1. Introduction
The setting up of a foreign subsidiary is one of the most effective and efficient ways by which international businesses enter the Indian market. As defined under the Section 2(87) of the Companies Act, 2013, a subsidiary is a company in which another company controls more than one-half of the total share capital or exercises control over the composition of its board of directors. When the holding company is situated outside India, the resulting company is referred to as a foreign subsidiary. This route is preferred because it creates a separate legal identity in India, allowing the business to operate independently while retaining control with the foreign parent.
Foreign subsidairy’s incorporation and compliance in India is not governed by a single law but involves interaction between several authorities. The Companies Act, 2013 prescribes incorporation procedures, while the Foreign Exchange Management Act (FEMA) and the Reserve Bank of India (RBI) regulate the foreign direct investment. In addition to these provisions, taxation plays a major role in determining the regulatory compliance by a company to which effect the provisions under the the Income Tax Act determines the mechanism which is used to determine how the income and profits are taxed and also includes application of transfer pricing rules, withholding obligations, and treaty benefits. These taxation provisions together create the corporate tax framework India within which every subsidiary must operate.
2. Legal Framework Governing Foreign Subsidiaries
The process to incorporate, register and operate a foreign subsidiary in India requires compliance with the applicable provisions of the Companies Act, 2013, FEMA,RBI regulations, and the Income Tax Act, 1961. These provisions collectively govern incorporation, investment, operation and taxation.
A. Companies Act, 2013
1. Definition of a subsidiary
Section 2(87) defines a subsidiary as a company where the holding company controls more than half of the total share capital or the board composition.
2. Requirements under the Act
- At least two shareholders
- At least two directors, one resident in India
- Filing of incorporation documents, memorandum of association and articles of association, and issuance of a Certificate of Incorporation
Therequirements under the Companies Act, 2013 as stated herein above applies to all sector. It is essential for the recognition of any entity as a Company and for its operation in India..
B. FEMA and RBI Regulations
1. FDI Policy
The investment in India by any foreign entity into India’s economy which includes the foreign subsidiary FEMA and the FDI Policy.The investment into India is broadly classified into two routes namely automatic and approval route which are classified based on sIndustry.
2. Automatic vs. approval route
- Automatic route – The automatic route is the route in which the foreign investment does not require any prior approval. However, the entity is required to comply with thepost investment reporting
- Approval route – Approval routes are applicable on the sectors such as defence and banking wherein the investiment is permitted only after acquiring the prior government approval. Similar to the automatic route, entities are required to comply with the post investment reporting.
3. Reporting obligations
Foreign capital inflow and share allotment must be reported to RBI through Form FC-GPR within 30 days. Any person failing to comply with the filing of the FC_GPR attracts penalties under FEMA for an amount upto INR 5,00,000/-.
C. Other Applicable Laws
1. Income-tax provisions
- A foreignsubsidiary residing in India is treated as a domestic company
- Transfer pricing applies to transactions with the foreign parent company.
- Withholding tax applies to dividends, royalties, and fees
2. Sectoral restrictions
Certain sectors such as defence, telecom, insurance, and multi-brand retail require approval or have equity caps.
3. Employment and data protection laws
Any foreign subsidiary will be required to comply with the regulations provided under the labour law and Digital Personal Data Protection Act, 2023 as and when such law becomes applicable to such company.
3. Pre-Incorporation Considerations
A. General position
Before proceeding with foreign company registration in India, promoters must consider issues affecting incorporation timelines and long-term compliance, particularly notarisation and apostille of foreign documents.
B. Choice of business structure
The legal regime in India provides various structures that a foreign company may consider prior to setting up the business. These structures include liaison office, branch office, LLP, and private limited company. The setting up of foreign subsidiary company which is incorporation under Companies Act 2013 is preferred by the foreign company because any company which is incorporated under the Companies Act, 2013 has a separate legal personality which provides operational freedom, and credibility.
C. Minimum statutory requirements
Provided that a private limited company is established by the foreign entity, the foreign subsidiary residing in India must meet the following eligiblity criteria:
- Directors – Minimum two directors, one resident in India
- Shareholders – Minimum two shareholders
- Share capital – No statutory minimum, though practical capital is advisable
D. Documentation required
- Identity and address proof of directors and shareholders
- Apostilled foreign documents
- Registered office proof
- Board resolution of foreign parent
- Incorporation documents for the foreign subsidiary company.
