India is one of the world's
fastest-growing economies and a very lucrative market for foreign companies
formation in India. Setting up a subsidiary in India could be a viable approach
for foreign companies to expand their operations and gain exposure to this
large customer base.
But the process of setting up a
subsidiary in India can be complicated and time-consuming, particularly for
companies unfamiliar with the country's regulatory and legal landscape.
Today, we will present an
overview of the key steps involved in establishing a subsidiary in India, as
well as guidance to support foreign companies in successfully navigating the
process.
Reasons why foreign businesses want to set up a subsidiary in India
Following are some of the main
reasons why foreign companies want to establish a subsidiary in India:
1. Access to a major market
India is the world's second-most
populated country, with over 1.3 billion people. Establishing a subsidiary in
India gives foreign companies access to a huge and developing market with a
rapidly emerging middle class that drives demand for a broad range of products
and services.
2. Lower production costs
India is famous for its low-cost
labour, which can enable foreign companies to substantially lower their cost of
production. Establishing a subsidiary in India can also help companies take
advantage of tax incentives, subsidies, and other perks provided by the Indian
government to encourage foreign direct investment.
3. Skilled workforce
India has a highly educated and
skilled workforce, with a strong emphasis on education in science, technology,
engineering, and mathematics (STEM). Establishing a subsidiary in India gives
foreign companies access to this skilled workforce, which can be used to fuel
growth and innovation.
4. Favourable business atmosphere
In recent years, India has made
tremendous progress in improving its business atmosphere, with an emphasis on
simplifying rules and eliminating bureaucratic bottlenecks. Establishing a
subsidiary in India can offer foreign companies a more attractive business
environment than in many other emerging markets.
5. Strategic location
India's strategic location at
Asia's crossroads makes it an excellent location for companies seeking to
expand their operations in the region. Establishing a subsidiary in India can
give foreign companies a strategic location from which to enter other booming
markets in Southeast Asia and beyond.
Types of Entities:
The entities that a foreign
enterprise can set up in India can be either unincorporated or incorporated.
1. Incorporated Structures
The incorporated structures are
as follows:
1.1 Wholly Owned Subsidy (“WOS”)
A wholly-owned subsidiary is a
resident Indian company whose stock is entirely owned by its parent
corporation. The Indian company can be a private limited company or a public
limited company.
A private company, being an
Indian resident company has the freedom to carry out any operations in India
(subject to the restrictions on certain activities such as defence and chit
funds etc. imposed under India’s forex laws). A private company is regulated by
the Ministry of Corporate Affairs in India along with the Reserve Bank of India
(in case of WOS) and has to undertake many legal and regulatory compliances as
compared to a Branch Office (“BO”) or Liaison Office (“LO“).
Advantage: Despite the
higher regulatory environment, the rate of corporate tax is much lower compared
to a BO/LO, given that a WOS is a resident Indian company and is taxed at flat
rate of 25%.
1.2 Limited Liability Partnership (“LLP”)
The LLP is another alternative
corporate business structure that provides the benefits of limited liability of
a company, but allows its members the flexibility of organising their internal
management on the basis of a mutually arrived agreement, as is the case in a
partnership firm. As compared to the WOS, the compliances are relatively lesser
and the LLP offers higher internal flexibility.
Advantage: 100% foreign
direct investment is permitted in LLPs and therefore a foreign entity can
completely own the Indian LLP.
2. Unincorporated Structures
The unincorporated structures are
as follows:
2.1 Liaison Office (“LO”)
The LO is a representative office
of an overseas entity and acts as a communication channel between the principal
office of the LO and different businesses in India. The LO cannot undertake any
commercial/trading/ industrial activity, directly or indirectly, and maintains
itself out of inward remittances received from abroad through normal banking
channel. The LO therefore cannot generate profits as it does not have any
business activity of its own.
In India, LO’s are set up only
with the prior approval of the Reserve Bank of India (“RBI“).
- The RBI has prescribed the
following activities as activities that a LO is permitted to undertake:
- Representing the parent company / group
companies in India.
- Promoting export / import from / to India.
- Promoting technical/ financial collaborations
between parent / group companies and companies in India.
- Acting as a communication channel between the
parent company and Indian companies.
2.2 Branch Office (“BO”)
Similar to the LO, the BO is also
set up with the prior permission of the RBI (routed through a local banker (AD
Bank), however the scope of permissible activities that the BO can undertake is
much wider. The BO can engage in commercial activities of its own and can
operate on a cost plus model.
RBI has prescribed the following
activities that a BO can undertake in India:
- Export/import of goods
- Rendering professional or consultancy services
- Carrying out research work in which the parent
company is engaged
- Promoting technical or financial collaborations
between Indian companies and parent or overseas group company
- Representing the parent company in India and
acting as buying/ selling agent in India
- Rendering services in Information Technology and
development of software in India
- Rendering technical support to the products
supplied by parent/group companies and
- Representing a foreign airline/shipping company.
2.3 Trust
A Trust is a relationship in
which a person or entity holds a valid legal title to a certain property which
is known as the Trust property, but is bound by a fiduciary duty to exercise
that legal title for the benefit of any one or more individuals or group of
individuals or organisations, who are known as the Beneficiaries. The Trust
shall be always governed by the terms of the Written Trust agreement. Corporate
Trusts in India are considered as private trusts regulated by the Indian Trusts
Act, 1881 and are taxed at a flat rate of 30% plus surcharge and education cess
if the income crosses INR 10,00,000. Trusts can avail rebate under the Income
Tax Act.
To create a Trust these steps are
to be followed:
- A trust for immovable property must be in
writing in a non-testamentary document signed by the author or creator of the
trust. Any person who is competent to contract can create a trust and therefore
a company may be the author or trustee or beneficiary of a trust.
- A trust is created when the person creating the
trust, termed the author of the trust indicates with reasonable certainty by
any words or acts about the trust property
- The Act doesn’t prescribe any specific purpose
for creation of trust. A trust can be formed for any purpose, provided such
purpose is lawful.
- The Trust Deed will have to be printed on stamp
paper of due value and registered at a Sub-Registrar office after paying
registration charges.
Advantages:
No mandatory obligations as imposed on companies
under the Companies Act, 2013.
Simpler process of registration.
A valid trust deed can be enforced by the court.
There is no limit on the number of authors,
trustees or beneficiaries.
2.4 Partnership
Partnership can be defined as
collective relationship between persons for the purpose of sharing profits. The
essentials of a valid partnership are:
1. A contract is crucial to form a partnership
2. Maximum number of partners is 50
3. A business must be carried on by the partnership
4. There must be an objective to share profits
5. The business must be carried on by all the
partners or by one or more partners on behalf of the others
A partnership firm is not a
separate and distinct entity from its partners. Partners are jointly and
severally liable for the acts of other partners and of the firm. They are also
personally liable to the extent of their assets. Partnership firms are taxed at
a flat rate of 30% plus surcharge and education cess.
The Partnership may be converted
into a private limited company as per the Companies Act, 2013.
While these are the different
structures that a foreign entity can consider, the following factors will need
to be borne in mind before a decision is made with regard to the choice of
entity to be set up:
· Tax structure
· Business requirement in India
· Feasibility of setting up and running the entity
in India.
Created & Posted by Sony Garg
Accounts & Finance Executive at TAXAJ
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