Before establishing an Indian presence, a foreign company must choose among several entity structures: a wholly owned subsidiary (WOS), a joint venture subsidiary, a branch office (BO), a liaison office (LO), or a project office (PO). Each has distinct legal, tax, and operational implications. Understanding these distinctions is the first critical decision in the India entry strategy.
| Parameter | Subsidiary (WOS/JV) | Branch Office | Liaison Office |
|---|---|---|---|
| Legal identity | Separate Indian company | Extension of foreign company | Extension of foreign company |
| Governing law | Companies Act, 2013 | FEMA regulations + Companies Act (Chapter XXII) | FEMA regulations |
| RBI approval needed | No (automatic route sectors) | Yes — prior RBI approval required | Yes — prior RBI approval required |
| Revenue-generating activity | Yes — full business operations | Limited — export/import, consultancy, R&D, technical support | No — only liaison/representative activities |
| Tax treatment | Indian company — 22%/25% corporate tax (new regime) | 40% tax rate (foreign company) + surcharge + cess | Not expected to earn income; expenses funded by parent |
| Profit repatriation | Dividends — freely remittable (no DDT since April 2020) | Profits remittable after Indian tax | Not applicable |
| Liability | Limited to share capital | Unlimited — foreign company liable | Unlimited — foreign company liable |
| Duration | Perpetual (unless wound up) | Initially 3-5 years; renewable | Initially 3 years; renewable up to further 3 years |
| Setup time | 4-8 weeks | 8-12 weeks (RBI approval + registration) | 8-12 weeks (RBI approval + registration) |
For most foreign companies planning substantive operations in India — whether in IT services, manufacturing, SaaS, consulting, or e-commerce — the subsidiary structure is overwhelmingly preferred for several reasons:
Before initiating the incorporation process with MCA, the foreign entity must conduct a thorough FEMA and FDI policy analysis. This is a step that many entities skip, leading to complications later. At Virtual Auditor, we always begin with this regulatory mapping exercise.
The FDI Policy, issued by the Department for Promotion of Industry and Internal Trade (DPIIT), prescribes the sectoral caps and entry routes for FDI. The Consolidated FDI Policy (updated periodically) classifies sectors into three categories:
The Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 (NDI Rules), notified under FEMA Section 6(2), replaced the earlier FEMA Notification 20(R) and govern all non-debt capital inflows into India. Key provisions relevant to subsidiary setup include:
Even in 100% automatic route sectors, there may be sector-specific conditions. For example:
These conditions are typically embodied in DPIIT Press Notes and subsequently incorporated into the Consolidated FDI Policy. Non-compliance with these conditions constitutes a FEMA contravention. We always verify the latest Press Notes and circulars before advising on sector-specific FDI structures.
A critical FEMA concept is the computation of indirect foreign equity. If a foreign entity holds shares in Indian Company A, and Indian Company A invests in Indian Company B, the FDI percentage in Company B is computed on a look-through basis. This means:
This computation is governed by Rule 23 of the NDI Rules and the methodology prescribed in the Consolidated FDI Policy. Downstream investment by an Indian company that is owned or controlled by a non-resident entity must comply with the sectoral cap and entry route conditions applicable to the sector of Company B. This is a frequently misunderstood provision that can lead to inadvertent contraventions, particularly in group restructurings.
Once the FEMA and FDI analysis confirms that the proposed subsidiary structure is permissible, the incorporation process begins. The Companies Act, 2013 and the Companies (Incorporation) Rules, 2014 govern this process, which is now entirely online through the MCA21 portal.
A private limited company requires a minimum of two directors (Section 149(1)). At least one director must be resident in India — meaning they have stayed in India for a total period of at least 182 days during the financial year (Section 149(3)). The foreign parent’s nominee(s) can serve as directors, but the resident director requirement must be independently satisfied.
Each proposed director must obtain a Director Identification Number (DIN) from MCA. Foreign nationals apply for DIN through SPICe+ form itself, submitting a passport copy (apostilled or notarised and consularised by the Indian embassy in their country) and proof of address.