The documents submitted during the incorpoation procedure must ensure that it has proper authentication, failure to secure the same can lead to major cause of resubmission of the applications.
E. Observations
- Pre-incorporation planning on the business structure is critical.
- Atleast one director being a resident of India and document authentication are essential to the process of incorporation.
- FEMA compliance should be complied from the date of incorporation if any applicable and the entity must ensure to remain compliant to reduce risk.
- Tax implications must be considered at structuring stage and must be balanced with the operational efficiency.
4. Step-by-Step Process of Registration
A. General position
The position now is that the procedure to register a foreign subsidiary in India is neither mechanical nor confined to filling one form. It is a sequence of steps under the Companies Act, 2013 which must be followed carefully. The setting up of a foreign subsidiary company in Indiain practice faces delays not due to the legal provisions or process but due to the supporting documents which originate outside India. The setting up of the subsidairy mandates that the required documents have to be notarised or apostilled. This creates the instance whereby each document must adhere to the prescibed format otherwise the same is liable to rejections and the application being marked for resubmission.
B. Approval of name
In practice, the process starts with reserving a name. The MCA offers a Reserve Unique Name service and Part A of SPICe+, either of which may be used. The subsidiaries wishing to use identical name of the foreign parent company would be required to make application for the same but the under the Indian legal regime any entity which is registered under the Companies Act, 2013 must register the name with suffix such as “Private Limited” or any other descriptive suffix as applicable It is suggested that any foreign subsidiary which aims to establish itself in India may undertake steps towards registration of its preferred name as a trademark during the stage of approval of name.
C. Digital signatures and DIN
Every proposed director must first obtain a digital signature, which is essential for submissions of the relevant form before the MCA. In the event the foreign subsidiary is a private limited company, at least two directors are required, to incorporate such a company provided that one of such director must be resident of India for a period of more than 182 days. The obtaining of DIN of a director who is a resident of India is required to submit Indian identifiers like PAN or Aadhaar, however sincece the foreign directors do not have such documents the apostilled passports and foreign address proofs are accepted.
D. Incorporation filing
The incorporation of the foreign subsidiary similar to any other company in India is made by filing of the SPICe+ form. The Memorandum of Association and Articles of Association are the incorporation document which govern the functioning of a company and have to be prepared at the stage of registration of the company. The incorporation document must be accompanied by the foreign shareholder company’s board resolution authorising subscription which should also be apostilled. Along with aforementioned documents the incorporation document must also be supported by proof of the registered office, declarations, affidavits and KYC of directors are attached. The entity will also be required to pay stamp duty which shall be subject to a state-wise stamp duty which is paid electronically.
E. Certificate of Incorporation
Once the Registrar is satisfied, a Certificate of Incorporation is issued along with the CIN, PAN and TAN for the foreign subsidiary company. This is conclusive evidence that the company exists under Companies Act 2013 and that it bears a seperate legal existence, but compliance does not stop here. The entity will still require to comply with the legal requirements governing the share allotment to the foreign parent triggers under the RBI regulations, and for tax purposes the entity is regarded as a domestic company so corporate tax for foreign subsidiaries in India applies at the same rates as for Indian-owned companies and must therefore comply with the tax regime applicable to it.
5. Taxation of Foreign Subsidiaries in India
A. General position
The position now is that once a company has been incorporated in India and capital is brought in from abroad, compliance under FEMA is triggered, and simultaneously, liability under the Income Tax Act for companies in India begins. The law is clear that a company incorporated in India is treated as resident for tax purposes, irrespective of whether it is wholly owned by a foreign parent.
B. Rate structure and treatment
It may be noted that there is no special regime carved out for subsidiaries. The ordinary Indian corporate tax rates apply — 25 per cent where turnover falls below the threshold, and 30 per cent otherwise, subject to surcharge and cess. Since 2019, sections 115BAA and 115BAB provide concessional rates of 22 per cent and 15 per cent if conditions are met, and companies opting for these regimes are outside MAT.
