India is one of the fastest-growing economies in the world, with a projected GDP growth of 6‒6.8% in 2023-24. A 2022 report reveals that 71% of MNCs consider India an attractive market to invest in for their global expansion. Foreign companies wanting to expand their business operations in India can enter by forming a wholly-owned subsidiary.
A wholly-owned subsidiary is a company structure in which 100% shares are owned by another company, referred to as the parent company. This gives the parent company complete control over its subsidiary's management, operation and finances. Wholly-owned subsidiaries are formed to expand into newer regions or start a new division of an existing business.
In India, an Indian or foreign company can start its own wholly-owned subsidiary. But the Indian government has specific restrictions for a wholly-owned subsidiary in India by foreign company concerning investment in certain sectors.
If you are considering expanding your business in India, this article will help you understand the requirements, advantages, disadvantages and taxation of a wholly-owned subsidiary in India.
Difference Between a Subsidiary and Wholly-Owned Subsidiary
A subsidiary and a wholly-owned subsidiary in India are two separate business structures that often get confused.
A subsidiary company is owned and controlled by a parent or holding company with at least 51% of shares. The holding company has a majority stake in its subsidiary but not complete ownership. It can influence a subsidiary's operations and finances.
According to Section 2(87) of the Indian Companies Act 1956, “A company will be referred to as a Wholly-Owned Subsidiary when the parent company owns all the shares.” It means a company whose entire share capital is controlled by another parent corporation is a wholly-owned subsidiary. This other company could be an established Indian company or a foreign company.
A wholly-owned subsidiary can register as a private or public limited company in India.
Advantages of Having a Wholly-Owned Subsidiary in India
A wholly-owned subsidiary in India has numerous advantages. Let us divide them into two major categories for better understanding.
1. Operational Advantages
- Ease of Operations: The parent company holds 100% of the subsidiary’s shares and executes total control over the latter. You can decide your subsidiary's operations or work strategy. Within this flexible business model, the decision-making is faster as you can guide the wholly-owned subsidiary based on your experience of what has worked in the past.
- More Access to Resources: A wholly-owned subsidiary enjoys a vast pool of resources from its parent company. The company’s expertise, technical knowledge, trade secrets and other assets are not limited to the parent company alone. The two businesses can constructively use the shared resources for marketing and growth.
It promotes a better vertical integration between two or more companies, streamlining their operations without relying on external sources in a foreign land.
- Gain New Market Experience: Setting up a wholly-owned subsidiary can help study a new marketplace. It also helps in expanding or diversifying the business into newer markets. Opening a subsidiary under the same name as the parent company will create your brand recognition in another region.
Suppose a company wants to establish a new line of products and services. In that case, it can test the demands in the international market by forming or acquiring a subsidiary in the target country.
2. Financial Advantages
- Reduced Costs: The parent company takes care of a wholly-owned subsidiary's financial decisions. With common pooled resources between the two companies, the cost of hiring, getting new equipment and managing operations gets divided. It mutually benefits both companies.
- Tax Benefits: Multinational organisations with considerable foreign investment for their subsidiaries can enjoy tax benefits of a different location. Buying complete shares qualifies for tax purposes in the case of an acquisition.
Several exemptions are available for the taxation of wholly-owned subsidiaries in India. Deductions are available for expenses on research and development.
- Consolidated Filings: The parent company and its wholly-owned subsidiary can include their income and losses in a consolidated tax return. The two entities can be combined as one during tax filing and the profits of the parent company can offset any loss incurred by the subsidiary. This reduces the tax liability for the parent company.
Requirements for Forming a Wholly-Owned Subsidiary in India
A wholly-owned subsidiary in India by a foreign company can be incorporated by making foreign direct investments (FDI) in the Indian market. The government of India makes regulatory reforms to attract more FDI.
With an automatic route, prior approval from the Reserve Bank of India is unnecessary for specific sectors, including the Information Technology sector.