All directors must obtain a Class 3 Digital Signature Certificate from a certifying authority recognised by the Controller of Certifying Authorities (CCA) under the Information Technology Act, 2000. For foreign directors, the DSC application requires a passport copy and address proof, authenticated by the Indian embassy or apostilled (for Hague Convention countries).
The proposed company name must be reserved through Part A of SPICe+ (RUN — Reserve Unique Name). MCA allows up to two name choices. The name must not be identical or deceptively similar to any existing company, LLP, or registered trademark. Names must comply with the Companies (Incorporation) Rules, 2014 regarding prohibited and restricted words. Name reservation is valid for 20 days from approval.
The SPICe+ (Simplified Proforma for Incorporating Company Electronically Plus) is an integrated web form that bundles the following services into a single application:
The following documents must be submitted with SPICe+ for a foreign subsidiary:
| Document | Details | Authentication |
|---|---|---|
| Memorandum of Association (MoA) | INC-33 format — objects clause, liability, capital clause | DSC of subscribers |
| Articles of Association (AoA) | INC-34 format — internal governance rules | DSC of subscribers |
| Declaration by first directors (INC-9) | Not convicted of fraud, not disqualified | DSC of each director |
| Consent to act as director (DIR-2) | For each proposed director | DSC of each director |
| Foreign parent’s board resolution | Authorising the Indian subsidiary incorporation | Apostilled or notarised + consularised |
| Foreign parent’s certificate of incorporation | Proof of existence of the foreign company | Apostilled or notarised + consularised |
| Passport copies of foreign directors/subscribers | Identity proof | Apostilled or notarised + consularised |
| Address proof of foreign directors | Utility bill or bank statement (not older than 2 months) | Apostilled or notarised + consularised |
| Registered office proof | Ownership document or lease/rent agreement + NOC from owner | Original or certified copy |
| Professional’s certificate (INC-8) | Certification by CS/CA/Advocate that all requirements are complied with | DSC of professional |
Documents originating from outside India must be properly authenticated before submission to MCA. Two methods apply:
This authentication requirement is one of the most time-consuming aspects of incorporating a foreign subsidiary. We advise clients to initiate document authentication 2-3 weeks before filing SPICe+.
Upon successful processing, MCA issues the Certificate of Incorporation bearing the Corporate Identity Number (CIN). The certificate also contains the PAN and TAN of the company. Post-incorporation, the following steps must be completed promptly:
After incorporation, the subsidiary is ready to receive FDI from the foreign parent. This phase involves strict FEMA compliance that must be adhered to within prescribed timelines.
The foreign parent remits the investment amount to the subsidiary’s bank account through normal banking channels. The AD bank conducts KYC on the remitter (the foreign parent) including verification of the source of funds, identity of the beneficial owner, and compliance with FEMA regulations. The remittance must be accompanied by a Foreign Inward Remittance Certificate (FIRC) or an e-FIRC generated by the AD bank.
Pending allotment of shares, the foreign investment amount is kept in a share application money pending allotment account. The company must allot shares within 60 days of receipt of the remittance. If shares are not allotted within 60 days, the amount must be refunded to the foreign investor. Any amount remaining beyond 60 days without allotment or refund constitutes a FEMA contravention.
The Board of Directors passes a resolution allotting shares to the foreign subscriber. The shares must be allotted at a price not less than the fair market value determined in accordance with the NDI Rules:
Within 30 days of allotment of shares, the subsidiary must report the FDI to RBI through the AD bank using Form FC-GPR on the FIRMS (Foreign Investment Reporting and Management System) portal. The FC-GPR filing includes:
Delayed filing of FC-GPR is a FEMA contravention that requires compounding. In our experience at Virtual Auditor, delayed FC-GPR filings account for the largest category of FEMA compounding applications. We strongly advise clients to set up internal reminders and engage their AD bank and CA immediately upon share allotment.