C. Scope of income
Under section 6(3), a company incorporated in India is resident of India. As a resident, it is taxed on its worldwide income. Relief may be claimed under treaties if income is taxed both in India and abroad. In practice, most subsidiaries restrict themselves to Indian business, but the statutory scope remains global, and this requires attention at the time you register a foreign subsidiary in India, so that structures are planned with double taxation in mind.
D. Dealings with the parent company
Scrutiny is greatest in related-party transactions. Sections 92 to 92F mandate that pricing between the subsidiary and its foreign parent must be at arm’s length. This extends not only to goods and services but to royalties, interest, cost allocations, or guarantees. Documentation is required each year, and Form 3CEB must be filed. Penalties for default are substantial. In practice, transfer pricing forms the backbone of corporate tax compliance in India for subsidiaries.
E. Withholding and treaty relief
Whenever the Indian subsidiary makes payments to its parent — dividends, interest, royalties or fees for technical services — tax must be withheld at domestic rates unless a treaty provides relief. Treaties generally cap the rate at 10 or 15 per cent, but to claim this, a Tax Residency Certificate from the parent’s jurisdiction is mandatory. Disputes are frequent on whether a payment is royalty, FTS, or business income, since classification affects rate and liability.
F. Observations
The corporate tax framework India does not distinguish between Indian-owned and foreign-owned companies. Once incorporated, the entity is resident, taxed on global income, and subject to the same rates and compliance. What makes the position of subsidiaries more complex is the volume of transactions with their foreign parent, which brings in transfer pricing, withholding, and treaty analysis.
6. Sector-Specific Restrictions and Approvals
A. Position under policy
The position now is that even if promoters complete all the formal steps of subsidiary incorporation under Companies Act 2013, that act alone does not mean the company can straightaway go into any business. Incorporation only creates ensure that the company is established and is legally capable to make actions under its own name. Whether that company can lawfully operate in a particular sector is decided separately under the FDI Policy and the FEMA notifications which the Reserve Bank enforces. The authorities have classified the sectors into following categories:
B. Automatic route
Most industries are classified under the automatic route, which means no prior clearance from the relevant authority is needed for the setting up of the organisation in India. The only condition is that once capital is received it must be reported through the authorised dealer bank to the RBI. Industries which fall under the automatice route include Manufacturing, IT, consulting and support services..
C. Approval route
The government in order to protect certain sensitive sectors mandate that the prior to any foreign investment the entity must seek approval from the relevant authority. The restriction beyond which approval is required may arise out of 100% restriction or a percentage based restriction. Defence is the best-known case — foreign capital can come in, but above a limit it needs Government approval. Telecom is technically open up to 100%, yet beyond 49% approval is necessary. Multi-brand retail still requires approval and is capped. Insurance and banking are subject to their own ceilings, usually 74%.
D. Practice on the ground
The timeline for the establishment of a company is greatly impacted by the route which is applicable on the company. A manufacturer can incorporate and receive funds within weeks under the automatic route, moving straight into business. A foreign retailer, by comparison, may wait months for permission.
E. Observations
From the tax side, the corporate tax for foreign subsidiaries in India is not affected by sector. The company, once incorporated, is a domestic taxpayer. The difference lies in whether its capital inflow was permissible. These restrictions do not appear in the Companies Act text but are enforced independently through FEMA and the FDI Policy. If investment itself is irregular, tax authorities can go further and question deductions or disallow expenses, complicating corporate tax compliance in India.
7. Comparison of Subsidiary with Other Structures
The position now is that a foreign investor entering India is not restricted to a single form. It may be noted that while one may register a foreign subsidiary in India, the law equally allows the opening of a branch office, a liaison office, or an LLP with foreign participation.
A. Branch office
A branch office, on the other hand, is an extension of the foreign parent and whatever liabilities arise flow directly back.
B. Liaison office
A liaison office is still more restricted. It cannot trade or earn revenue; its activities are confined to representation and coordination. In practice this means it can meet customers, share information, and act as a channel, but it cannot invoice.
C. Subsidiary and LLP
Foreign investment into LLPs is permitted, but sectoral conditions remain. Unlike a company, an LLP cannot raise equity capital in the same way, and many regulators still prefer the company format. The structure of rights is also different: in an LLP, rights are held directly by partners, while in a subsidiary they flow through the board.
