforward, but understanding the rules and regulations is crucial.

This knowledge will help you decide whether to incorporate a foreign subsidiary in India. As it has additional requirements of paperwork over local company incorporation.

Drivers for Forming a Subsidiary Company in India

Every company has one or many of the drivers listed below as the reason for forming a subsidiary company in India. Ensure you have thought through the process, objective, and reason for why you want to incorporate the Indian subsidiary.

Building Company Culture and Branding

When you, as a foreign company contemplate setting up a business in India. The first and foremost driver to attracting talent in India is to create a brand and culture for your company. Your brand has a significance that attracts potential employees.

Global technology companies look at the Indian market through many lenses, to get more users or revenue. Business-focused SMEs are stepping up their investments in the Indian market for the availability of a talent pool.

The Entity that can be Controlled and is a Part of the Group

As a wholly owned subsidiary (WOS), the holding company has full control over decision-making and financial matters. This is because you make a 100% investment into the subsidiary.

IP Protection

Protection of intellectual property in the earlier times demanded physical presence and manual logins of the employees. Today, you can easily control Intellectual Property by integrating all your data into the cloud. A cloud-based information security system makes this process seamless.

Valuation During the Exit

The companies who are eyeing the acquisition as a possible exit, do see a better overall valuation by having a subsidiary company in India. This is because of the lower burn rate and better talent pool.

Sales Opportunity in India

The Indian economy is projected to remain the fastest-growing in 2017, with a growth rate of 7.7%. This forecast comes from the United Nations’ “World Economic Situation and Prospects 2017” report.

India is a place with many opportunities for business expansion. Narendra Modi encourages building international relations and shifting their focus from China to India. Whether it’s in consumer goods, OTT (over-the-top), online education, or the gaming industry, India has promising emerging markets in the world.

Ready to witness the thriving potential of the Indian market?

Incorporate your subsidiary in India today and leverage the talent, growth, and opportunities.

Contact us to get started!

5 Key Considerations Before Forming a Subsidiary Company in India

1. Process of Incorporation and Registrations

To initiate the procedure of foreign company registration in India, your subsidiary company will need two directors and two shareholders. One director must be an Indian resident, and both should have a DIN (Director Identification Number). This helps avoid administrative delays.

The shareholders can be individuals or businesses and the parent company should be publicly limited. The company has to comply with the rules and regulations of the Companies Act, 2013. In simple words, it cannot be privately owned, in a partnership, or an LLC (limited liability company). There are two steps to the process, namely, name approval and incorporation on submission of by-laws. 

Your parent company can be located anywhere, but if you wish to incorporate a company in India, the subsidiary company has to be registered in India to have a corporate address.

After an entity is formed, it has to be registered with multiple government agencies to continue the business operations smoothly.

2. Time Required for Incorporating a Subsidiary Company

Setting up a business entity in India may require a duration of 2-4 months. All the decisions need to be approved by your parent company over the subsidiary company.

3. Money

A subsidiary formation in India will cost anywhere from $645 to $2582. A public limited company can be formed with a minimum paid-up capital of $6436.

In addition to this one-time cost, also consider the following 2 important cost considerations.

• What are the running costs of incorporating a subsidiary Company in India?

  Forming a subsidiary in India means it will undergo a statutory audit. This audit is as per the Companies Act, Income-tax Act, and transfer pricing audit.

  You’ll also need to comply with labor laws, pay taxes, and handle filings such as monthly, quarterly, and annual returns. This includes Goods and Services Tax (GST) and Tax Deducted at Source (TDS). Else it will be subjected to delayed filing fees and penalties considering the professional fees for each of these.

• Compulsory margin money, income tax (arm’s length pricing), and repatriation of money

  If you have to run a business in India or establish a subsidiary company in India, it is imperative to show the government that profit is made. Because in India, subsidiaries aren’t allowed to make losses. Your subsidiary company has to raise an invoice equivalent to its cost. Because it’s a cost center (no sale) here. With no other revenue to offset costs, you’ll need to cover expenses like salaries, auditor fees, office rent, and more. So in such a scenario, your cost center needs to raise an invoice to the parent company to run its operations.

  When you set up a business in India, it is mandatory to invest a 12-18% margin also known as arm’s length costing along with your investment. This percentage is decided by an auditor. The government in India does not support a 0% profit margin. You, as a parent company, have to send an additional percentage to keep your subsidiary company functioning. Until your Indian 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. The only way you can repatriate that money or send it back to your country is by paying the dividend to the shareholders. On that dividend tax, the government charges 30%. Plus on the profit margin, the government will charge you another percentage of the tax slab. This in turn impacts your fund flow in the parent company.