Every Indian company that has received FDI must file an Annual Return on Foreign Liabilities and Assets (FLA Return) with RBI by 15 July each year. The FLA Return captures the company’s foreign liabilities (FDI, portfolio investment, loans, trade credits) and foreign assets. Non-filing of FLA is treated as a contravention and can lead to difficulties in processing future FDI-related applications.
For sectors requiring government approval (defence, telecom beyond 49%, print media, broadcasting, multi-brand retail, mining of certain categories), the foreign parent must obtain approval from the concerned administrative ministry before making the investment.
Applications under the government route are filed through the FIFP portal, managed by DPIIT. The application includes details of the proposed investment, the sector, the business plan, the identity of the foreign investor, and the proposed shareholding structure. The concerned ministry (e.g., Ministry of Defence for defence sector investments) examines the application and may seek clarifications. The typical processing time is 8-10 weeks, though complex cases can take longer.
For FDI from countries sharing a land border with India — specifically Bangladesh, China, Pakistan, Nepal, Myanmar, Bhutan, and Afghanistan — Press Note 3 of 2020 mandates that all FDI requires government approval regardless of the sector or the extent of foreign holding. This applies even to transfers of existing FDI where the beneficial owner is from these countries. Additionally, FDI proposals from Pakistan are restricted to the government route in specific sectors, and no FDI from Pakistan is permitted in defence, space, and atomic energy.
This Press Note 3 requirement has significant implications for Chinese investors, who were previously able to invest under the automatic route in most sectors. All new Chinese investments now require government approval, and the processing times have been considerably longer than for other nationalities.
Establishing the subsidiary is only the beginning. The ongoing compliance framework spans the Companies Act, FEMA, Income Tax, GST, labour laws, and potentially sector-specific regulations. A structured compliance calendar is essential.
| Compliance | Due Date | Form / Action |
|---|---|---|
| Board Meetings | Minimum 4 per year; gap between two meetings not exceeding 120 days | Minutes signed and filed |
| Annual General Meeting (AGM) | Within 6 months from close of FY (i.e., by 30 September) | AGM notice, minutes |
| Financial Statements | Within 30 days of AGM | Form AOC-4 / AOC-4 CFS (if consolidated) |
| Annual Return | Within 60 days of AGM | Form MGT-7 (or MGT-7A for small/OPC) |
| Statutory Audit | Before AGM | Auditor appointed under Section 139 |
| Director’s KYC | 30 September each year | Form DIR-3 KYC (for existing DIN holders) |
| Disclosure of Interest (MBP-1) | At the first Board meeting of each FY | MBP-1 from each director |
| Commencement of Beneficial Interest (BEN-2) | Within 30 days of receipt of BEN-1 declaration | Form BEN-2 with ROC |
A foreign subsidiary inevitably has transactions with its parent company — management fees, royalties, IT services, cost recharges, shared service costs, or intercompany loans. Under Sections 92A to 92F of the Income Tax Act, 1961, these are “specified domestic transactions” or “international transactions” with associated enterprises, subject to transfer pricing regulations.
| Tax/Return | Due Date | Key Notes |
|---|---|---|
| Corporate Tax Return (ITR-6) | 31 October (where transfer pricing report required) or 31 July | 22% rate under Section 115BAA; 15% under Section 115BAB (new manufacturing) |
| Advance Tax | 15 June, 15 Sept, 15 Dec, 15 March (quarterly) | Interest under Section 234B and 234C for shortfall |
| TDS Returns | Quarterly — 31 July, 31 Oct, 31 Jan, 31 May | TDS on salary, professional fees, rent, intercompany payments |
| GST Returns | Monthly (GSTR-1 by 11th, GSTR-3B by 20th) or quarterly (QRMP) | Export of services — zero-rated, eligible for refund of ITC |
| Form 15CA/15CB | Before each remittance to parent/non-resident | Required for dividend remittances, royalty, management fees. Our 15CA/15CB service ensures compliance. |
| Transfer Pricing Report (3CEB) | 31 October | Mandatory if international transactions with AEs exceed Rs 1 crore |
One of the primary reasons foreign companies establish Indian subsidiaries is to generate revenue in the Indian market and repatriate profits. The dividend repatriation framework has become significantly simpler since April 2020 when the Dividend Distribution Tax (DDT) was abolished.