8. Common Challenges in Registration
A. General position
The position now is that while the statute makes it appear as though one can easily register a foreign subsidiary in India by filing incorporation documents with the Registrar of Companies, in reality the process is rarely so linear and requires the entity to navigate through the numerous compliances under the Companies Act , the RBI fixes timelines, and the FDI Policy which delays the operations of the entity.
B. Documentation
One of the first recurring hurdles is paperwork. Under subsidiary incorporation under Companies Act 2013, proof of identity of directors, constitutional papers of the foreign parent, and resolutions authorising incorporation must all be filed. If these originate outside India, they are not accepted at face value.
C. FEMA and RBI
Once incorporation is done, the next set of problems relates to FEMA and RBI compliance for foreign subsidiaries. Funds sent from the parent must be reported to RBI through the authorised dealer bank within 30 days. Once shares are allotted, Form FC-GPR must be filed, again within 30 days. These filings require greater burden and thereby considerable time and resources due to the banks asking for clarifications not mentioned in the rules,the FIRMS portal rejecting documents over formatting or occurance ofclerical errors which can lead to rejection.
D. Sectoral limits
Another difficulty arises when the intended business falls in a restricted industry. Defence, telecom, insurance, multi-brand retail — these are all areas where caps or approvals apply. A company may succeed in completing foreign company registration in India, but without government approval it cannot legally start operations.
E. Ongoing burden
Even when approvals are obtained, the company must maintain registers, convene meetings, and file annual returns. On taxation regime, corporate tax for foreign subsidiaries in India is applied and all dealings with the parent invite transfer pricing scrutiny.
9. Conclusion
The position now is that when a promoter decides to register a foreign subsidiary in India, the act of filing incorporation papers and receiving a certificate from the Registrar is only the inception of its operations and the entity will require to navigate itself through numerous compliance requirements. The certificate of incorporation under Companies Act 2013 confirms the company’s legal existence, but by itself it does not allow operations and follows is a long chain of reporting and compliance obligations. Investments coming in from abroad must be disclosed to the authorised dealer bank, share allotments must be reported on the RBI portal, and at the same time the company steps immediately into the framework of Indian taxation, labour law and sectoral regulation. Each layer interacts with the others, a delay in FEMA reporting may block capital inflow, a mistake in filings may affect tax assessments, and non-compliance with labour or GST requirements can stall day-to-day functioning.
About Us
Corrida Legal is a boutique corporate & employment law firm serving as a strategic partner to businesses by helping them navigate transactions, fundraising-investor readiness, operational contracts, workforce management, data privacy, and disputes. The firm provides specialized and end-to-end corporate & employment law solutions, thereby eliminating the need for multiple law firm engagements. We are actively working on transactional drafting & advisory, operational & employment-related contracts, POSH, HR & data privacy-related compliances and audits, India-entry strategy & incorporation, statutory and labour law-related licenses, and registrations, and we defend our clients before all Indian courts to ensure seamless operations.
We keep our client’s future-ready by ensuring compliance with the upcoming Indian Labour codes on Wages, Industrial Relations, Social Security, Occupational Safety, Health, and Working Conditions – and the Digital Personal Data Protection Act, 2023. With offices across India including Gurgaon, Mumbai and Delhi coupled with global partnerships with international law firms in Dubai, Singapore, the United Kingdom, and the USA, we are the preferred law firm for India entry and international business setups. Reach out to us on LinkedIn or contact us at contact@corridalegal.com/+91-9211410147 in case you require any legal assistance. Visit our publications page for detailed articles on contemporary legal issues and updates.
Legal Consultation
In addition to our core corporate and employment law services, Corrida Legal also offers comprehensive legal consultation to individuals, startups, and established businesses. Our consultations are designed to provide practical, solution-oriented advice on complex legal issues, whether related to contracts, compliance, workforce matters, or disputes.
Through our Legal Consultation Services, clients can book dedicated sessions with our lawyers to address their specific concerns. We provide flexible consultation options, including virtual meetings, to ensure ease of access for businesses across India and abroad. This helps our clients make informed decisions, mitigate risks, and remain compliant with ever-evolving regulatory requirements.