Here are other requirements for establishing a wholly-owned subsidiary in India by foreign company:
- Number of directors: A minimum of two directors are required. Non-resident Indians and foreign nationals can be directors of Indian subsidiaries, provided one of the directors is an Indian citizen and resident of India.
- Number of shareholders: A minimum of two shareholders are required. Both of them can be NRI or foreign nationals.
- Paid-up capital: You must have a minimum capital of ₹100,000.
Taxation for Wholly-Owned Subsidiary in India
Under the Income Tax Law, a wholly-owned subsidiary in India is eligible for all exemptions, deductions as applicable to any other Indian company. Here are some key figures to know about the taxation of wholly-owned subsidiaries in India:
- The Indian government taxes a corporate tax to foreign subsidiaries at 40% of the income earned.
- However, if the international parent company is headquartered in India, the tax rate could be lowered to 20%.
- The income tax rate is 22% plus surcharge and cess, which brings the tax rate to 25.17% of the profits made in India.
Business Compliances for Wholly-Owned Subsidiary in India
After successfully registering a wholly-owned subsidiary in India, it is liable for particular business and financial compliances such as:
- Board Meetings: After incorporation, the company's first board meeting has to be held within 30 days. Four board meetings should be held annually and the gap between two consecutive meetings can be at most 120 days. A shareholder meeting should take place annually.
- Obtain licences: Depending on the nature of the work, a company should acquire the necessary licences required for business operations in India. This includes Goods & Service Tax (GST), Professional Tax, Importer Exporter Code or any other permits required.
- Maintaining Accounts: Keep a record of the financial transactions under the country's accounting standards. Submit the reports to the regulatory authorities at the Securities and Exchange Board of India.
- Statutory Audits: A practising chartered accountant should maintain the records of your financial statements. A statutory audit has to be done annually.
- Others: Many other business compliance requirements begin from registering a wholly-owned subsidiary in India. These include filling out forms, operating a bank account, GST registration, auditor appointment, maintaining the minutes of annual general meetings, foreign remittance intimation etc.
As per the State of Tax Justice report, globally, $245 billion is directly lost to corporate tax abuse by multinational corporations. It has prompted severe crackdowns on defaulters everywhere and the punishments levied are hefty.
Challenges to Set Up a Wholly-Owned Subsidiary in India
1. Expensive and Time-Consuming: The initial process of setting up a separate entity takes time. You must find a relevant name, fill out necessary forms, get all documentation in order, prepare Articles of Association and get it all approved.
Several fees are involved at each stage, so the process can also get expensive and time-consuming. Registering a foreign subsidiary can take a minimum of 15 days.
2. Language Barriers: People in India speak different languages as diverse cultures coexist in their states. You may face language barriers depending on the location you choose to start a wholly-owned subsidiary in India.
3. Understanding Local Laws: Indian labour law has distinct provisions depending on states and economic zones. Tackling these laws and regulations can be challenging for a foreign company. Having local expertise becomes necessary to ensure compliance.
4. Setting up Infrastructure: The infrastructure costs could also vary from one vendor to another. Getting a workspace and technical equipment for the initial few employees can prove costly if you don’t know the market prices.
But if you partner with an employer of record like Rapid, they can help you with office rentals and IT equipment purchases. You will also save 18% GST on these as they have a passthrough taxation.
5. Local Competition: When entering a new territory, one must be aware of the competition from well-established local companies. Your products and services should be able to compete with the existing competitors in the country.
For companies headquartered abroad, following all regulatory compliances and overcoming other challenges of a wholly-owned subsidiary in India seem tedious. You also have to focus on augmenting your business growth.
But if you partner with an EOR service like Rapid, the process can be simplified to a few clicks on an all-integrated platform.
Rapid is a trusted service provider with more than two decades of deep local expertise in the Indian market. From recruiting qualified talent to ensuring all tax compliances, they can handle all your business needs and offer customised solutions. Once you set up your business entity, Rapid can manage the payroll and HR functions and help you maintain regulatory compliance per the laws.