4. Availability of Time Bandwidth with the Management

Staffing your subsidiary with the right talent is key, along with creating a comfortable workspace for your employees. You’ll also need a strategy to manage HR, insurance, benefits, payroll, risk management, and administrative operations.

You may also need to devise a plan to ensure proper employee training is conducted in a well-set-up office infrastructure. Ensure compliance with Indian laws, including monthly payroll, taxation, and accounting. You’ll also need to manage employee benefits, bookkeeping, and coordination with auditors. You will need to hire a dedicated team and recruit. Monitor performance management, periodic interactions, and direct reporting.

You have to evaluate the time and energy required to run a foreign company in India. You will have to consider the time zone differences and the geographical barriers. Also, consider the language barriers and communication through digital applications to get your subsidiary company running in India. In addition to managing your parent company, you and your team will need to dedicate extra time to overseeing operations in India.

• Increased compliance load: If you wish to run a business in India, you will have to put up with the additional costs of business compliance and running the business as well. This includes HR operations, administration and auditor fees, salary tax deductions, and timely government tax payments per employee. Consider employee-related laws such as PF, employee state insurance, salary TDS, professional tax, and minimum wages. You’ll also need to account for bonuses, maternity costs, gratuity, and leave encashment.

5. Understanding the Indian Culture to Form a Subsidiary Company in India

Culture plays an important role in the decision to establish a subsidiary in a particular country.

You choose India for its diversity. India is made up of diverse regional states, each with its own unique language and geography. These differences make each individual distinct in their own way.

Before establishing a subsidiary in India, consider whether you’re ready to conduct business with such a diverse population. This diversity plays a key role in shaping operations.

Expert Guidance for Forming a Subsidiary Company in India with Remunance

At Remunance, we focus on small and medium enterprises that wish to set up a local company in India. Rajendra, the founder, has crafted a business model that benefits India by ensuring the PEO business is both strategic and compliant.

If a subsidiary is a cost center, consider the taxation aspect closely

Incorporating an entity has become more convenient today as compared to traditional times. If a subsidiary is a cost center (no sales in India), it is advisable to consider the taxation aspect closely. This includes a transfer pricing margin and a minimum 25.168% income tax in India, that needs to be maintained.

Test the ground before forming a subsidiary company

A PEO, i.e. professional employment organization provides hand-holding while setting up a legal entity and business operations.

Remunance extends its expertise in forming a subsidiary in India without any hassles or security issues. Remunance ensures that the entity functions smoothly in India with proper government authority registrations. Registering a subsidiary in India is more specialized than standard company formation. We offer end-to-end support exclusively for overseas companies.

Get started with Remunance’s PEO services for more information.

Ensure you can transfer the staff from the outsourcing/PEO agency

You can efficiently hire a desirable staff with the help of a PEO agency. A PEO agency will provide you with hand-picked potential employees through their trained professionals. Once you’ve built your team in India through a PEO or outsourcing agency, you can transfer them to your subsidiary. This ensures a smooth transition and helps kick-start your operations.

Delay it as much as possible to ensure you can do without a subsidiary company

Once you consider all the aspects required to open a subsidiary in India, like the bandwidth of time, cost of operations, administrational headaches, tax payments, and HR management. It is best to procrastinate on forming a subsidiary company in India as much as possible.

We do not think you shouldn’t open a subsidiary company here, but just consider if you can do without one for a considerable time.

The closure is more difficult

Closing a company is far more demanding than forming one. It is not only an expensive affair but also time-consuming. You are bound by preconditions. You have to consider the possibility of triggering bankruptcy clauses or acquiring a no-objection certificate.

The duration of time it takes to strike off a company’s name from the Registrar of Companies is tentatively around 3-4 months. 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. However, winding up a private limited company may take a year or two after getting clearance from government departments. So ensure you do everything necessary to make your subsidiary successful.

Get it formed from an agency that has done it multiple times

Remunance addresses your concerns regarding time-bound company formation, complete compliance, hiring a reliable team, and conducting methodical work.

Remunance understands the Indian pulse better. We have a deep knowledge of the laws here. We will help you set up a company conveniently under the provisions of the Company Act and get approval from the Reserve Bank of India as well. Your concern about entering into new territory, and dealing with compliance issues will be smoothly taken care of by us.

Click here to learn more about our services and how we can help you.

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.