Five things to know before you form a subsidiary company in India

Five things to know before you form a subsidiary company in India

Are you thinking of expanding your business to India by forming a subsidiary company? If yes, then you must give a thought to the five critical points suggested by experts in the field.

Once you have identified your drivers like building your company brand, exercising control over your holding company, and IP protection. And other drivers like 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 subsidiary in India. Therefore, it will be helpful to give a thought to a few considerations.

Let us take you through the practical aspects of incorporating a foreign subsidiary in India. There is time, and cost aspects with regard to running costs, compulsory margin, arm’s length pricing, and extraction of money. Also, the availability of time bandwidth with the management, and understanding of the Indian culture.

In this article, experts from the field advise you to test the Indian ground before forming an entity with the support of a Professional Employer Organization. And also to consider the time-consumption and pre-conditions of the closure procedure of a subsidiary company.

Incorporation of foreign subsidiary in India (process)

India has pulled the interest of a lot of foreign companies as it has a fast-growing market. It is recognized for its huge skilled pool. Research shows that a lot of US companies see Bangalore, Pune, Mumbai, Delhi, and Hyderabad as fit places for subsidiary formation. It is 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.

We will 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 one that is controlled by a parent company or a 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. The process of company formation or incorporation in India is relatively straightforward. However, knowing the rules and regulations will help you 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. Also, the objectives and reasons why you want to incorporate a subsidiary in India.

Building company culture and branding

When your subsidiary company is a WOS, the holding company can exercise complete control. Control over decision-making and other financial decisions as you make 100% investment into the subsidiary company.

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

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.

IP protection

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. It is done 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 opportunities 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 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.

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:
1) Two directors and two shareholders. 
2) One of the directors should be an Indian resident and both should have a DIN (Direct Identification Number) to avoid administrative time delays.
3) The shareholders can be individuals or businesses and the parent company should be publicly limited. 
4)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 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. It should be done to ensure the business operations run smoothly.

2. 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.

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 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.

It will also be submitted to other labor laws like law compliances and payment of taxes. As well as other related filings like monthly, quarterly and annual returns like Goods and Service Tax (GST) and Tax Deducted at Source (TDS).

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 important 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 equal 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. This margin is 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. You will have to back up your subsidiary company by sending a decided percentage margin. This will need to be done until your subsidiary doesn’t generate revenue to incur the operational costs. This percentage keeps accumulating in the Indian banks and cannot be touched. The only way you can extract 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

You may have to consider staffing your subsidiary with the right potential. This can be ensured by creating a comfortable workspace for your employees. You may have to map out a strategy to execute HR, insurance, benefits, payroll and risk management, and admistrational operations. A plan also needs to be devised to ensure proper training is conducted in a well-set-up office infrastructure. You will have to ensure mandatory compliance as per Indian laws. Those include monthly payroll execution, taxation compliances, accounting, employee benefits, bookkeeping, coordination with auditors, etc. A dedicated team needs to be hired and monitored on performance management, periodic interactions, and direct reporting.

You have to evaluate the time and energy required to run a foreign company in India. The time zone differences and the geographical barriers also need to be considered. Also, consider the language barriers and communication through digital applications to get your subsidiary company running in India. Along with managing your parent company, additional time will be needed to monitor the business operations in India.

Increased compliance load

If you wish to run a business in India, you need to bear the additional costs of running the business and business compliance. These include:
1) HR operations
2) administration fees
3) auditor fees
4) taxes on salary deductions
5) paying government taxes per employee on time, etc.

There are other employee-related laws to be considered like PF, employee state insurance, salary TDS, and professional tax. The other laws are minimum wages, bonuses, maternity costs, and retirement benefits like gratuity, and leave encashment.

5. 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 their language and geographical differences.

In order to establish a subsidiary company here, you need to consider diversity. If you are prepared to work 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. It ensures the PEO business is strategic and compliant.

1. 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, which needs to be maintained.

2. 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 problems 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. We assure end-to-end support to overseas companies only.

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

3. 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 successfully building a team in India through a PEO or an outsourcing agency you can move that team. The team can be transferred to your subsidiary to ensure a smooth transition and workflow.

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

Once you have considered all the aspects to open a subsidiary in India. Like the bandwidth of time, cost of operations, administration 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.

5. 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.

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