India has comprehensive DTAAs with over 90 countries. The applicable DTAA rate for dividends varies:
| Parent Country | DTAA Dividend Rate | Conditions |
|---|---|---|
| USA | 15% (25% for portfolio) | 15% if parent holds at least 10% voting stock |
| UK | 10% (15% for portfolio) | 10% if parent holds at least 10% of capital |
| Singapore | 10% (15% for portfolio) | 10% if parent owns at least 25% of shares |
| Netherlands | 10% | 10% if parent holds at least 10% of capital |
| Germany | 10% | 10% if parent holds at least 10% of capital |
| Japan | 10% | 10% if parent holds at least 26% of shares |
| UAE | 10% | 10% on all dividends |
| Mauritius | 5% (15% for portfolio) | 5% if parent holds at least 10% of capital; subject to PoEM and LOB conditions |
To claim the beneficial DTAA rate, the subsidiary must obtain a Tax Residency Certificate (TRC) from the parent company, issued by the tax authority of the parent’s country of residence, along with a Form 10F declaration.
The authorised capital is the maximum number of shares the company can issue without amending its MoA. The paid-up capital is the amount actually invested by shareholders. For a foreign subsidiary, we recommend setting the authorised capital at 2-3 times the initial investment to accommodate future capital infusions without the cost and delay of increasing authorised capital (which requires shareholder approval and payment of additional ROC fees and stamp duty).
A private limited company requires a minimum of two shareholders (Section 3(1)(b) of the Companies Act, 2013). For a WOS, both shareholders are typically the same foreign parent (holding shares in different capacities — e.g., the parent company directly and through a nominee). Alternatively, the foreign parent holds the majority, and a nominee or group entity holds one share. This is a common structuring question, and we advise that the nominee arrangement should be properly documented with a nominee agreement to avoid future ownership disputes.
Under the NDI Rules, FDI can be received through equity shares, compulsorily convertible debentures (CCDs), or compulsorily convertible preference shares (CCPS). CCDs are particularly popular in startup funding as they allow investment without immediately determining the valuation — the conversion happens at a future date based on a pre-agreed formula. However, the conversion must be mandatory and not optional. Optionally convertible instruments are treated as debt (ECB) and not as FDI, attracting a different regulatory framework entirely.
Foreign parents may need to exit their Indian subsidiary due to changes in business strategy, underperformance, or group restructuring. The exit options include:
The foreign parent can sell its shares in the Indian subsidiary to an Indian buyer or another non-resident buyer. Under FEMA, the pricing is regulated:
The transfer must be reported on Form FC-TRS within 60 days of receipt of the sale consideration. Capital gains tax implications (either short-term or long-term depending on the holding period) must be addressed, and Form 15CA/15CB is required for remittance of sale proceeds.
Under the Insolvency and Bankruptcy Code, 2016 (IBC) read with Section 59 of the Companies Act, 2013, a company with no debts or with debts fully paid can be wound up voluntarily. The process involves a declaration of solvency by directors, special resolution by shareholders, appointment of a liquidator (registered with IBBI), realisation of assets, payment of liabilities, and distribution of surplus to shareholders. The entire process typically takes 12-18 months.
For dormant companies that have not carried on any business for two consecutive financial years, strike-off under Section 248 of the Companies Act is a faster and more cost-effective exit. The application is filed in Form STK-2 with the ROC, and the company’s name is removed from the register. However, the directors remain liable for any pending obligations, and repatriation of residual funds requires FEMA compliance including appropriate tax clearances.
