If you are thinking of expanding your business to India by forming a subsidiary company, you must give a thought to the critical five points suggested by the expert in the field.
Once you have identified your drivers like building your company brand, exercising control over your holding company, IP protection, valuation during exit, and sales opportunity to form a subsidiary company in India. You may have questions about the preparation for the incorporation of a foreign subsidiary in India, it will be helpful to give a thought to a few considerations.
Let us take you through the practical aspects of incorporation of a foreign subsidiary in India, time, cost aspects with regard to running costs, compulsory margin, arm’s length pricing, and repatriation of money. Also, the availability of time bandwidth with the management, and understanding the Indian culture.
In this article, experts from the field advise you to test the Indian ground before forming an entity with the hand-holding support of a Professional Employer Organization. And to also consider the time-consuming and pre-conditions the closure procedure of a subsidiary company demands, before you decide on expanding your business operations to India.
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 a lot of US companies see Bangalore, Pune, Mumbai, Delhi, and Hyderabad as fit places for subsidiary formation because of the availability of skilled force and infrastructure.
Remunance has a mission to inspire foreign companies to build successful businesses in India. That is how Remunance has devised a basket of services from professional employment organization (PEO services) to foreign company registration in India and has 70 plus clients from 16 countries.
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?
A subsidiary company is controlled by a parent or holding company. The subsidiary company can be WOS (wholly owned subsidiary) or partially owned. To qualify as a partially owned “subsidiary company”, the parent entity must own at least 51% stock in the subsidiary company.
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 or incorporation in India is a straightforward procedure, but knowing about the rules and regulations will help in deciding on incorporating a foreign subsidiary in India. As it has additional requirements of paperwork over local company incorporation.
Drivers for forming a subsidiary company
Every company has one or many of the drivers listed below as their reason to form a subsidiary in India. Ensure you have thought through the process, objective, and reason for why you want to incorporate the subsidiary in India.
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 of 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.
Entity that can be controlled and is a part of the group
When your subsidiary company is a WOS, the holding company can exercise complete control over decision-making and other financial decisions as you make 100% investment into the subsidiary company.
Protection of intellectual property in the earlier times demanded physical presence, and manual logins of the employees. But today, you can control Intellectual Property at the click of a button by integrating all the information on the cloud with the help of a cloud-based information security system.
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 in India. This is because of the lower burn rate and better talent pool.
Sales opportunity in India
The Indian economy will remain the fastest developing economy in the fiscal year 2017 with a growth rate of 7.7%, according to a report projected by the United Nations ‘World Economic Situation and Prospects 2017’.
India is a place of many opportunities for business expansions. 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.
5 key considerations before forming a subsidiary company in India
- 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 of the directors should be an Indian resident and both should have a DIN (Direct Identification Number) to avoid administrative time 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.
Time required for incorporating a subsidiary company
Setting up a business entity in India may require a duration of 2-4 months. As all the decisions need to be approved by your parent company over the subsidiary company.
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 in India?
When you form a subsidiary company in India, it will be subjected to a statutory audit under the Company Act, Income-tax Act, and a transfer pricing audit.
Other labor law compliances, payment of taxes, and other related filings like monthly, quarterly and annual returns like Goods and Service 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 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. Since there will be no other revenue to offset the cost incurred in the local subsidiary, like salaries, auditors fees, office fees, etc. 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 arms 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 subsidiary company 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.
- Availability of time-bandwidth with the management
You may have to consider staffing your subsidiary with the right potential by creating a comfortable workspace for your employees as well. You may have to map out a strategy to execute HR, insurance, benefits, payroll and risk management, and admistrational operations. You may also need to devise a plan to ensure proper employee training is conducted in a well set-up office infrastructure. You may have to ensure mandatory compliance as per Indian laws, monthly payroll execution, taxation compliances, accounting, employee benefits, bookkeeping, coordination with auditors, etc. 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. Along with managing your parent company, you and your team of managers will have to dedicate additional time to monitoring the business 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. These include HR operations, administration fees, auditor fees, taxes on salary deductions, paying government taxes per employee on time, etc.
You will have to consider the employee-related laws like PF, employee state insurance, salary TDS, professional tax, minimum wages, bonus, maternity costs, and retirement benefits like gratuity, and leave encashment.
- Understanding the Indian culture to form a subsidiary company in India
Culture plays an important role in the decision of establishing a subsidiary in a particular country.
You choose India for its diversity. India is a country that has many regional states. These individuals are unique in their own way given to their language and geographical differences.
In order to establish a subsidiary company here, you need to consider if you are prepared to conduct business operations with such a diverse population.
My advice to you …
At Remunance, we focus on small and medium enterprises that wish to set up a local company in India. The founder of the company, Rajendra has carved out a business model that works in the best interest of India ensuring the PEO business is 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. Subsidiary company registration in India is a specialized task in comparison to any company formation, and we assure end-to-end support to overseas companies only.
Get started with Remnunance’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. After you have successfully built your team in India through a PEO or an outsourcing agency, you can move that team to your subsidiary to ensure a smooth transition and kick start your subsidiary.
- 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 possibilities 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 clearances 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.