At Virtual Auditor, we offer a comprehensive Indian subsidiary setup service that covers the entire lifecycle from pre-incorporation planning through ongoing compliance. Our process, led by CA V. Viswanathan (IBBI/RV/03/2019/12333), follows these stages:
For transparent pricing on our subsidiary setup services, visit our pricing page.
Yes, but with significant restrictions. FDI in LLPs is permitted only in sectors where 100% FDI is allowed under the automatic route AND where there are no FDI-linked performance conditions. The LLP must operate in eligible sectors, and the investment is governed by FEMA (Non-Debt Instruments) Rules. However, LLPs cannot issue different classes of securities (preference shares, debentures), which limits structuring flexibility. For most foreign investors, the private limited company remains the preferred vehicle. See our comparison guide on FDI in Indian startups for a detailed analysis.
Under Press Note 3 of 2020, FDI from countries sharing a land border with India (Bangladesh, China, Pakistan, Nepal, Myanmar, Bhutan, Afghanistan) requires prior government approval regardless of the sector. This applies to both direct and indirect beneficial ownership. If the ultimate beneficial owner is a citizen of or incorporated in these countries, the government route applies. The approval process through FIFP typically takes 8-16 weeks, and national security considerations are evaluated. FDI from Pakistan has additional restrictions — it is permitted only in specific sectors under the government route.
There is no statutory minimum FDI amount prescribed by RBI or FEMA for establishing a subsidiary in India (except for sector-specific minimums such as USD 5 million for construction development). The Companies Act, 2013 has also removed the minimum paid-up capital requirement for private limited companies. Practically, we advise an initial investment sufficient to cover 6-12 months of operating costs, including office rent, employee salaries, and compliance costs. Many IT/ITES subsidiaries start with an initial capital of Rs 10 lakh to Rs 50 lakh.
Yes, but capital repatriation is more regulated than dividend repatriation. Options include: (a) share buyback — under Section 68 of the Companies Act, subject to FEMA pricing norms (shares bought at not more than FMV), (b) capital reduction under Section 66 with NCLT approval, (c) liquidation and distribution of surplus assets. Each of these routes requires specific FEMA compliance, tax withholding, and Form 15CA/15CB. Capital repatriation is a capital account transaction and is subject to RBI regulations, unlike dividend remittance which is a current account transaction.
Establishing an Indian subsidiary does not automatically create a PE for the foreign parent in India. Under most DTAAs, a subsidiary is a separate legal entity and is not a PE of its parent. However, a PE may be created if: (a) the subsidiary acts as a dependent agent of the parent — i.e., it has authority to conclude contracts on behalf of the parent and habitually exercises that authority, (b) the subsidiary’s premises constitute a fixed place of business of the parent. Careful structuring of the subsidiary’s mandate, reporting lines, and authority is essential to avoid inadvertent PE creation. This is particularly relevant for IT service companies where employees of the subsidiary may interact with the parent’s clients.
Foreign nationals deputed by the parent to work in the Indian subsidiary require: (a) an Employment Visa (not a Business Visa), (b) registration with the Foreigners Regional Registration Office (FRRO) within 14 days of arrival if the stay exceeds 180 days, (c) PAN (mandatory for any person earning income in India), (d) Indian tax return filing if they qualify as resident or have Indian-source income. The subsidiary must deduct TDS on salary and comply with Indian labour laws (PF, ESI, Shops & Establishments Act). The remuneration structure may be split between the Indian subsidiary and the parent for tax efficiency, but this must be documented in a secondment agreement and priced at arm’s length for transfer pricing compliance.
While the initial subscription to shares at face value does not require a formal valuation, subsequent FDI rounds at a premium require a valuation by a SEBI-registered merchant banker or a CA. Additionally, if the subsidiary’s shares are transferred between a resident and a non-resident, a formal valuation is mandatory under FEMA pricing guidelines. CA V. Viswanathan, as an IBBI Registered Valuer (IBBI/RV/03/2019/12333), provides valuation services for FDI pricing, share transfers, and related-party transactions, ensuring compliance with both FEMA requirements and transfer pricing regulations.
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